Question

Why does the government intervene in the labor market and impose minimum wage? Is this government intervention a price floor or price ceiling? Using economic terms, what happens to quantity demanded and quantity supplied with minimum wage? Who are the winners and losers from minimum wage?

Answer 1

Government intervenes in the labour market and imposes minimum wage to increase the wages of the workers who are earning very little. This government intervention is a price floor as it is set above the market wage rate. Quantity demanded will increase as the workers have more resources to buy goods. The quantity supply will also increase as more people will be willing to work. The workers are the winners and firms may seem like losers initially, but they will earn more profits with higher production.