Question

Show the classical/standard view of minimum wage graphically. Please explain what the graph is showing.

Answer 1

Minimum wage is the minimum amount of remuneration that an employer is supposed to pay to his wage earners for a job done or work performed permitted imposed by the law .
Minimum wage is similar to the price floor.A price floor is a government imposed price control or limit on how low a price can be charged for a product or service. A price floor is higher than the equilibrium price .
Equilibrium rate is determined through the market forces of demand and supply i.e. what the firms are willing to pa and what the workers willing to agree to.Equilibrium wage rate is very low.

Governments often impose a minimum wage to raise the wages of workers who are earning very little and protect the workers from exploitation in the labor market.


The equilibrium wage rate was determined at point E equal to OR1 which gave employment to OQ1 quantity of wordkers.Governement intervenes and imposes a minimum wage for the benefit of the unskilled workers. The wage rate increases from OR1 to OR2 and employment also rises from OQ to OQ1.