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1.5 In the labour market for carpenters, the current market clearing wage rate is R800 per...

1.5 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. (20 marks

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Answer #1

A minimum wage is binding only when imposed above equilibrium wage rate, as in this case. At a higher wage,, quantity of labor demanded decreases but quantity of labor supplied increases. This leads to a surplus of workers, and higher unemployment in labor market.

In following graph, wage rate (w) & quantity of labor (L) are depicted along vertical and horizontal axes respectively. D0 & S0 are labor demand & labor supply curves, intersecting at equilibrium point A with equilibrium wage rate w0 (= R800) and quantity of labor L0. When a minimum wage is set at the level w1 (= R1000), quantity of labor supplied increases to L1 but quantity of labor demanded decreases to L2, leading to an unemployment (surplus of labor) equal to (L1 - L2).

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