During 2018, the South African government introduced a national minimum wage of R20 per hour. In the following analysis, we will make use of demand and supply analysis to determine the possible impact of a minimum wage on a competitive labour market.
Study the following diagram of a competitive labour market and answer the questions:
- What is the equilibrium wage?
- What is the quantity of labour employed at this equilibrium wage?
Assume a minimum wage of R3 000, which is higher than the equilibrium wage is imposed on this competitive labour market. This is illustrated in the following diagram:
- What is the quantity of labour hours demanded at this minimum wage of R3 000?
- What is happening to the quantity of labour supplied at this minimum wage of R3 000?
- What happens to unemployment at this minimum wage of R3 000?
- Who benefits and who loses when a minimum wage higher than an equilibrium wage is introduced in a competitive labour market?
Some economists oppose increases in the minimum wage on grounds that such increases boost unemployment. Other economists argue that the demand for unskilled labour is relatively inelastic, so a higher minimum wage boosts the incomes of unskilled workers as a group. That gain, they say, justifies the policy, even if it increases unemployment.
The table below provides data for the market for house cleaners:
Market for house cleaners
|Quantity demanded||Quantity supplied|
|50||4 000||2 000|
|100||3 500||2 500|
|150||3 000||3 000|
|200||2 500||3 000|
|250||2 000||4 000|
- Draw the demand and supply curve for house cleaners.
- What is the equilibrium wage rate and the equilibrium quantity of labour?
- What is the total daily income of house cleaners at the equilibrium wage?
- Assume a daily minimum wage of R200 is imposed on the market.
- How many house cleaners will be employed at the minimum wage of R200?
- How many house cleaners will lose their jobs due to the minimum wage?
- What is the total daily income of house cleaners at the minimum equilibrium wage?