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Q1. (2 marks) From the perspective of economic theory, what is a minimum wage and when
is it binding?
Minimum wage is the good example of price floor. Minimum wage is the lowest price set by the government below which no firms are legally allowed to hire. The minimum wage was first introduced in U.S congress by the Fair labour Standard Act of 1938. Minimum wage was instituted with the objective of ensuring a minimum standard of living to the poor workers.
The binding minimum wage must be imposed above the equilibrium price in order to have an effective impact. Setting the minimum wage below the equilibrium price does not make any economic sense. As the equilibrium wage is above the minimum wage, it does not have any effect in the market. The impact of minimum wage largely depends on the experience and the skill of the labour. The workers who are highly skilled and experienced are not at all affected by the minimum age because their equilibrium wage is much above the minimum wage. Minimum wage is nor binding for these workers. Minimum wage has the greatest impact on the teenage workers beaus their pay is very low – they are the least experienced and lest skilled workers in the market. Minimum wage is binding for these workers. (Mankiw, 2009)
Q2. (2 marks) According to the Fair Work Commission’s National Minimum Wage Order for
2018 (available on it’s website), what is the national minimum wage per hour in Australia
for an adult worker?
Fair Work Commission’s National Minimum Wage Order have been in operation on July 1 2018. The order has replaced the National Minimum wage order of 2017 and will continue to remain in operation until the new order takes place.
According to this order, the Current minimum wage in Australia is $18.93 an hour or $719.20 a week for an adult worker. This minimum wage criteria in Australia are applicable for all employee except a junior employee, an employee with disability or an employee for whom training arrangement is going on. (FaieWorkCommission, 2018)
The following information will be used for the remaining 10 questions.
Assume that the market for unskilled labour in Australia is a competitive market and can be
described by the following demand and supply curves:
D = 1,500,000 – 60,000W
S = 120,000W – 1,200,000
Where W = wage rate per hour for labour, D is hours of labour demanded and S is hours of labour
supplied.
Q3. (10 marks) Calculate the equilibrium wage rate and quantity of unskilled labour
employed. Draw a diagram to illustrate your answer.
The demand and supply equation for the unskilled labour is given as
Equilibrium at the unskilled labour market occurs at the point where demand for unskilled workers are exactly matched with supply of unskilled workers.
Equating the demand for and the supply of unskilled labour we get
We can illustrate the answer with the help of demand supply diagram:
Q 4. (8 marks) Show on your diagram and calculate the size of the:
(i) Consumer/firm surplus (3 marks)
(ii) Producer/worker surplus (3 marks)
(iii) Total Surplus (2 marks)
In the above graph, Consumer surplus is the area of the blue shaded triangle.
ii)
iii)
Adding up consumer surplus and producer surplus we will get the total surplus.
Total surplus = CS+PS
Q5. (6 marks) Suppose that the Fair Work Commission imposes a minimum wage of $19 per
hour.
(i) How many hours of employment are exchanged in the market? (2 marks)
(ii) Calculate the size of the surplus or shortage of hours created by the imposition of the
minimum wage. (4 marks)
i) Equilibrium wage rate is calculated as $15 per hour. Now the minimum wage is introduced at $19 per hour.
Thus (19-15) = 4 hours of employment are exchanged in the market.
ii) Minimum wage is set as $19
Since the wage rate is above the equilibrium wage, the market will not remain as efficient as before. It will create either surplus or shortage.
Plugging the minimum wage in the demand equation we get
Plugging w=$19 in the supply equation we get,
Since the minimum wage is higher than equilibrium wage, supply of unskilled labour is more than demand for unskilled labour. Surplus will be created in the market.
An imposition of minimum wage $19 will create a surplus of 720000 of unskilled workers in the market.
Q6. (12 marks) Assume that a minimum wage of $19.00 per hour is introduced. However,
there is no change in either the Supply or Demand equations used in Question 3.
Draw a new diagram and label the minimum wage. This...