Microeconomics Principles: Effects of Minimum Wage on Labor Market

This article discusses the effects of minimum wage on the labor market, including its impact on consumer and producer surplus, total surplus, deadweight loss, and allocative efficiency. It also explores the welfare implications of minimum wage legislation and its impact on unskilled laborers and firms.

Running head: MICROECONOMICS PRINCIPLES
Microeconomics Principles
Name of the Student
Name of the University
Author note
Course ID

1MICROECONOMICS PRINCIPLES
Table of Contents
Question 1........................................................................................................................................
Question 2........................................................................................................................................
Question 3........................................................................................................................................
Question 4........................................................................................................................................
Question 5........................................................................................................................................
Question 6........................................................................................................................................
Question 7......................................................................................................................................
Question 8......................................................................................................................................
Question 9......................................................................................................................................
Question 10....................................................................................................................................
Question 11....................................................................................................................................
Question 12....................................................................................................................................
References list................................................................................................................................

2MICROECONOMICS PRINCIPLES
Question 1
Minimum wage refers to the price floor that government of a nation implements to
ensure a minimum payment for the workers. Wages paid below the set minimum limit is
considered as illegal.
A minimum wage is said to be binding when it is set above the equilibrium wage1.
Minimum wage set below the equilibrium wage does not have any impact on the labor
market as workers in such a market are already receiving a higher wage.
Question 2
The national minimum wage per hour in Australia for an adult worker is $18.932.
Question 3
Demand and Supply curve of unskilled labors are given as
D = 1,500,000 – 60,000W
S = 120,000W – 1,200,000
1 Meer, Jonathan, and Jeremy West. "Effects of the minimum wage on employment dynamics." Journal of
Human Resources 51.2 (2016): 500-522.
2 "Welcome To The Fair Work Ombudsman Website." Fair Work Ombudsman. N.p., 2018. Web. 1 Oct. 2018.

3MICROECONOMICS PRINCIPLES
Figure 1: Equilibrium in the labor market
At the equilibrium,
Labor demand=Labor supply
¿ , 1,500,000 – 60,000 W=120,000 W – 1,200,000
¿ , 120,000W +60,000 W =1,500,000+1,200,000
¿ , 180,000W =2,700,000
¿ , W¿=15

4MICROECONOMICS PRINCIPLES
Number of Unskilled labor ( L¿ ) =1,500,000 – 60,000 W
¿ 1,500,000− ( 60,000 × 15 )
¿ 1,500,000−900,000
¿ 600,000
Question 4
Figure 2: Consumer surplus, Producer surplus and Total surplus

5MICROECONOMICS PRINCIPLES
i)
D = 1,500,000 – 60,000W
The maximum wage that firm willing to pay is given as
W0 =1,500,000
60,000
¿ 25
Consumer∨firm surplus (CS)= 1
2 × ( W 0−W ¿
) × L¿
¿ 1
2 × ( 25−15 ) ×600,000
¿ 1
2 ×10 ×600,000
¿ 3,000,000
ii)
S = 120,000W – 1,200,000
The minimum wage cost for labor is
W 1= 1,200,000
120,000
¿ 10
Producer∨worker surplus (PS)= 1
2 × (W ¿−W 1 ) × L¿
¿ 1
2 × ( 15−10 ) × 600,000

6MICROECONOMICS PRINCIPLES
¿ 1
2 ×5 ×600,000
¿ 1,500,000
Total Surplus=Consumer Surplus ( CS ) + Producer Surplus ( PS )
¿ 3,000,000+1,500,000
¿ 4,500,000
Question 5
Fair Work Commission imposes a minimum wage of $19.
At this wage,
Labor demand is obtained as
D=1,500,000−60,000 W
¿ 1,500,000− (60,000 × 19 )
¿ 1,500,000−1,140,000
¿ 360,000
Corresponding to minimum wage,
Labor supply is obtained as
S=120,000W −1,200,000
¿ ( 120,000 ×19 )−1,200,000
¿ 2,280,000−1,200,000
¿ 1,080,000

7MICROECONOMICS PRINCIPLES
ii)
At the minimum wage, supply of labor exceeds that of the demand. This creates a
surplus of labor in the market.
Labor Surplus=1,080,000−360,000
¿ 720,000
Question 6

8MICROECONOMICS PRINCIPLES
Figure 3: Minimum wage and effect on economic surplus
i)
Given the minimum wage of $19
Consumer surplus is equivalent to the triangular area A
Consumer Surplus= 1
2 × ( 25−19 ) ×36 0,000
¿ 1
2 ×6 × 36 0,000
¿ 1 , 08 0 ,000
ii)
Producer or worker surplus corresponding to set minimum wage is equivalent to the area (B +
C)
B= ( 19−15 ) ×360,000
¿ 4 ×360,000
¿ 1,440,000
C= ( C+ E ) −E
C+ E= 1
2 × (15−10 ) ×600,000
¿ 1
2 ×5 ×600,000
¿ 1,500,000
E=1
2 × ( 15−13 ) × ( 600,000−360,000 )

9MICROECONOMICS PRINCIPLES
¿ 1
2 ×2 ×240,000
¿ 240,000
C=1,500,000−240,000
¿ 1,260,000
Producer Surplus ( PS )=1,440,000+1,260,000
¿ 2,700,000
iii) Total Surplus
Total Surplus=CS+ PS
¿ 1 , 080 ,000+2,700,000
¿ 1080000+2,700,000
¿ 3,780,000
iv) Resource cost
Resource Cost= [ { ( 1,080,000−360,000 ) × ( 19−15 ) }−480,000− {1
2 × (19−15 ) × ( 1,080,000−600,00 ) }]
¿ 4,320,000−480,000−960,000
¿ 2,880,000
v) Deadweight Loss
Deadweight loss is given by the area D + E
D= 1
2 × ( 19−15 ) × ( 600,000−360,000 )

10MICROECONOMICS PRINCIPLES
¿ 1
2 ×6 × 240,000
¿ 480,000
Deadweight Loss=D+ E
¿ 480,000+240,000
¿ 720,000
Question 7
i)
After the imposition of minimum wage, firms have to pay a higher wage to the workers. This
reduces surplus to firms from 3,000,000 to 1,000,000. The firms are thus worse off after the
minimum wage.
ii)
Workers on the other hand get a higher wage per hour after the minimum wage. Surplus to
workers thus increases from 1, 500,000 to 2,700,000.
iii)
The reduction in consumer surplus exceeds that of the increase in surplus to workers. As a
result, there is a decline in overall surplus from 4,500,000 to 3,780,000.
Question 8
i)
There will be no change in consumer surplus. It remains to the earlier level of 1,080, 000.
ii)

11MICROECONOMICS PRINCIPLES
If resources lost in the job search given to the producers, then surplus to workers increases to
(2,700,000 + 2880000) = 5,580,000
iii)
Total surplus increases to (1, 080, 000 + 5, 580, 000) = 6, 660, 000
iv)
There would be no deadweight loss under this condition.
Question 9
After reallocation of resources, there is no change in welfare of firms. The workers
however receive a higher surplus compared to the estimation in part (7). As there is a
significant amount of resource lost because of minimum wage, this when adds to producers’
surplus offset both loss in consumer surplus and deadweight loss. Consequently, there is an
increase in social welfare.
Question 10
Allocative efficiency refers to the situation where goods and services are distributed
optimally among different members of the society. More precisely, allocative efficiency is
achieved corresponding to the point where price is paid equivalent to the marginal cost of
production3. At this point, price reflecting willingness to pay of buyers match with the price
at which sellers are willing to sell the product. The optimal distribution hence is determined
from equality between marginal utility and marginal cost.
Minimum wage is a form of price intervention that set a legal minimum wage.
Government intervention in the form of minimum wage fails to bring allocative efficiency.
3 Wood, Aaron D. "A model to teach non-rival and excludable goods in undergraduate
microeconomics." International Review of Economics Education 24 (2017): 28-35.

12MICROECONOMICS PRINCIPLES
There is a mismatch between labor supply and labor demand. At higher wage, labor supply
exceeds the labor demand at that wage. The marginal cost to workers in supplying labor is
less than the marginal benefit enjoyed by them4. Workers are benefitted at the cost of reduced
surplus to firms. Workers receive more than marginal cost. Moreover, there is a welfare cost
and a cost for lost resources in job search. Minimum wage thus fails to ensure allocative
efficiency
Question 11
The minimum wage increases remuneration to the workers. As wage increases,
workers are encouraged to supply more labor hours at the given wage. Employers on the
other hand face a higher cost of workers. This reduces demand for labor hours from 600,000
to 360,000 hours. Supply of labor hour on the other hand increase from 600,000 to 1,080, 000
hours. Consequently, there is a surplus of unskilled labor hours amounting to 720,000 hours.
The excess labor hours lead to unemployment in the economy. The unskilled laborers who
get higher wage enjoys a higher standard of living5. Workers who lost their jobs suffers a
decrease in living standard. There is loss in resources resulted due to job searching by the
unemployed workers.
The minimum wage thus increases living standard of only a fraction of unskilled
laborers. Others on the other hand experiences a decrease in living standard from losing jobs6.
The practice of levying minimum wage to increase living standard of unskilled workers is not
ethically right as instead of increasing welfare of all the unskilled workers it increase welfare
of only a small fraction of workers.
4Booth, Alison L. "Wage determination and imperfect competition." Labour Economics 30 (2014): 53-58.
5 McCluskey, Martha T., Frank Pasquale, and Jennifer Taub. "Law and Economics: Contemporary
Approaches." Yale Law & Policy Review 35.1 (2017): 10.
6 Weiss, Andrew. Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Vol. 1192.
Princeton University Press, 2014

13MICROECONOMICS PRINCIPLES
Question 12
From the previous discussion, welfare comparison of free market equilibrium and that
of minimum wage suggest that after minimum wage, unskilled laborers remaining in the
labor force get a higher surplus. Consumers or firms receive a lower surplus from the higher
wage. There is a decline in total surplus in the economy. There is a resulted inefficiency from
reallocation of resources7. The cost from inefficiency is termed as dead weight loss.
Resources are also lost from job searching of unemployed workers. Hence, from the welfare
perspective, practice of minimum wage is socially inefficient.
The minimum wage legislation though intends to increase welfare but it often hurts
those whom it targets to protect. Under free market condition, without any legislation,
workers are given equilibrium wage. The binding minimum wage that sets the wage above
equilibrium creates unemployment among the unskilled workers8. The minimum wage thus
though helps a fraction of workers but hurt others more by causing them to lose their current
jobs.
References list
7 Gerritsen, Aart. "Equity and efficiency in rationed labor markets." Journal of Public Economics 153 (2017):
56-68.
8 Basu, Kaushik, et al. "Regulation, Minimum Wage and Informality: Introduction to Symposium." Review of
Development Economics 21.4 (2017): 935-938.

14MICROECONOMICS PRINCIPLES
"Welcome To The Fair Work Ombudsman Website." Fair Work Ombudsman. N.p., 2018.
Web. 1 Oct. 2018.
Basu, Kaushik, et al. "Regulation, Minimum Wage and Informality: Introduction to
Symposium." Review of Development Economics 21.4 (2017): 935-938.
Booth, Alison L. "Wage determination and imperfect competition." Labour Economics 30
(2014): 53-58.
Gerritsen, Aart. "Equity and efficiency in rationed labor markets." Journal of Public
Economics 153 (2017): 56-68.
McCluskey, Martha T., Frank Pasquale, and Jennifer Taub. "Law and Economics:
Contemporary Approaches." Yale Law & Policy Review 35.1 (2017): 10.
Meer, Jonathan, and Jeremy West. "Effects of the minimum wage on employment
dynamics." Journal of Human Resources 51.2 (2016): 500-522.
Weiss, Andrew. Efficiency wages: Models of unemployment, layoffs, and wage dispersion.
Vol. 1192. Princeton University Press, 2014.
Wood, Aaron D. "A model to teach non-rival and excludable goods in undergraduate
microeconomics." International Review of Economics Education 24 (2017): 28-35.