Question

discuss the welfare effect of new legislation if the new minimum wage is below equilibrium wage and above the equilibrium wage rate with labour hours as your quantity variable

Answer 1

A wage rate set above the equilibrium wage rate would cause excess supply of labor in the

Explanation:

• In the labor market,considering that the labor hours as the quantity variable,the equilibrium quantity and wage rate in the market is established at the point where the overall market demand for labor by the firms and companies is equal or identical to the overall or total market supply of labor in the market.
• Now,if the wage rate is set above the equilibrium wage in the market as per the new legislation,it will create an excess supply of labor in the market as the laborers would be more willing to supply higher quantity of labor or more number of labor hours in the market but the firms or companies would not be willing to hire as much labor at the higher wage rate set under the new legislation.Now,from a practical point of view,this would indicate that the labor market in the economy is operating at above its equilibrium capacity which would reduce both the worker's and firm's surpluses and create a deadweight loss in the market,as compared to the equilibrium position.
• On the other hand,a wage rate set below the equilibrium wage level in the market would case a shortage of labor in the market as that wage rate,labor supply by the laborers would be less than what is demanded by the firms or the companies.Now,in this case,compared to the equilibrium position,the lower wage rate compared to equilibrium wage would cause a reduction in the worker's surplus and generate a deadweight loss in the market as well.The labor shortage will also negatively affect the production and business operation of the firms or companies.