Question

Suppose Congress implements a minimum wage of $7.50 for college graduates. Is this a price ceiling or a price floor? If the equilibrium wage for college graduates is below $7.50, would this lead to a surplus or a shortage of labor? In light of your answer to question 1, what do U think about the current trend to raise minimum wage? Do you think this is a wise idea? ?

Answer 1

If the congress implements a minimum wage of $7.50 for college grauates then it is referred to as Price Floor as the price floor is the lowest price that can be paid in goods,labor or capital market.

In the diagram above,in the absence of government intervention,prices will be adjusted due to market forces of supply and demand and will be at equilibrium E.When the government intervenes, it sets a new price Pf which results in excess quantity supplied of labor as against demand. When quantity supplied exceeds quantity demanded, a surplus of labor will happen.

The trend to raise minimum wages is not a good idea as it will result in firm hiring less workers so unemployment increases.More and more people will demand jobs but they don't have enough skills for those jobs as producers will hire high skilled people to justify the raise in wages so,the low skilled people will find themselves without jobs.

It will also result in firms increasing their cost of production and decrease the production to cover their costs which will result in higher prices, pay reductions,early retirement packages will happen which will demotivate the labor force and increase the burden on the society.