Drawing and interpretation of diagrams illustrating national minimum wages

Micro‑economic Decision‑Makers: Workers (Cambridge IGCSE 0455 – 3.3)

Learning Objectives

By the end of this section students should be able to:

• Define a national minimum wage (NMW) and explain its place in the wider set of wage‑determination factors.
• Identify the main factors that influence an individual’s choice of occupation (syllabus 3.3.1).
• Draw and label a labour‑market diagram showing a binding minimum wage, including the unemployment surplus and dead‑weight loss.
• Analyse the effects of a binding NMW on workers, firms and the government.
• Evaluate arguments for and against a NMW, distinguishing between developed and developing economies.

Definition Box

3.3.1 – Factors Affecting an Individual’s Choice of Occupation

Wage is only one of several determinants of occupational choice. The other key factors are:

• Personal interests and aptitudes – people tend to choose jobs they enjoy or are good at.
• Education and training – the level and type of qualifications required for a job.
• Location and mobility – proximity to home, willingness to relocate, and transport costs.
• Family and social considerations – caring responsibilities, family tradition, or peer influence.
• Expected earnings (wage) – the higher the expected wage, the more attractive the occupation, ceteris paribus.

Link to Wage‑Determination

Expected earnings are shaped by the interaction of demand‑side and supply‑side factors (see 3.3.2) and by government policy such as a NMW. When a NMW raises the floor, it can make low‑skill occupations relatively more attractive, but may also reduce the number of jobs available in those occupations.

3.3.2 – Wage Determination (Demand & Supply, Trade‑Unions, Government Policy, NMW)

Demand‑Side Factors

• Productivity of workers
• Demand for the final product (output market)
• Technology and capital intensity
• Profit‑maximising behaviour of firms
• Trade‑union bargaining power – can shift the demand for labour upward by forcing higher wages.

Supply‑Side Factors

• Population size and demographics
• Education, training and skill levels
• Geographical mobility
• Alternative sources of income (e.g., welfare)
• Government policies (taxes, subsidies) – affect the cost of supplying labour and can shift the supply curve.

Other Influences on Wage Differentials (3.3.3)

• Discrimination (gender, ethnicity, age)
• Sectoral differences (e.g., agriculture vs. services)
• Regional cost‑of‑living variations
• Trade‑union coverage and collective bargaining agreements
• Government interventions – taxes, subsidies, and the NMW.

How a National Minimum Wage Fits the Framework

• It is a government policy instrument that directly sets a price floor for labour.
• If the floor is set above the market‑determined equilibrium wage, it interferes with the natural interaction of demand‑ and supply‑side factors.
• The size of the resulting surplus (unemployment) depends on the elasticities of labour demand and supply, and on other wage‑determination influences such as strong trade‑unions (which may already push wages up) or high taxes on labour.

Step‑by‑Step Guide to Drawing the Labour‑Market Diagram

1. Draw a Cartesian plane. Vertical axis: Wage (W). Horizontal axis: Quantity of Labour (L).
2. Sketch an upward‑sloping labour‑supply curve (S) and a downward‑sloping labour‑demand curve (D). Label the curves.
3. Mark their intersection as the market equilibrium point E. Label the equilibrium wage W_e and equilibrium quantity L_e.
4. Draw a horizontal line above W_e to represent a bindingW_min. Extend it across the diagram.
5. From W_min drop a vertical line to the demand curve – the intersection gives the quantity of labour actually employed, L_min.
6. From W_min drop a vertical line to the supply curve – the intersection gives the quantity of labour workers are willing to supply, L_s.
7. Shade the horizontal rectangle between L_min and L_s. This is the unemployment surplus (labour surplus) created by the policy.
8. Shade the triangle bounded by the demand curve, the supply curve and the line W_min. This triangle is the dead‑weight loss (efficiency loss).

Diagram – Before the Minimum Wage (for reference)

Diagram – Binding Minimum Wage

Interpretation of the Diagram

When W_min > W_e (binding floor):

• Quantity of labour demanded falls from L_e to L_min because firms hire fewer workers at the higher wage.
• Quantity of labour supplied rises from L_e to L_s as more workers are willing to work at the higher wage.
• The horizontal gap L_s − L_min is the **unemployment surplus** – workers who are willing to work at W_min but cannot find a job.
• Workers who retain their jobs earn a higher wage, increasing their **real income** and consumer surplus.
• The shaded triangle is the **dead‑weight loss**, representing the net loss in total surplus (consumer + producer) caused by the market distortion.

Consequences for Different Stakeholders

Summary Table – Before vs. After a Binding Minimum Wage

Evaluation – Arguments For and Against a National Minimum Wage

Arguments **for** a minimum wage

1. Poverty reduction and higher living standards – raises income for low‑paid workers, helping them meet basic needs. Particularly important in developing economies where a large share of the workforce is in low‑skill, low‑pay jobs.
2. Reduced wage inequality – narrows the gap between the lowest and average wages, promoting social cohesion.
3. Improved productivity and morale – higher pay can increase effort, reduce turnover, and encourage firms to invest in training.
4. Political acceptability – governments can demonstrate action on “fair pay”, gaining electoral support.

Arguments **against** a minimum wage

1. Unemployment and under‑employment – the surplus of labour created by a binding floor can be large when labour‑demand is price‑elastic (common in labour‑intensive sectors of developing countries).
2. Higher production costs – may lead firms to raise prices (inflationary pressure), relocate to lower‑cost regions, or substitute labour with capital (automation).
3. Growth of the informal sector – in economies with weak enforcement, firms may evade the law, pushing workers into unregulated employment with no protections.
4. Distortion of market signals – a price floor masks underlying productivity problems; it does not address why wages are low in the first place.

Evaluation tip: weigh each argument against the specific context – e.g., strength of trade‑unions, existing unemployment rate, size of the informal sector, fiscal capacity of the government, and the elasticity of labour demand and supply. A modest NMW set only slightly above equilibrium may achieve redistribution with limited job loss, whereas a high floor in a low‑skill, highly elastic market can cause substantial unemployment.

Exam‑Style Questions

1. Draw and label a labour‑market diagram that shows a binding national minimum wage. Identify and shade the unemployment surplus and the dead‑weight loss.
2. Using your diagram, explain why a minimum wage can increase earnings for some workers while causing unemployment for others.
3. Discuss two arguments for and two arguments against the introduction of a national minimum wage in a developing country. Refer to the effects on workers, firms and the government.
4. Explain how the impact of a minimum wage would differ in a country where the labour market is highly elastic compared with one where it is relatively inelastic.
5. Outline three non‑wage factors that influence an individual’s choice of occupation and explain how a change in the minimum wage might affect those choices.

Key Points to Remember

• The labour market works like any other market: price = wage, quantity = number of workers.
• A **binding** minimum wage is a price floor set **above** the equilibrium wage.
• Unemployment caused by the policy is measured as the horizontal distance between the supply and demand curves at W_min (L_s − L_min).
• Dead‑weight loss is the loss of total surplus caused by the distortion.
• Policy effectiveness depends on:
  • Elasticities of labour demand and supply,
  • Existing wage‑determination environment (trade‑unions, discrimination, sectoral conditions),
  • Government fiscal capacity and enforcement ability.
• When assessing a NMW, always consider both the **distributional** (who gains) and **efficiency** (overall welfare) impacts.