(139) Price Floors: The Minimum Wage

Price Floors: Overview

• A price floor is a minimum price set by law.

• Prices below this floor are illegal to transact.

• Common effects include:

  • Surpluses,

  • Lost gains from trade,

  • Wasteful increases in quality,

  • Misallocation of resources.

Comparison of Price Floors and Price Ceilings

• Price floors are less common than price ceilings.

• More buyers than sellers lead to price ceilings being politically favorable.

• Price floors are used in cases where sellers exceed buyers, as in the minimum wage scenario.

The Minimum Wage as a Price Floor

• The minimum wage prevents labor from being sold below a specified amount.

• It primarily affects low-skilled workers, especially young or inexperienced individuals.

• High-productivity workers are not usually impacted.

Impact of Minimum Wage on Labor Market

• Creates a surplus of labor (unemployment):

  • Quantity of labor supplied (Qs) exceeds quantity demanded (Qd) at the minimum wage.

  • Illustration: labor quantity on the horizontal axis, wages on the vertical.

• Current research suggests a modest minimum wage increase has limited effects on unemployment.

• For the minority affected, it may raise wages but not substantially improve conditions.

Consequences of Increasing Minimum Wage

• Large increases in minimum wage can lead to significant unemployment:

  • Example: Puerto Rico in 1938 where a minimum wage increase led to widespread unemployment and bankruptcy of firms.

  • Contrast with relative minimum wage increases in other countries like France where youth unemployment is high due to high labor costs and strict labor laws.

Lost Gains from Trade

• Minimum wage leads to lost gains from trade:

  • Buyers willing to pay below minimum wage and suppliers willing to work for less cannot legally transact.

  • Result: Deadweight loss—mutually beneficial deals are not made.

Conclusion

• Covered two effects of price floors: surpluses and lost gains from trade.

• Next lecture will address wasteful increases in quality and misallocation of resources.