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Price floors in the labor market: living wages and minimum wages

In contrast to goods and services markets, price ceilings are rare in labor markets, because rules that prevent people from earning income are not politically popular. There is one exception: sometimes limits are proposed on the high incomes of top business executives.

The labor market, however, presents some prominent examples of price floors, which are often used as an attempt to increase the wages of low-paid workers. The U.S. government sets a minimum wage    , a price floor that makes it illegal for an employer to pay employees less than a certain hourly rate. In mid-2009, the U.S. minimum wage was raised to $7.25 per hour. Local political movements in a number of U.S. cities have pushed for a higher minimum wage, which they call a living wage . Promoters of living wage laws maintain that the minimum wage is too low to ensure a reasonable standard of living. They base this conclusion on the calculation that, if you work 40 hours a week at a minimum wage of $7.25 per hour for 50 weeks a year, your annual income is $14,500, which is less than the official U.S. government definition of what it means for a family to be in poverty. (A family with two adults earning minimum wage and two young children will find it more cost efficient for one parent to provide childcare while the other works for income. So the family income would be $14,500, which is significantly lower than the federal poverty line for a family of four, which was $23,850 in 2014.)

Supporters of the living wage argue that full-time workers should be assured a high enough wage so that they can afford the essentials of life: food, clothing, shelter, and healthcare. Since Baltimore passed the first living wage law in 1994, several dozen cities enacted similar laws in the late 1990s and the 2000s. The living wage ordinances do not apply to all employers, but they have specified that all employees of the city or employees of firms that are hired by the city be paid at least a certain wage that is usually a few dollars per hour above the U.S. minimum wage.

[link] illustrates the situation of a city considering a living wage law. For simplicity, we assume that there is no federal minimum wage. The wage appears on the vertical axis, because the wage is the price in the labor market. Before the passage of the living wage law, the equilibrium wage is $10 per hour and the city hires 1,200 workers at this wage. However, a group of concerned citizens persuades the city council to enact a living wage law requiring employers to pay no less than $12 per hour. In response to the higher wage, 1,600 workers look for jobs with the city. At this higher wage, the city, as an employer, is willing to hire only 700 workers. At the price floor, the quantity supplied exceeds the quantity demanded, and a surplus of labor exists in this market. For workers who continue to have a job at a higher salary, life has improved. For those who were willing to work at the old wage rate but lost their jobs with the wage increase, life has not improved. [link] shows the differences in supply and demand at different wages.

Questions & Answers

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Mugisha Reply
An increase in the number of people within a specific age group without jobs but are actively looking for jobs is a major macro economic issue in any country. Please briefly explain the factors that influence a rise in this phenomenon and the effect it has on the country.
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Ferdous
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preety Reply
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preety
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Uganda Reply
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Adnan Reply
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SHAKEEL Reply
1. Division of labour increases the quality of output 2. it brings about specializations where a worker has an advantage of his area of competence. 3. The pay you get help you to buy the goods and wants
Becky Reply
1. to make choice in the face of scarcity 2. specializations 3.division of labour
Becky
Human wants and needs are numerous but the resources available are limited in supply.
Becky
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Becky
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Becky
A computer systems engineer only specialized in his field of study as a computer engineer not a painter. so he needs to get the service of a painter to paint his house and he will pay for the service of the painter
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the kitchen will produce more meals because there is division of labour and area of expertise
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Asiedu
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a flow is a quantity that can be measured over a specific period of time
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social science
Sammy
social science
Babarali
social Science as a Subject and Pure science as a study
Abhishek
How to compute National income by using the expenditure approach
Bridget Reply
explain the method?
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Sajjad
C+I+G+(X-M) C= Consumption Expenditure I= Investment Expenditure G= Government Expenditure X-M = Net Export
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Diana
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Ayesha
Briefly explain whether the discipline of economics is a social science or pure science( normative or positive)
Okafor Reply
answer.... Economics is social science
Sammy
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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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