Minimum Wage Legislation: Impact on Surplus and Welfare

This article analyzes the impact of minimum wage legislation on surplus and welfare. It discusses the concept of price floor, equilibrium wage rate, and surplus. It also evaluates the ethical justification of minimum wage legislation.

MINIMUM WAGE LEGISLATION 1
MINIMUM WAGE LEGISLATION
By (Name)
Name of the class (course)
The Course instructor (Professor)
The Institution
The City and State location
The Date

MINIMUM WAGE LEGISLATION 2
Q1.
Minimum wage falls under the category of price control known as a price floor. This type of
price floor stipulates the lowest wages an employee can receive as compensation for labor
provided (Case et al., 2014, p.54). Therefore, the enactment of minimum wage legislation is
meant to protect the interest of workers so that the employers do not exploit them. For minimum
wage to bind, it must be set above the market equilibrium wage rate. If it set below the market
equilibrium, it will be ineffective and will not influence the market due to the price mechanism.
Q2.
Australia’s minimum wage rate is 18.93 dollars per hour (Fair Work Ombudsman, 2018).
Q3.
At equilibrium, Quantity supplied (Qs) equals the Quantity demanded (Qd)
Qd = 1,500,000 – 60,000W
QS = 120,000W – 1,200,000
Therefore,
1,500,000 – 60,000W = 120,000W – 1,200,000
Collect the like terms together
-60,000W - 120,000W = – 1,200,000 - 1,500,000
-180,000W = -2,700,000
W = -2,700,000 / -180,000

MINIMUM WAGE LEGISLATION 3
W = 15
Equilibrium wage rate = $15 per hour
Substitute 15 in any of the equations to obtain equilibrium quantity of labor.
Qd = 1,500,000 – 60,000W
W = 15
Therefore,
Qd = 1,500,000 – 60,000(15)
Qd = 1,500,000 – 900,000
Q = 600,000
Equilibrium quantity = 600,000 hours
We will choose values of wage rate and calculate Qs and Qd at each value and then graph the
results in excel.
Wage rate per hour 10 15 20 25
Hours of labour supplied. 0 600,00
0
1,200,000 1,800,000
Hours of labour
demanded
900,000 600,00
0
300,000 0

MINIMUM WAGE LEGISLATION 4
-500000 0 500000 1000000 1500000 2000000 2500000 3000000
0
5
10
15
20
25
30
35
Demand and supply of labor
Hours of labour supplied Hours of labour demanded
Quantity (labor)
Wage rate per hour
Q4.

MINIMUM WAGE LEGISLATION 5
-500000 0 500000 1000000 1500000 2000000 2500000 3000000
0
5
10
15
20
25
30
35
Demand and supply of labor
Hours of labour supplied Hours of labour demanded
Quantity (labor)
Wage rate per hour
i.
Consumer surplus is shown by the area shaded orange. This surplus is given as the area below
the demand curve and above the market clearing wage rate.
Mathematically, consumer surplus is given as ½ base * height
Base = 600,000
Height = 25 – 15 = 10
Hence
Consumer surplus = ½ * 600,000 * 10 = $3,000,000
ii.

MINIMUM WAGE LEGISLATION 6
Producer surplus is depicted by the area shaded green. This surplus is given as the area above the
supply curve and below the market clearing wage rate.
Producer surplus = ½ base * height
Base = 600,000
Height = 15 – 10 = 5
Therefore,
Producer surplus = ½ * 600,000 * 5 = $1,500,000
Producer surplus = $1,500,000
iii.
Total surplus = Consumer surplus + Producer surplus
Consumer surplus = $3,000,000
Producer surplus = $1,500,000
Therefore,
Total surplus = $3,000,000 + $1,500,000 = $4,500,000
Q5.
i.
Hours of employed = to the number of hours demanded
The demand curve was given as Qd = 1,500,000 – 60,000W. We will, therefore, find the value of
Qd.

MINIMUM WAGE LEGISLATION 7
Minimum wage rate per hour = 19
Therefore,
Qd = 1,500,000 – 60,000(19)
Qd = 1,500,000 – 1,140,000
Qd = 360,000 hours
The number of hours employed or demanded by firms is 360,000.
ii.
To determine whether there is a shortage or a surplus, we will find the difference between the numbers of
hours demanded and number of hours supplied as a minimum wage rate of 19 dollars per hour.
Number of hours demanded
Qd = 1,500,000 – 60,000W
Qd = 1,500,000 – 60,000(19)
Qd = 1,500,000 – 1,140,000
Qd = 360,000 hours
Number of hours supplied
QS = 120,000W – 1,200,000
QS = 120,000(19) – 1,200,000
Qs = 1,080,000 hours

MINIMUM WAGE LEGISLATION 8
From the calculations above, it is evident that the number of hours demanded are lower that the
number of hours supplied. Hence, the introduction of minimum wage results in surplus in the
market as workers are will to supply more hours at a higher wage rate.
Surplus = 1,080,000 - 360,000 = 720,000 hours.
Q6.
-500000 0 500000 1000000 1500000 2000000 2500000 3000000
0
5
10
15
20
25
30
35
Demand and supply of labor
Hours of labour supplied Hours of labour demanded
Quantity (labor)
W a g e ra te p e r h ou r
i.
Minimum wage ($19)

MINIMUM WAGE LEGISLATION 9
Consumer or firm surplus is depicted by region painted orange. To find consumer surplus, we
will calculate the area of this region.
Area = ½ base * height
Base = 360,000
Height = 25 – 19 = 6
Therefore,
Consumer surplus = ½ * 360,000 * 6 = $1,080,000
ii.
Worker or producer surplus is depicted by region painted green. Find the area of this region.
Area = ½ base * height
Base = 360,000
Height = 13 – 10 = 3
Thus,
Producer surplus = ½ * 360,000 * 3 = $540,000
iii.
Total surplus = Consumer surplus + Producer surplus
Consumer surplus = $1,080,000
Producer surplus = $540,000
Therefore,

MINIMUM WAGE LEGISLATION 10
Total surplus = $1,080,000 + $540,000 = $1,620,000
iv.
Resources lost in job search are depicted by the area shaded black
Area = length * width
Length = 360,000
Width = 19 – 13 = 6
Hence
Area of rectangle = 360,000 * 6 = $2,160,000
v.
Deadweight loss is given by area shaded red.
Deadweight loss = ½ base * height
Base = 600,000 – 360,000 = 240,000
Note: we will find the heights of the two triangles to calculate their areas.
The upper triangle = 19 – 15 = 4
The lower triangle = 15 – 13 = 2
Therefore,
Deadweight loss = (½ * 240,000 * 4) + (½ * 240,000 * 2)
Deadweight loss = 480,000 + 240,000 = $720,000.

MINIMUM WAGE LEGISLATION 11
Deadweight loss = $720,000.
Q7.
i.
The introduction of the minimum wage rate has made the consumers or firms worse due to a
decline in their surplus. This legislation has diminished the welfare of consumers by 1,920,000
dollars, that is, from $3,000,000 to $1,080,000.
ii.
The workers or producers are worse off since their surplus has also decreased considerably. The
benefit that the producers receive for participating in this market has reduced by 960,000 dollars,
that is, from $1,500,000 to $540,000.
iii.
The decrease in consumer surplus and workers or producer surplus is enough indication that the
welfare of the society has also been impacted adversely. The minimum wage has diminished by
surplus of the society by 2,880,000 dollars, that is, from $4,500,000 to $1,620,000.
Q8.
i.
Consumer surplus is given as ½ * base * height
Base = 360,000
Height = 25 – 19 = 6
Therefore,

MINIMUM WAGE LEGISLATION 12
Consumer surplus = ½ * 360,000 * 6 = $1,080,000
ii.
Producer surplus is given as {½ * base * height} + {length * width}, that is, the area of the
triangle and rectangle.
Base = 360,000
Height = 13 – 10 = 3
Therefore,
Producer surplus = (½ * 360,000 * 3) + (360,000 * 6) = $2,700,000.
iii.
Total surplus is given as Consumer surplus + Producer surplus
Consumer surplus = $1,080,000
Producer surplus = $2,700,000.
Therefore,
Total surplus = $1,080,000 + $2,700,000 = $3,780,000.
iv.
Deadweight loss is given as ½ base * height
Base = 600,000 – 360,000 = 240,000
Note: we will find the heights of the two triangles to calculate their areas.

MINIMUM WAGE LEGISLATION 13
The upper triangle = 19 – 15 = 4
The lower triangle = 15 – 13 = 2
Therefore,
Deadweight loss = {½ * 240,000 * 4} + {½ * 240,000 * 2}
Deadweight loss = 480,000 + 240,000 = $720,000.
Q9.
The firms or employers are still worse off since their surplus they get for participating in the
market is lower compared to when the minimum wage law was not in action. Before the
implementation, the surplus of the firms was $3,000,000, and now it is $1,080,000.
Though the welfare of the firms is still low, that of workers or producers has improved. Before
the minimum wage, the workers surplus was $1,500,000, and now it is $2,700,000. A significant
rise in the welfare of producers or employees shows that they are now better off than before.
On the other hand, the welfare of the society has declined from $4,500,000 to $2,700,000.
Therefore, still, the welfare of the whole society is lower than when the wage was determined by
the price mechanism, the society is still worse off.
10.
No. The enactment of the minimum wage by the Fair Work Commission is not ethically justified
as it causes allocative inefficiency, that is, this policy diminishes the total surplus of the society.
The deadweight loss resulting from the enactment of such a policy is one of the aspects that
result in a decrease in total surplus. The deadweight loss takes place because any company which
is willing to engage a worker for remuneration lower than the minimum wage it cannot do so

MINIMUM WAGE LEGISLATION 14
(Sloman et al., 2015, p.35). Similarly, those candidates looking for work cannot obtain one
because, at a minimum wage, the employers will not be willing to hire more people. As a result,
such workers waste a lot of resources and time searching for employment.
11.
From the analysis of question seven, it is clear that the introduction of the minimum wage of 19
dollars per hour by the Fair Work Commission has reduced the welfare of workers substantially.
This evidence indicates the minimum wage is an efficient and blunt approach for diminishing
income inequalities and poverty in the society (Mankiw, 2014, p.87). Moreover, studies show
that the implementation of the minimum wage hurts more employees in the private sectors of the
economy. This is because the enactment of the minimum wage prevents the companies from
employing new staff and also makes the employers to lay off some workers as they try to cut on
the cost of doing business. As a result, since the minimum wage makes the employees worse off,
the enactment of such a policy is not ethically justified.
On the other hand, the analysis of question nine depicts that the enactment of minimum wage
results in the improved wellbeing of the unskilled employees. The implementation of a minimum
wage assists the working poor particularly at a time when the cost of living is escalating and
when the income inequalities are widespread (Sloman et al., 2015, p.42). Hence, since the
minimum wage increases the welfare of the working poor, this policy is ethically justified.
12.
The theory of Deontology holds that we have the moral obligation to act according to a particular
set of rules and principles regardless of the outcome. According to Immanuel Kant, the founder
of this theory, an action is wrong or right depending on the scrutiny of whether the action in

MINIMUM WAGE LEGISLATION 15
question agrees with or disobeys the categorical imperative. Moreover, Kant argues that human
life would be useless if justice were to be taken away (O'Mahony, 2013, p.65). Therefore, based
on the theory of Deontology, minimum wage is desirable and should be implemented. Foremost,
the minimum wage will ensure that workers get justice by receiving a living wage for the efforts
and time they put in their works. A living wage is necessary because it will enable an employee
to support himself or herself as well as his families as per the accepted standard of living in the
community (Hubbard et al., 2016). Furthermore, a living wage is important because low wages
and salaries for persons at the bottom of an economic ladder cause a deprivation to them and
their families especially for single parent families. As a result, the government should enact
minimum wage legislation to guarantee that workers particularly the poor ones receive a living
wage to support themselves and their families.

MINIMUM WAGE LEGISLATION 16
Reference List
Case, K.E., Fair, R.C. & Oster, S.M., 2014. Principles of economics. Harlow,
England: Pearson.
Fair Work Ombudsman, 2018. Minimum wages. [Online] Available at:
https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-
sheets/minimum-workplace-entitlements/minimum-wages [Accessed 2nd October
2018].
Hubbard, R.G., Garnett, A., Lewis, P.E.T. & O'Brien, A.P., 2016. Essentials of
economics. 3rd ed. Melbourne, Victoria: Pearson Australia, [2016].
Mankiw, N.G., 2014. Principles of economics. Stamford, CT : Cengage Learning.
O'Mahony, P., 2013. The contemporary theory of the public sphere. Oxford ; New
York : Peter Lang.
Sloman, J., Wride, A. & Garratt, D., 2015. Economics. 9th ed. Harlow : Pearson.