The Minimum Wage: An Important Example Of A Price Floor

The Minimum Wagean Important Example Of A Price Floor Is The Minimum W

The Minimum Wagean important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally adequate standard of living. In 2015, the minimum wage according to federal law was $7.25 per hour. Some states mandate minimum wages above the federal level. Many European nations have minimum-wage laws as well, sometimes significantly higher than in the United States.

For example, even though the average income in France is almost 30 percent lower than it is in the United States, the French minimum wage is more than 30 percent higher. To examine the effects of a minimum wage, we must consider the market for labor. Panel (a) of Figure 5 shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government doesn’t intervene, the wage normally adjusts to balance labor supply and labor demand.

Figure 5 illustrates how the minimum wage affects the labor market. Panel (a) shows a labor market with wages adjusting freely, while Panel (b) demonstrates the impact when a binding minimum wage is imposed. Since the minimum wage acts as a price floor above the equilibrium wage, it results in a surplus—more labor supplied than demanded—leading to unemployment. When the minimum wage is above equilibrium, the quantity of labor supplied exceeds the quantity demanded, causing unemployment. Consequently, while minimum wages increase the income of employed workers, they also cause unemployment for those who cannot find jobs.

The impact of the minimum wage varies across different types of labor. For highly skilled and experienced workers, the minimum wage tends to be non-binding because their equilibrium wages are already above the minimum. In contrast, the minimum wage has its greatest impact on teenage labor markets, where wages are typically lower due to less skill and experience. Teenagers often accept lower wages for training opportunities or internships, which may not be covered by minimum-wage laws, especially if they pay nothing.

Research shows that increases in the minimum wage can decrease teenage employment by 1 to 3 percent for every 10 percent rise, indicating a notable effect—although debates persist regarding the extent of this impact. The law also influences teenage labor supply by encouraging more teenagers to seek jobs, some dropping out of school to work, while others displace peers who are already employed or out of school. Minimum-wage advocates argue it helps lift workers from poverty, citing that in 2015, full-time minimum-wage workers earned only marginally above the poverty line, with some advocates emphasizing the moral imperative of raising wages despite some adverse effects.

Opponents counter that a high minimum wage can be counterproductive, potentially increasing unemployment, discouraging school dropouts, and limiting unskilled workers' access to on-the-job training. These critics also highlight that less than a third of minimum-wage earners are in poverty—many are teenagers from middle-class households working part-time. The debate continues, with different perspectives on whether increasing the minimum wage effectively reduces poverty without incurring excessive economic costs.

In conclusion, the minimum wage exemplifies a price floor with complex effects on the labor market, impacting employment, income distribution, and youth labor participation. Policymakers must weigh the benefits of higher wages against potential unemployment increases, considering the diverse effects across various worker groups and economic contexts.

References

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