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.

---

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.

---

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.

---

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.

---

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.

The Growing Demand for Healthcare Workers: What It Means for the Job Market

Did you know that back in 2013, 20% of the U.S. population was over 60 years old? That’s nearly 63 million people! As folks age, they tend to need more medical care, which means a bigger demand for doctors, nurses, and hospital services. Plus, with advances in technology helping people live longer and healthcare laws like the Affordable Care Act making it easier for millions to get treatment, the need for healthcare professionals is only getting stronger.

But what does all this mean for jobs and salaries in healthcare? Let’s break it down using some simple economic concepts.

Supply and Demand in the Job Market

The principles of supply and demand don’t just apply to buying and selling products. They’re also crucial in job markets and even in finance. When we talk about job markets, we’re looking at employees (like job seekers) as the suppliers of labor and companies (like hospitals) as the ones demanding labor. If you think of financial markets, the logic works similarly: people who save money add to the money supply, while borrowers increase the demand for money.

Here’s a real-world example of how this works for jobs: if salaries for nurses go up, hospitals might not hire as many. But if salaries go down, hospitals might hire more. It’s all about finding that perfect balance, called the equilibrium, where there are just enough nurses willing to work at the wage offered and hospitals needing their skills.

The Nursing Market: A Closer Look

Hospitals may try to find ways to cut costs if nurses’ salaries get too high. They could invest in tech, like automated patient monitoring systems, or hire lower-paid health aides. But in an ideal scenario, salaries adjust so that everyone who wants a job and everyone who needs a worker finds their match.

Now, the job market for nurses isn’t uniform. There’s variation, just like how gasoline has different grades—regular, premium, and super-premium. The same goes for the nursing world, where different qualifications and specialties come into play.

What Affects Demand for Labor?

Several factors can shift how many workers a company wants to hire, and these shifts can have a big impact:

• Consumer Demand: When people buy more of a product, like cars, manufacturers hire more workers. This is known as “derived demand.”
• Education and Training: If workers have better skills, companies might hire more of them. Think about the increase in demand for IT specialists because of software advancements.
• Technology: It’s a double-edged sword. Sometimes tech replaces jobs (like self-checkout machines), but it can also create demand for tech-savvy workers.
• Number of Businesses: More businesses mean more job openings. Fewer businesses mean fewer jobs.
• Government Regulations: Rules requiring specific qualifications for healthcare jobs can increase demand for professionals like nurses while decreasing demand for less-trained staff.
• Price and Availability of Inputs: If companies have cheaper or more accessible resources, they might hire more workers to produce more.

Supply of Workers: What Impacts It?

Labor supply follows the law of supply: higher wages mean more people want to work, while lower wages mean fewer people are interested. But there are also factors that can shift the supply of workers:

• Number of Workers: Changes like immigration or more women joining the workforce can increase the labor supply.
• Education: Jobs that require more education usually have a smaller pool of qualified workers. For example, there are fewer cardiologists compared to general doctors.
• Government Policies: Things like unemployment benefits or child care support can influence people’s decision to work or stay home.

Understanding the basics of supply and demand in labor markets helps us see why jobs and wages change. Whether you’re looking at nurses or tech jobs, these forces play a major role in shaping opportunities and salaries. And in healthcare, the need for workers is only set to grow as the population gets older and technology continues to evolve. So, if you’re considering a career in a high-demand field like nursing, now’s a great time to jump in!

Netflix's Price Increase in 2011: A Case Study on Demand Elasticity

In 2011, Netflix made a bold decision to increase its prices by 60%. The aftermath of this decision provides a fascinating case study on the elasticity of demand, consumer behavior, and market competition.

Initial Impact of the Price Increase

• Subscriber Loss: After the price hike, Netflix saw a significant backlash, with 810,000 U.S. subscribers canceling their subscriptions. This brought the total number of U.S. subscribers down from 24.6 million to 23.79 million.
• Stock Price Plunge: The company’s stock price reflected the market’s negative reaction, plummeting from about $33.60 per share to just under $7.80 within a year. This drop signaled investors' concerns about Netflix's future prospects after the price increase.

Elasticity of Demand

• Expected vs. Actual Response: Netflix officials anticipated that the price increase would result in the loss of about 600,000 subscribers, suggesting they expected an inelastic response. However, the actual loss of 810,000 subscribers indicates that the demand was more elastic than anticipated.
• Close Substitutes: One of the critical factors Netflix overlooked was the availability of close substitutes. Competitors like Vudu, Amazon Prime, Hulu, Redbox, and traditional retail stores offered alternative ways for consumers to access movies and TV shows. This increased the elasticity of demand, as consumers had viable alternatives to Netflix, making them more sensitive to price increases.

Long-Term Recovery and Growth

• Subscriber Growth: Despite the initial setback, Netflix's subscriber base grew substantially over time. By June 2013, the number of U.S. streaming subscribers had risen to 36 million, an increase of 11.4 million since the price increase. This steady growth continued, and by the end of 2021, Netflix had over 214 million subscribers worldwide.
• Stock Price Rebound: Netflix's stock price also recovered impressively. By the end of 2016, it had surged to $123 per share, and by the end of 2021, it was over $600 per share. This rebound reflected investors’ renewed confidence in Netflix's long-term strategy and the growing demand for streaming services.

Lessons Learned

• Misjudging Demand Elasticity: Netflix underestimated the elasticity of demand for its service, failing to fully account for the impact of close substitutes and the shifting preferences of consumers.
• Changing Consumer Preferences: Initially, many consumers still preferred physical DVD rentals over streaming. However, over time, the convenience and accessibility of streaming won out, leading to a shift in consumer preferences toward digital media.
• Market Dynamics: The case highlights the importance of understanding market dynamics, particularly the role of substitutes, consumer preferences, and the long-term effects of strategic decisions.

Conclusion

Netflix’s experience with the 2011 price increase underscores the complexity of demand elasticity and the challenges of making pricing decisions in a competitive market. While the short-term impact was severe, Netflix's ability to adapt and capitalize on the growing preference for streaming ultimately led to its success.