True or false: minimum wage always increases the welfare of workers. Explain your answer with a...

True or false: minimum wage always increases the welfare of workers. Explain your answer with a graph.

Expert Solution

False.

A minimum wage s imposed above equilibrium wage rate. At this higher wage rate, quantity of labor demanded falls and quantity of labor supplied rises, leading to surplus labor and unemployment in labor market. Those workers whose jobs are retained at higher wage are better-off, but workers losing their job are worse-off. So minimum wage does not increase welfare for all workers. Also, it leads to a deadweight loss which lowers social welfare.

In following graph, wage rate (w) & quantity of labor (L) are measured along vertical axis & horizontal axis respectively. D0 & S0 are initial demand & supply curve of labor, intersecting at point A with initial wage rate w0 & quantity of labor L0.

When a minimum wage is set at the level w1 (higher than w0), quantity of labor supplied increases to L1 and quantity of labor demanded decreases to L2, causing a surlus (unemployment) equal to (L1 - L2). The minimum wage law also creates a deadweight loss equal to area ABC which is the social inefficiency loss. Therefore society is worse off.

Rahul Sunny answered 2 years ago

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