Question

Question 1 [25 Marks]

Read the news extract below and answer Question 1 (a) and (b): The South African government has approved sectorial minimum wages with effect from January 2019.

a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labour. Using relevant diagrams and hypothetical numbers of the unskilled labour market, show the potential impact of the minimum wage on the labour market in South Africa.

b. If the demand for unskilled labour were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers? Would your answer change if the demand for unskilled labour were elastic?

Answer 1

(a) Assuming the minimum wage is above the equilibrium wage in the market for unskilled labour, the equilibrium wage is $ 10 per hour and the equilibrium quantity is 100 labours. Now, lets suppose the government sets a minimum wage to $ 15 per hour, then the quantity of labour supplied will increase to 110 labours but the quantity of labours demanded will decrease to 90 labours. So, the surplus labours in the market is (110 - 90) which is equal to 20 labours.

(b) If the demand for unskilled labour were inelastic, the proposed increase in the minimum wage would raise the total wage payments to unskilled workers because the percentage decrease in quantity demanded would be less than the percentage increase in wage when there is inelastic demand for labour. Now, if the demand for unskilled labour was elastic, the proposed increase in the minimum wage would lower the total wage payments to unskilled workers because then the percentage decrease in quantity demanded would be higher than the percentage increase in the minimum wage and hence our answer would change in this situation.