Question

In a graph depicting the labor market, illustrate the welfare effects of a minimum wage policy.

Show the workers', the firms' and the total surplus in the free market equilibrium and the respective welfare with the minimum wage.

Show the welfare loss and the welfare redistribution.

Show the unemployment resulting from the policy.

Answer 1

Fig.1

Fig.1 shows the workers', firms' and total surplus at equilibrium wage rate

Fig.2

Fig.2 shows the redistributed surplus of Firms and Workers due to minimum wage policy and welfare loss due to the same.Welfare loss is the cost of minimum wage policy. Fig. 2 also shows us the occurance of unemployment due to minmum wage rate because minimum wage rate being higher than equilibrium wage rate less and less workers will be employed at higher wage rate resulting to unemployment.