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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.
Got questions? Get instant answers now!

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

how do I view the graphs
Patricia Reply
how do I open the links
Patricia
what is the markert
Ester Reply
A market is any place where buying and selling can take place.
Landing
20. Why is a football game on ESPN a quasi-public good but a game on the NBC, CBS, or ABC is a public good?
Brigam Reply
how people make decision?
Xafsa Reply
what is supply and demand
Xafsa Reply
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price.
Landing
thank you very much
Xafsa
list and briefly explain the three principles that describe how the economy as whole works?
Xafsa
what is algebra?
ibiflower Reply
what is the relationship between price and demand
Evans Reply
the relation ship between price and demand is the income and Utility means when you are satisfied and you can buy it then you have to demand it.Thanks
Abdulkadir
who thought u that? you are not answering this as an economist
Evans
alright, but can you tell how the economist will be answered
Abdulkadir
alright, but can you tell me how the economist will be answered
Abdulkadir
Law of demanded  states: As price  of a good increases, the quantity demanded  of the good falls, and as the price  of a good decreases, the quantity demanded of the good rises.
Lewis
So, there is an inverse relationship between price and demand.
Lewis
lewis answered it perfectly
Evans
I want for market value for price. or cleance
Samantha
time ticket of value market down so double be self 1.09 but I 10 chesse for 1.09 bugger
Samantha
hi
Langanani
Without scarcity there would be no subject call Economics. Explain why?
Landing
because economics is the study of scarcity of resources and the satisfaction of basic human need
Pele
give an example of some action that has both amonetary and nonmonetary apportunity cost?
Aisha Reply
any action can be argued to have both. For instance, being in class has the opportunity cost of time you could be spent earning wages, or time that could've been spent leisurely.
DASRAT
absolutely
Abdulkadir
Really
DASRAT
there is no any action that hasn't both a monetary and non-monetary as said Mr Dasrat
Abdulkadir
thanks
Aisha
u Welcome
Abdulkadir
describe an important trade-off you recently faced?
Aisha Reply
Financial issues and careerPersonal life and work lifeMost people don't like the work they do. The interest they have is something different from the work they do and eventually forgo their interest. These are the three most important tradeoffs I have come across, yet there may be many in number.
DASRAT
still
Abdulkadir
Yah still
DASRAT
yes
Abdulkadir
why people make the choices they make and how economist go about explaining those choices
Asim Reply
what is tradeoffs
Asim
giving up one thing to have another
Shriyash
what is demand
Asim Reply
why demand and supply interact in a market
Asim
In the supply and demand model of price determination, there is never a surplus or shortage of goods at the equilibrium level. The market always settles at the point where supply equalsdemand. If demand increases (decreases) and supply is unchanged, then it leads to a higher (lower) equilibrium pric
DASRAT
why demand is based on need and wants ?
Asim
because there is scarcity of resources,whether you can not get whatever you want one time so you have to chooseen which you will choose that is your needs(basic) after that you can demand it on the other hand,every society would demand their basic needs when they recognized it. so ther is no demand
Abdulkadir
there is no demand if there is no needs and wants
Abdulkadir
Because when you have need and your wants is depends upon demand
DASRAT
what is other causes
Asim
overall demand is coused by an income and price,if the price satisfies to you and your income is enough to you the you will demand whatever you want
Abdulkadir
what is satiety ?
Asim
what is a different between marginal cost and marginal benefit
Ndumiso Reply
What is Tradeoff
Oumie Reply
What is traoff
Oumie Reply
It's tariff not traoff
DASRAT
I mean Tradeoff
Oumie
a balance achieved between two desirable but incompatible features; a compromise.
SHARMAKE
Thanks
Oumie
these problems of scarcity are been face by household companies and nation at large
Muafue Reply
will you please explain it more😭
kainat
i am economist and i need helping to be perfect person in that field
Dr
okay
kainat
Hey
DASRAT
yup
kainat
hi
louh
scarcity is inevitable as it ensures sanity and sanctity among men. it's alled 'the Lord's act'. The issue of the victims is just a simple one of Cause and Effect. Somebody or entity must be a recipient of whatever.
tolu

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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