Question

Q2: Explain why the introduction of a minimum wage by the government reduces overall welfare in the labour market. Give one reason why the government should introduce a minimum wage anyway?

Answer 1

Introduction of the minimum wage, cause wage rate to increase and in response to it, firms decrease the demand of workers in the labor market. It causes increase in the unemployment and overall welfare decreases in the labor market. Due to this reason, the biggest sufferers are the non-skilled workers, for that the minimum wage was enacted. Hence, the burden of overall loss of the welfare falls to these non-skilled workers and they become unemployed.

One reason is that it will makes workers to get skilled and come back to the market to get atleast a minimum wage that is higher than the previous wage level. Further, existing skilled labor will at least get the minimum wage.