Price Floors in the Labor Market: What Living Wages and Minimum Wages Really Mean

 

Price floors are policies that set a minimum price for something—like wages in the labor market. One of the most common goals for price floors in labor markets is to boost the wages of workers who are earning low pay. Supporters of the living wage argue that full-time workers deserve to earn enough to cover life’s basics, like food, shelter, clothing, and healthcare.

The concept took off in the U.S. when Baltimore passed the first living wage law in 1994. Since then, many cities have followed suit, enacting similar laws in the late '90s and 2000s. These living wage laws don’t apply to every employer, but they do ensure that workers employed directly by the city or by contractors hired by the city get paid at least a few dollars more than the federal minimum wage.

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How Price Floors Affect the Labor Market

Let’s imagine there’s no federal minimum wage for simplicity. In this case, the equilibrium wage—the wage that balances the number of workers employers want to hire with the number of workers looking for a job—is $10 per hour. At this wage, the city hires 1,200 workers.

Now, let’s say a group of citizens convinces the city council to implement a living wage law that sets the wage at $12 per hour. As a result, 1,600 workers apply for jobs, eager to earn more. But at this higher wage, the city can only afford to hire 700 workers. So, what happens? A surplus of labor is created—there are more people wanting jobs at this higher wage than there are jobs available.

For the workers who keep their jobs at the higher salary, life has improved. But for those who were willing to work for the lower wage and lose their jobs, the wage increase doesn’t look so great. They’re out of a job, and the higher wage doesn’t benefit them at all.

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Minimum Wage as a Price Floor

The minimum wage is another form of price floor. Let’s say the minimum wage is set just below the equilibrium wage. In this case, the minimum wage doesn’t really affect the market because it’s "nonbinding." It means that wages can still fluctuate according to market demand above that price floor, but they can’t go below it.

When the minimum wage is slightly raised above the equilibrium wage, it may become "binding." This means it could create a small gap between the number of jobs employers want to offer and the number of workers willing to work at that wage. However, this gap isn’t usually large, because minimum wages are typically set close to the equilibrium level for low-skill labor. So, unless the minimum wage is dramatically raised—say, doubled to match living wages in certain cities—the effects on employment are usually minor.

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What Happens When Minimum Wage Goes Up?

You might wonder: if the minimum wage increases, why does it sometimes reduce employment? The law of demand tells us that when wages rise, employers tend to hire fewer workers, or they cut back on hours. So, if 98% of people earning the minimum wage get a raise, but 2% lose their jobs, do the gains outweigh the losses?

Well, it depends. If the 2% of workers who lose their jobs are the main breadwinners for their families, that’s a tough situation. But if they’re high school students working part-time over the summer, the impact is different.

Another factor to consider is that many minimum wage workers don’t work full-time throughout the year. For example, imagine a minimum wage worker who holds a few part-time jobs during the year, with periods of unemployment in between. While this worker gets a 10% pay raise, they might also end up working 2% fewer hours because employers are less inclined to offer as many hours at the higher wage. In this case, the worker’s total income could still increase, as the 10% raise would likely offset the 2% reduction in hours.

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Bottom Line: Is Raising the Minimum Wage Worth the Trade-Off?

So, what’s the takeaway? While raising the minimum wage can help some workers, it can also reduce the number of jobs available. The effects really depend on who benefits from the wage increase and who might lose out. It’s a balancing act—raising wages helps many, but it can also reduce the demand for labor, especially for low-skill workers or part-time employees. Policymakers need to carefully weigh the benefits and challenges before making decisions about minimum wage laws.

In the end, the goal is to create a system where workers can earn a decent living, but we also need to make sure the jobs are there for people to take. It’s a tricky issue, but one worth talking about as we consider the future of work and wages in our economy.