Answer to Question #194673 in Microeconomics for angel

Question

on January 1, 2019, South Africa's first-ever national minimum wage came into effect. The legislation stipulated a minimum national rate of R20 per hour, or R3500 per month, depending on the number of hours worked. Some economists warned that it may depress SA's already high unemployment rate further by making it more expensive to hire workers. Using your knowledge of basic economic theory, illustrate and explain with the aid of a graph why some economists might have given such a warning?

Answer 1

The minimum wage rate is an advantage for the labor, but it is not an advantage for the producers. It will increase the supply of labor because many individuals will come forward to work. Because they will be getting minimum wage at least.

The imposition of minimum wage will result in a fall in demand for labor because the producers or employees will be not in a position to pay the minimum wage to the labor, if they choose to pay they need to reduce the production.

Thus, the imposition of the minimum wage is not good for the demand side of the labor economy and it increases more unemployment.

In the above diagram, DD represents the labor demand curve, while SS represents the labour supply curve. Equilibrium occurs at the intersection of both the curves at point E. The equilibrium real wage rate that clears the market is w, and quantity of labour is Q.

The orange line represent the minimum wage set by the government. So here, w1 = 3500. Since this wage rate is above the equilibrium wage, so the labor market fails to clear. Labor demand = D1 and Labor supply = S1. So we see that there is an excess supply of labour. The number of jobs available in the economy is not enough to provide work to everyone who wants to be in the labour force. This results in unemployment.