Sun, surf and bonzer pay; Wages in Australia

The Economist. 432.9152 (July 20, 2019): p34(US).

AUSTRALIA HAS long been at the leading edge of minimum wages. The state of Victoria was the second place in the world to introduce a wage floor in 1896, beaten only by New Zealand. A landmark legal case in 1907 took a more expansive view of a fair wage, ruling that it should be enough to maintain a family with three children in "frugal comfort". Australia is still at it: it now has the world's most generous minimum wage, reclaiming a distinction it last held more than a decade ago.

The OECD, a club mainly of rich countries, compares minimum wages around the world by adjusting for inflation and the cost of living, and converting them into American dollars. On that basis Australian workers pulled in at least $12.14 an hour last year, up by nearly 4% from 2017. That puts them narrowly ahead of their peers in Luxembourg, ranked second, and a whopping two-thirds better off than federal minimum-wage earners in America.

It used to be an article of faith among economists that higher minimum wages would cause job losses, but data from Australia add to evidence that counters that assumption, at least as long as increases are gradual. A study by the Reserve Bank of Australia (RBA), the central bank, examined minimum-wage increases between 1998 and 2008, and found no discernible effect on employment. Similarly, over the past five years, Australia's unemployment rate has fallen steadily.

a)Using the supply and demand model with wages on the vertical axis and quantity of workers on the horizontal axis, analyse the effect on the market outcomes (wage and quantity of workers) of the imposition of minimum wages in the Australian labour market. 4 marks

b)The article cites a study by the RBA suggesting there has been minimal effect on unemployment.Unemployment exists when people that want a job are unable to get a job.Identify the unemployment created by the wage floor on the diagram. Explain and illustrate how the elasticity of demand and/or supply could be the factor that potentially explains why the effect on unemployment is very small. 3 marks