(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.