Minimum Wage And Labor Market Equilibrium In Australia

What is a Minimum Wage?

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.

Australia’s minimum wage rate is 18.93 dollars per hour (Fair Work Ombudsman, 2018).

At equilibrium, Quantity supplied (Qs) equals the Quantity demanded (Qd)

Qd = 1,500,000 – 60,000W

QS = 120,000W – 1,200,000

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

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	600,000	1,200,000	1,800,000
Hours of labour demanded	900,000	600,000	300,000	0

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

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

Producer surplus = ½ * 600,000 * 5 = $1,500,000

Producer surplus = $1,500,000

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

Hours of employed = to the number of hours demande

The demand curve was given as Qd = 1,500,000 – 60,000W. We will, therefore, find the value of Qd.

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.

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

The National Minimum Wage in Australia

QS = 120,000(19) – 1,200,000

Qs = 1,080,000 hours

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.

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

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

Producer surplus = ½ * 360,000 * 3 = $540,000

Total surplus = Consumer surplus + Producer surplus

Consumer surplus = $1,080,000

Producer surplus = $540,000

Therefore,

Total surplus = $1,080,000 + $540,000 = $1,620,000

Resources lost in job search are depicted by the area shaded black

Area = length * width

Length = 360,000

Width = 19 – 13 = 6

Area of rectangle = 360,000 * 6 = $2,160,000

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.

Deadweight loss = $720,000.

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.

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.

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.

Consumer surplus is given as ½ * base * height

Base = 360,000

Height = 25 – 19 = 6

Therefore,

Consumer surplus = ½ * 360,000 * 6 = $1,080,000

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.

Total surplus is given as Consumer surplus + Producer surplus

Labor Market Equilibrium Analysis

Consumer surplus = $1,080,000

Producer surplus = $2,700,000.

Therefore,

Total surplus = $1,080,000 + $2,700,000 = $3,780,000.

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.

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.

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.

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 (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.

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.

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 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.

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.