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A living wage: example of a price floor

The graph shows how a price floor results from an excess supply of labor.
The original equilibrium in this labor market is a wage of $10/hour and a quantity of 1,200 workers, shown at point E. Imposing a wage floor at $12/hour leads to an excess supply of labor. At that wage, the quantity of labor supplied is 1,600 and the quantity of labor demanded is only 700.
Living wage: example of a price floor
Wage Quantity Labor Demanded Quantity Labor Supplied
$8/hr 1,900 500
$9/hr 1,500 900
$10/hr 1,200 1,200
$11/hr 900 1,400
$12/hr 700 1,600
$13/hr 500 1,800
$14/hr 400 1,900

The minimum wage as an example of a price floor

The U.S. minimum wage is a price floor that is set either very close to the equilibrium wage or even slightly below it. About 1% of American workers are actually paid the minimum wage. In other words, the vast majority of the U.S. labor force has its wages determined in the labor market, not as a result of the government price floor. But for workers with low skills and little experience, like those without a high school diploma or teenagers, the minimum wage is quite important. In many cities, the federal minimum wage is apparently below the market price for unskilled labor, because employers offer more than the minimum wage to checkout clerks and other low-skill workers without any government prodding.

Economists have attempted to estimate how much the minimum wage reduces the quantity demanded of low-skill labor. A typical result of such studies is that a 10% increase in the minimum wage would decrease the hiring of unskilled workers by 1 to 2%, which seems a relatively small reduction. In fact, some studies have even found no effect of a higher minimum wage on employment at certain times and places—although these studies are controversial.

Let’s suppose that the minimum wage lies just slightly below the equilibrium wage level. Wages could fluctuate according to market forces above this price floor, but they would not be allowed to move beneath the floor. In this situation, the price floor minimum wage is said to be nonbinding —that is, the price floor is not determining the market outcome. Even if the minimum wage moves just a little higher, it will still have no effect on the quantity of employment in the economy, as long as it remains below the equilibrium wage. Even if the minimum wage is increased by enough so that it rises slightly above the equilibrium wage and becomes binding, there will be only a small excess supply gap between the quantity demanded and quantity supplied.

These insights help to explain why U.S. minimum wage laws have historically had only a small impact on employment. Since the minimum wage has typically been set close to the equilibrium wage for low-skill labor and sometimes even below it, it has not had a large effect in creating an excess supply of labor. However, if the minimum wage were increased dramatically—say, if it were doubled to match the living wages that some U.S. cities have considered—then its impact on reducing the quantity demanded of employment would be far greater. The following Clear It Up feature describes in greater detail some of the arguments for and against changes to minimum wage.

What’s the harm in raising the minimum wage?

Because of the law of demand, a higher required wage will reduce the amount of low-skill employment either in terms of employees or in terms of work hours. Although there is controversy over the numbers, let’s say for the sake of the argument that a 10% rise in the minimum wage will reduce the employment of low-skill workers by 2%. Does this outcome mean that raising the minimum wage by 10% is bad public policy? Not necessarily.

If 98% of those receiving the minimum wage have a pay increase of 10%, but 2% of those receiving the minimum wage lose their jobs, are the gains for society as a whole greater than the losses? The answer is not clear, because job losses, even for a small group, may cause more pain than modest income gains for others. For one thing, we need to consider which minimum wage workers are losing their jobs. If the 2% of minimum wage workers who lose their jobs are struggling to support families, that is one thing. If those who lose their job are high school students picking up spending money over summer vacation, that is something else.

Another complexity is that many minimum wage workers do not work full-time for an entire year. Imagine a minimum wage worker who holds different part-time jobs for a few months at a time, with bouts of unemployment in between. The worker in this situation receives the 10% raise in the minimum wage when working, but also ends up working 2% fewer hours during the year because the higher minimum wage reduces how much employers want people to work. Overall, this worker’s income would rise because the 10% pay raise would more than offset the 2% fewer hours worked.

Of course, these arguments do not prove that raising the minimum wage is necessarily a good idea either. There may well be other, better public policy options for helping low-wage workers. (The Poverty and Economic Inequality chapter discusses some possibilities.) The lesson from this maze of minimum wage arguments is that complex social problems rarely have simple answers. Even those who agree on how a proposed economic policy affects quantity demanded and quantity supplied may still disagree on whether the policy is a good idea.

Concepts and summary

In the labor market, households are on the supply side of the market and firms are on the demand side. In the market for financial capital, households and firms can be on either side of the market: they are suppliers of financial capital when they save or make financial investments, and demanders of financial capital when they borrow or receive financial investments.

In the demand and supply analysis of labor markets, the price can be measured by the annual salary or hourly wage received. The quantity of labor can be measured in various ways, like number of workers or the number of hours worked.

Factors that can shift the demand curve for labor include: a change in the quantity demanded of the product that the labor produces; a change in the production process that uses more or less labor; and a change in government policy that affects the quantity of labor that firms wish to hire at a given wage. Demand can also increase or decrease (shift) in response to: workers’ level of education and training, technology, the number of companies, and availability and price of other inputs.

The main factors that can shift the supply curve for labor are: how desirable a job appears to workers relative to the alternatives, government policy that either restricts or encourages the quantity of workers trained for the job, the number of workers in the economy, and required education.

Problems

Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

  1. Households in the labor market
  2. Firms in the goods market
  3. Firms in the financial market
  4. Households in the goods market
  5. Firms in the labor market
  6. Households in the financial market
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Predict how each of the following events will raise or lower the equilibrium wage and quantity of coal miners in West Virginia. In each case, sketch a demand and supply diagram to illustrate your answer.

  1. The price of oil rises.
  2. New coal-mining equipment is invented that is cheap and requires few workers to run.
  3. Several major companies that do not mine coal open factories in West Virginia, offering a lot of well-paid jobs.
  4. Government imposes costly new regulations to make coal-mining a safer job.
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References

American Community Survey. 2012. "School Enrollment and Work Status: 2011." Accessed April 13, 2015. http://www.census.gov/prod/2013pubs/acsbr11-14.pdf.

National Center for Educational Statistics. “Digest of Education Statistics.” (2008 and 2010). Accessed December 11, 2013. nces.ed.gov.

Questions & Answers

what is the difference between explicit cost and implicit cost
ustaz Reply
explicit cost:it is the cost which company made for purchasing or hiring resources from the factor owner. implicit cost : the cost of the owner of the company pay for the project.
دولت
explicit cost is that cost which is identified by the books of accounts of an organisation
Amulya
implicit cost is that cost which is not shown in the books of accounts but due to this cost organisation gets some benefits
Amulya
what is supply
Motunrayo
The willing and able to sells their goods in various price of a commodity is called supply.
Niraj
what are the laws of supply
Motunrayo
what is lonrenzo curve
osidele
What is price elasticity of demand?
Kanishka Reply
price elasticity of demand is a measure used in economics to show elasticity of quantity demanded of good or service to get a change in it's price while nothing but price changes.
Madhu
Price elasticity of demand is a measure of the change in the quantity demanded of a product in relation to its price change Price elasticity of demand = % change in quantity demand / % change in Price
Gaurav
Pls where can I found PRICE CONTROL on this app
Samuel Reply
top left corner
JUDE
A situation in an economy with one producer but many consumers
Kabali Reply
What is the theory of population according to Malthus?
Kabali
What is the Malthusian population theory?
Kabali
The Malthusian theory of population state that, where there are means of substinence like food, human beings have the tendency to procreate (ie.give birth) without restraint (ie. control).
George
he stated that population unchecked grows at a geometric progression ie 1,2,4,8,16 while the means food subsistence grows at arithmetic progression ie 1,2,3,4,5---- he declared that population has the tendency to outstrip the means of subsistence
Fung
What is money?
Kabali
money is any commodity that act as a medium of exchange
Fung
money is medium of exchange which is use in taking goods and giving some of it's worth or money value
Madhu
what is a debit card and a credit card?
Milly
a debit card is a payment card used instead of cash while purchasing
Madhu
a credit card is a payment card issued to users to enable cardholder to pay a merchant for goods and services
Madhu
oky tanx
Milly
good
ABDUL
What is an inferior good.?
Kabali
In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand rises when consumer income decreases), 
Rams
what is monopoly
Richmond Reply
a market situation when there is only one seller of a product representing whole industry.
how
where one business is the dominant one in that market. It determines the market price as they are price makers. No entry, no competition.
karl
it is a market situation where is a single seller and many buyer hear the seller is the price maker the is no free entering and exit in this market
Fung
A situation in the economy where there is one producer and many consumers
Kabali
A market situation where there is one producer and many consumers.
Kabali
Balance of payments for 2018
Mahlatse Reply
what is monopoly and what is monopolaist
Javid Reply
what is the affect of rise in value of dollar ?
Shabana
monopoly"a single firm or company owns all or nearly all of the market for a given type of product or service "monopoly is a price maker ...barrier of entry ,non availability of close substitute.
Shabana
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing etc
Shabana
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing
jay
monopoly is a market situation ...where there is a single seller and large number of buyers deals with commodities having no close substitutes......here the sellers are price makers... there is restrictions in the entry and exit of new firms in this market structure....
lovely
what is money?
Hilary
money is a medium of exchange.....through which...commodities are bought and sold
lovely
money is a medium/means of exchange that generally accepted by law
Prince
What is tranfer earnings
Admire
what is savings income?
Limitles
transfer earning is the minimum income that a factor is willing to accept in an occupation,it is also call the supply price of a factor
Fung
what is envelope curve
Dharam
what is depreciation
Fung
depreciation means decrease in value of a assets due to normal wear or year ,means decrease in value of assets like a machine due to its daily use
ru
Refers to wear and tear of capital machinery
apule
what is meant by currency depreciation?
Shabana
an envelope curve is also call an umbrella curve it is any curve that is enclosed by being tangen t to a series of other curves
Fung
fall in the value of currency vis-a-vis any other currency usually $ due to marker forces is called currency depreciation. it is different from devaluation where in value of currency is deliberately reduced to improve BoT
mohammad
depreciation in its broad sense means loss in the value of fixed capital say a tractor due to i) normal wear and tear ii) normal rate of accidental damage iii) expected absolescence to meet this, Depereciation Reserve Fund is created it is calculated by firms on the basis of their experience.
mohammad
what is green revolution ?discuss the achievement of green revolution in India
Sweety Reply
green revolution is the third revolution of agricultural refers to a set of research and development of technology transfer initiative occuring between 1930s and the late 1960s that increased agricultural is called green revolution
Javid
the green revolution happened because to improve the agricultural sector towards adopting mordern methods and improvement of agricultural equipments
Madhu
green revolution means new innovation for high yielding varieties seeds towards economic development in agriculture sector. started in 1966, it's achievement increase per productive of all crops ie rice, wheat,maiz,etc...mainly 131 million food grain in 1978-79 produced in india
Rams
Punjab and haryana was the first 2 states which have been successfully adopted hyv's and due to this adoption these two states find more successfull in india and it contributed though our national income and also to GDP growth this helps in development of our nation.
Madhu
what calculation for demand and supply
Amoo Reply
what is nationalisation
Awuni Reply
it is a process of converting private assets into public assets by undertaking the control of government or state authority
ru
yes
Emmanuel
so true
Violet
what are some the things that may lead to nationalisation
Fung
Over exploring of customers by the private individuals Also to make the nationalised organisation social reliable and accessible by all
Richard
feeling of one's is called nationalisation. unity among them self .
Madhu
anything which is widely acceptable as a medium of exchange
Shabana Reply
money ,currency
ru
Hello plz,what is the full mean of tertiary?
al Reply
tertiary also called philoshper
Waseem
tertiary means third..for example primary sector ,secondary and tertiary sector... means three number..
ru
ru 9ice tnk
al
your most welcome.
ru
tnz
al
what is money
Tettey
what is a bank
Walters
a financial institution which holds money for its clients ,which collect deposit and lend money at interest and trades generally in money...
Shabana
what is bankers draft ?kindly explain with example .
Shabana
money "anything which is widely acceptable as a medium of exchange"
Shabana
yes u ryt #shabana
Dar
difference between cost and price
Dar
Shallow definition
Adam
cost"the value of input that is the amount of money which is used to produce a good or service . price"an amount of money which has to b paid to buy something.
Shabana
Tertiary is an adjective(pre position) for stages or levels and refers to "top, final, full term ." ; Advanced.
Anderson
bank draft is a type of cheque which a person buy for to pay someone who is not willing to accept a personal cheque .
ru
tertiary sector is an providing any kind of services.
Madhu
primary sector is 'agriculture', secondary sector is ' industrial sector ,and the tertiary sector is ,' service sector' ,
Dharam
subana are you understand now the meaning of bank draft?
ru
what is golden- diamond paradox
Tammanna
what is occupational structure
Madhu Reply
occupational structure refers to the distribution of occupation on the basis of educational ,socoial ,income level in a society or economy
ru
no that is not a exact meaning
Madhu
than what is exact meaning
Dharam
It refers to also the what is the average income of the person
Madhu
what is deficit
Obiajunwa Reply
deficit = expenses > revenue
Waseem
yeah expenses over revenue results in deficit
Paulina
insufficiency
Anderson
What is What is Equilibrium
Bright Reply
from business point of view it is that point where business revanu are equal to its expenses.
ru
in economy where demand is equal to supply is called equalibrium
ru
Equilibrium in economics is where quantity demanded is equal to quantity supplied
Collins
what are the objectives of devaluation
Oyedun

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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