Minimum Wage Is A Price Floor And It Unemployment

In the case of minimum wage employees are the suppliers of labor the good while businesses become the consumers.

Minimum wage is a price floor and it unemployment.

Minimum wage is an example of a government intervention in order to redistribute wealth through the use of a price floor. A price floor is the legal limit on how low a price may be set for a good. When we talked about rent control that was a price ceiling. Price floors when prices are kept artificially high lead to several consequences that hurt the consumer.

That was a maximum price for rent now this is a minimum price for labor. In this video we take a look at the minimum wage. Because this is the most popular and recognizable example of a price floor we will concentrate on it for the rest of this. In our supply and demand analysis a minimum wage is a simple application of a binding price floor.

For instance if the minimum wage in a particular state is 12 and a company would like to pay their employees 14 per hour this is not an issue this is not a binding price floor. This is because a greater number of people are willing to work at the higher wage while a smaller number of jobs will be available at the higher wage. An example of a price floor is minimum wage laws where the government sets out the minimum hourly rate that can be paid for labour. Conversely if a company would like to pay employees 10 this will not work because that amount is lower than the price floor in this case it is a binding price floor.

In this case it is a surplus of workers suppliers of labor more of whom are willing to work in minimum wage jobs than there are employers demanders willing to hire at that wage. In this case the price which is typically on the y axis is the wage which gets paid to workers. More living wage definition. The supply and demand model implies that by mandating a price floor above the equilibrium wage minimum wage laws will cause unemployment.

Since the price floor this minimum price is higher than the actual clearing price it s going to distort the market. This right over here is our minimum wage. Unfortunately it like any price floor creates a surplus. In modern western countries labor is the primary recipient of price floors 1 in particular the government imposes a minimum wage making it illegal for an employer to pay a worker less than a certain amount per hour.

Our price floor is right over here 7. In this simplistic model it is best to think of the wage as how much a firm pays to get one worker.