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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

6. The countries of Figistan and Blah are small island countries in the South Pacific. Both produce fruit and timber. Each island has a labor force of 1,200. The following table gives production per month for each worker in each country. a. Which country has an absolute advantage in the product
Bablu Reply
6. The countries of Figistan and Blah are small island countries in the South Pacific. Both produce fruit and timber. Each island has a labor force of 1,200. The following table gives production per month for each worker in each country. a. Which country has an absolute advantage in the producti
Bablu
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Neil
Buddy
Neil
We need to know the values to help
Neil
BASKETS OF FRUIT BOARD FEET OF TIMBER Figistan workers 10 5 Blah workers 30 10 Productivity of one worker for one month
Bablu
basket of fruit |basket of timber Figistan workers 10 5 Blah workers 30 10
Bablu
a. Which country has an absolute advantage in the production of fruit? Which country has an absolute advantage in the production of timber? b. Which country has a comparative advantage in the produc- tion of fruit? of timber? c. Sketch the ppf’s for both countries. d. Assuming no trading betwe
Bablu
Neil rawat
The
Hy neil
shaikh
please
The
please help
The
bablu
The
where the table
Souley
my own idea is that we should divide the number of baskets of fruits and timber by labour force
The
Is it true. can somebody correct me
The
No not true
Neil
Absolute Advantage is determined by the numbers
Neil
You can't just divide it or something
Neil
For example, US makes 8 Cars and 6 Fish Canada makes 2 cars 3 fish US has absolute advantage in this scenario
Neil
Rawat thank you
The
Neil Rawat but a country is said to have absolute advantage over another country when it spends less time producing a commodity
The
For example, 8 cars are produced in one hour. how can we calculate the amount of time for producing one car
The
Ruwat
The
Neil Rawat*
The
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Saifullah Reply
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Nhamo
which 1u don't understand
ubong
marginal cost for what
Xasan
definition of economics
Abdal
Marginal cost is the additional increase in quantity produced as a result of increasing total cost
The
MC=dTC/dQ i.e change in total cost as a result of change in quantity produced
The
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Soga
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Abdal
What happens to the quantity of dollars when the demand for it increases and supply decreases? Does the quantity or volume remain the same?
Anamaya
hello
Bablu
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Bablu
yes
Abdal
yes
Soga
price of dollars will increase
Harsh
what are the principles of economics
Gajendra Reply
Economics is a social science that studies how people satisfy unlimited wants with scarce resources. It involves the analysis of choice and trade through the use of intuitive graphs and mathematical elements. The discipline is divided into two sections: microeconomics (micro) and macroeconomics(macr
Zain
micro and macro principles
Souley
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Gajendra
micro study economics partly eg hw mankind's makes decisions
Souley
explain clearly
Gajendra
it focuses on the actions of Individual agent within an economy like households,business etc
Souley
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Gajendra
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Souley
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Gajendra
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The
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Souley
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The
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Gajendra
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The
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The
is true
Souley
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Kojo
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Aman
no idea
Steven
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Steven
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Nhamo
Gajendra or anybody can you advice me on how I can improve on studying Economics
The
should I read a topic everyday. it will be difficult because I have other courses
The
what's unemployment
Souley Reply
increase in inflation
Zain
increase in jobless peaople
Zain
who are capable of doing job
Zain
hi
Vijay
hi
Zain
distinguish between substitution effect and income effect
albert Reply
Elucidate more on this please!
Moshood Reply
hello
Kojo
hi
Peter
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Abdal
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Anamaya
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Darlington
Hello
Darlington
hi
Abdal
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Darlington
Hi
Ihtisham
hi
Peter
hi
Abdal
yes
Fazal
still studying
sean
The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
Moshood
Income effect is the change in consumption patterns due to the change in purchasing power.
Moshood
still freshman studying at Tubman University
Emmanuel
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Brahim
hi
Chidi
hi
bola
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cherie
hlw
God
Hi
Owusu
Hi
Patricia
hi
Rod
hi
shaikh
what is agriculture?
Emmanuel
Srsly
Neil
Hi everyone.
Royal
Economic is a subject which study buying and selling.
Royal
can u elaborate more?
Dazy
it is the study of the wealth of of a nation
Adesina
It can also be defined as the social science that studies how the available scarce resources can be distributed to satisfy unlimited human want
Adesina
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Adesina
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Adesina
hi
Prtj
guys I have questions which I am not able to solve could you guys help me
Prtj
ask
kartik
what is economic about
Gene
What the difference between economics and economics education?
Rasaq
economics is all about natural resources and how they are distributed to satisfied human wants
Souley
Almsot the same
Steven
what z international trade
ntaate Reply
The exchange of produce and services among different countries.
Anamaya
the exchange of good & services across international boundaries
WILSON
conditions of international trade?
Nusrat
Compare and contrast between Natural and Artificial Resources and their ultimate impacts in an economy. Give one example to support your discussion.
Angela Reply
Exemple: Diamant or uranium, fer, calcaire
Ramadan
how does interest rate affect aggregate output
kelvin Reply
what is Keynesian theory
kelvin
need a curves for typical isoquost and isoquant
kelvin
what is isoquant
kelvin
isoquat is a curve shows differnt combinations of two inputs which can produce same level of output
Majid
examples of giffen goods
Getrude
then what isoquost
Peter
, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.
Peter
that's an example
Peter
majid Khan that's the wrong definition of isoquant
The
you are defining isocost
The
isocost curve is a locus of points that shows the different combinations of commodities purchased by a consumer with a fixed budget
The
The change in fiscal policy leads to an increased level of output and interest rates is because an increase in government expenses directly affects aggregate demand. A decline in taxes result in more disposable income, consequently leading to a rise in consumption expenditure.
Peter
dats for kelvin
Peter
dats d answer for the audio how does interest rate affect aggregate output
Peter
question not audio
Peter
u are right joker
Peter
what is journal entry?
Abel
explain the nature of economics
Matilda Reply
interpret micro economic issues
Matilda
ito ang dami ng producto na nais handa at kanyang ibenta ng isang prodyuser
Jomar Reply
i dont understand
Gaabshe
even I also don't understand ..this language.. vn I converse everybody say farzana ur language is not understood by all user? now no one there is question about it?
shaikh
he is saying that "this is the amount of product it wants to be ready and sells by a producer"
Aman
I Merr has knowledge,which is the economiccircuit role in a society
Ramadan
What is diminishing returns?
Shadrach Reply
explain competitive demand
ADENIJI Reply
the demand that are compiting for sale. the buyer can substitute one for another good
Iftikhar
yg
Margarette
the demand where commodities fight for the market. in this type of demand, commodities can be substituted for the most suitable one subject to ( price, consumers choice, consumers income etc)
WILSON
Demand is said to be competitive when a commodity that is needed to satisfy wants in place of another similar goods. increase in price of a commodity X will result in increase in demand of the substitute (commmodity Y).
yusuf
examples of giffen goods are garri (cassava), maize
yusuf Reply
what is Public Finance?
kweku Reply
it's basically the field of economics that deals with the government's involvement in the economy; from spending to maybe interest rate manipulation, etc.
Matthew
examples of giffen goods
Getrude

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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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