Answer to Question #88974 in Microeconomics for Anneline August

Question

Could you kindly assist with the graph and exlpanation of the below question:

In the labour market for carpenters, the current market clearing wage rate is R800 per day. With the aid of a diagram, discuss the welfare effects of government intervention in the form of legislation that sets the minimum wage rate for a carpenter at R1000 per day.

Answer 1

Such government intervention will create a surplus of carpenters because the quantity of labour demanded will be lower than the quantity of labour supplied. Moreover the total surplus which is the sum of buyer (employer’s) and seller (employee’s) surpluses will decrease because the deadweight loss will occur, that’s why the labour market for carpenters will be inefficient.