Question

why is minimum wage such a poplar government policy in most countries? use your understanding of supply/demand analysis to explain the advanatage of the minimum wage and the disadvanatages of the minimum wage. provide a graph to illustrate your answer. be sure to use your graph and the law of supply an demand to answer the question, not public opinion

Answer 1

Minimum wages acts as a price floor in the labor market. Minimum wage sets lowest level of wages that must be paid to the workers. It is set above the equilibrium wage level determined by labor demand and labor supply.

Since minimum wage is set above the equilibrium wage level, quantity demanded of labor is less than quantity supplied of labor, it means there is surplus of labor.

Equilibrium quantity falls from Q* to Qm, it means there is a fall in employment and a rise in unemployment.

Advantages of minimum wages is that it allows workers to receive higher wages for their work than before. This will increase the income of the workers. This may help reduce the poverty.

Inequality of Income between the rich and the poor may fall.

Disadvantages of minimum wages is that it leads to rise in unemployment due to the distortion in the market. There will be a fall in the other benefits that workers recieve since firms are paying higher wages. Firms may increase the proce of the output to cover for the increased cost of labor.