Minimum wage

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?
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The equilibrium wage is R2 500 and the equilibrium quantity of labour employed is 10 000.

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?
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From the diagram, it is clear that an introduction of a minimum wage of R3 000 decreases the quantity of labour demanded from 10 000 to 8 000, while the quantity of labour supplied increases from 10 000 to 12 000.

Unemployment increases since firms employ less labour and more people are willing to work than before. The people who are able to find employment at the minim wage benefits since they earn a higher income, while the people who loses their jobs because of the minimum wage loses.

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.

Activity

The table below provides data for the market for house cleaners:

Market for house cleaners

Wage rate
per day		 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
  1. Draw the demand and supply curve for house cleaners.
  2. What is the equilibrium wage rate and the equilibrium quantity of labour?
  3. What is the total daily income of house cleaners at the equilibrium wage?
  4. Assume a daily minimum wage of R200 is imposed on the market.
  1. How many house cleaners will be employed at the minimum wage of R200?
  2. How many house cleaners will lose their jobs due to the minimum wage?
  3. What is the total daily income of house cleaners at the minimum equilibrium wage?
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1.
2. The equilibrium wage is R150 per day and the equilibrium quantity of labour is 3 000.
3. The total daily income for all house cleaners is R150 x 3 000 = R450 000.
4.
a. At a minimum wage of R200 per day, 2 500 house cleaners will be employed.
b. The number of house cleaners that will lose their jobs is 3 000 – 2 500 = 500.
c. The total daily income of house cleaners at R200 is R200 x 2 500 = R500 000.