Answer to Question #94279 in Microeconomics for Lesego

Question

In 2002 the South African government introduced the minimum wage for domestic workers. With effect from the 1st of January 2019 it has been revised to R15 per hour with the exception of workers working fewer hours in certain areas. https://www.parent24.com/Family/Finance_Legal/What-is-the-minimum-wage-for-domestic-workersand-nannies-20150826 Accessed: 24/02/2019 With the aid of a diagram, discuss the welfare effects of such a policy if the wage rate set is above the market clearing wage rate (assuming this is R12 per hour).

Answer 1

If the National minimum wage increases and is above the market clearing rate, a situation of excess supply would prevail in the South African economy. If R 12 per hour is the market clearing wage rate, the demand for labour would equal the demand for labour supply creating a state of equilibrium.

However, if the Government raises the wage rate to R 15 per hour, it would distort market behaviour and disequilibrium would prevail. At this rate, the number of workers would increase. However, unemployment would increase as firms would only hire few workers due to the increased wage rate.