An 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 2005
the minimum wage according to federal law was 5.15 per hour and some state laws
imposed higher minimum wages.
To example the effects of a minimum wage we must consider
the market for labor. 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 dosen’t intervene the wage normally
adjusts to balance labor supply and labor demand.
The labor market with a minimum wage. If the minimum wage is
above the equilibrium level as it is here
the quantity of labor supplied exceeds the quantity demanded. The result
is unemployment. Thus the minimum wage raises the incomes of these workers who
have jove but it lowers the incomes of
workers who cannot find jobs.
To fully understand the minimum wage keep in mind that the
economy contains not a single labor market but many labor markets for different
types of workers. The impact of the minimum wage depends on the skill and experience of the worker. Workers with high skills and much experience are not
affected because their equilibrium wage are well above the minimum. For these
workers the minimum wage is not binding.
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