Question

In the labour market for carpenters, the current market clearing wage rate 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. [20 marks]

I have got the answer from the ones that you have done

Answer 1

The above graph shows the welfare effects of the government intervention that increases the minimum wage to R1000 from the market clearing wage that is R800. These effects are as follows:

1. Number of labors willing to work increase at Q2, though the number of labors demanded by the firms decreases to Q1 level.

2. The firms pay the wage of R1000, but they compensate the additonal expenses, by demanding less workers.

3. Due to lower demand and higher supply of labor, the unemployment of (Q2-Q1) labor is created in the market.

4. It helps those labors who are skilled and deserve the higher wages, but unskilled workers are negatively affected.