IGCSE Economics 0455 – Workers: National Minimum Wages
Microeconomic Decision‑Makers: Workers
Learning Objective
Students will be able to draw and interpret a labour‑market diagram that illustrates the effect of a national minimum wage.
Key Concepts
Labour supply and demand curves
Equilibrium wage (\$We\$) and quantity of labour (\$Le\$)
National minimum wage (\$W_{min}\$)
Surplus of labour (unemployment) and surplus of wages (excess earnings for workers employed at \$W_{min}\$)
Potential efficiency losses (dead‑weight loss)
Step‑by‑Step Guide to Drawing the Diagram
Draw a standard Cartesian plane. Label the vertical axis Wage (W) and the horizontal axis Quantity of Labour (L).
Sketch an upward‑sloping labour‑supply curve (S) and a downward‑sloping labour‑demand curve (D).
Mark the intersection of S and D as the equilibrium point E. Label the equilibrium wage \$We\$ and equilibrium quantity \$Le\$.
Draw a horizontal line above \$We\$ to represent the national minimum wage \$W{min}\$. Extend this line across the diagram.
From the \$W{min}\$ line, draw a vertical line down to the demand curve. The intersection gives the quantity of labour actually employed (\$L{min}\$).
From the \$W{min}\$ line, draw a vertical line down to the supply curve. The intersection gives the quantity of labour that workers are willing to work at \$W{min}\$ (\$L_{s}\$).
Shade the area between \$L{min}\$ and \$L{s}\$ on the horizontal axis – this represents the surplus of labour (unemployment).
Shade the triangular area between the demand curve, the supply curve, and the \$W_{min}\$ line – this is the dead‑weight loss (efficiency loss).
Suggested diagram: Labour market with a national minimum wage set above equilibrium, showing surplus of labour (unemployment) and dead‑weight loss.
Interpretation of the Diagram
When \$W{min} > We\$:
The quantity of labour demanded falls from \$Le\$ to \$L{min}\$ because firms hire fewer workers at the higher wage.
The quantity of labour supplied rises from \$Le\$ to \$L{s}\$ as more workers are willing to work at the higher wage.
The difference \$L{s} - L{min}\$ is the surplus of labour, i.e., unemployment caused by the policy.
Workers who retain their jobs earn a higher wage, increasing their consumer surplus.
The dead‑weight loss represents the net loss in total surplus (both consumer and producer surplus) due to the market distortion.
Summary Table
Aspect
Before Minimum Wage
After Minimum Wage (\$W{min} > We\$)
Equilibrium Wage
\$W_e\$
\$W_{min}\$ (higher)
Quantity of Labour Employed
\$L_e\$
\$L_{min}\$ (lower)
Quantity of Labour Supplied
\$L_e\$
\$L_{s}\$ (higher)
Unemployment (Surplus of Labour)
None (market‑clearing)
\$L{s} - L{min}\$ (positive)
Total Surplus (Consumer + Producer)
Maximum (no distortion)
Reduced by dead‑weight loss
Exam‑Style Questions
Draw and label a labour‑market diagram showing the effect of a national minimum wage set above the equilibrium wage. Identify and shade the unemployment surplus and dead‑weight loss.
Explain, using the diagram, why a minimum wage can lead to both higher earnings for some workers and higher unemployment for others.
Discuss two arguments for and two arguments against the introduction of a national minimum wage in a developing country.
Key Points to Remember
The labour market behaves like any other market: price = wage, quantity = number of workers.
A binding minimum wage (set above equilibrium) creates a price floor.
Unemployment is measured as the horizontal distance between the labour‑supply and labour‑demand curves at \$W_{min}\$.
Policy effectiveness depends on the size of the surplus and the elasticity of supply and demand.