Minimum wage below the equilibrium wage welfare effect
Introduction
Wage refers to a regular compensation given in consideration of time to workers for services offered to a company. Relates to commissions and salaries and is computed as per hours worked. Minimum wage refers to the least quantities of remuneration given to a worker as compensation by their employers for duties undertaken for a period of time, which cannot go beyond the collectively agreed amount in the contract. Authorities with expertise with key considerations to the field players set the minimum wage. Equilibrium wage is when the curve for demand and supply intersect at some point in labor metrics. It reaches a scenario where during the employment of workers, a situation occurs where the revenue from extra sales equals the remunerations by cost in employing workers.
Minimum wage below the equilibrium wage welfare effect
There is no notable effect when the equilibrium wage rate is above the minimum wage though it adversely affects employment. This is to say that it records a reduction in workers on low wages, low on skills too, which in turn affects the families negatively on as the breadwinners are sacked. Minimum wage setting works to reward mediocrity since the low on skills workers are guaranteed of high pay as compared to the average work they offer.
Minimum wage above the equilibrium wage welfare effect
The resultant direct effect of this scenario is increased unemployment. This is contributed to by the fact that the companies reduce labor intake rendering the supply of workers higher than the demand due to the exploitation of scarce company resources. Analyzing the details of the graph is clearly seen that the quantity of labor supplied supersedes the quantity of labor demanded by the firms. The unemployment situation creates a scenario where many workers want to work, but the firms can only take a few to cater to the stress imposed of the resources by the minimum wage above the equilibrium wage.
However, there is a positive effect on income. As the income flow increases to the workers taken in by the firms, there will be an increase in the leisure demanded since the wages can finance such needs.
Conclusion
The forces in the market that affect the determination of the minimum wages and the positioning of the equilibrium wage include the field players, unemployment level, immigration, inequality in income, and the labor unions. How these forces contribute to the market affects the equilibrium wage, which in turn affects the welfare of the people.
Reference
Hubbard, R.G., and O’Brien, A. P. (2013). Where price comes from the interaction of demand and supply. Pearson Education [online]. Available from: https://www.nccscougar.org/site/handlers/filedownload.ashx?moduleinstanceid=95&dataid=440&FileName=ho4e_macro_ch03.pdf [Accessed 14 April 2020].