Question

I have a paper to write on the following topic would a price floor such as minimum wage result in a surplus of labor and hence unemployment? two typed pages 12 point font with sources I need help please?

Answer 1

A price floor is a legal minimum, in which the government does not allow the price of a good or service to fall below the “floor.” Buyers caught paying less than the floor price face fines or other forms of punishment. The public justification for price floors is that certain sellers deserve a higher price for their goods or services than what they would receive in a pure market economy.

In modern Western countries labor is the primary recipient of price floors. In particular the government imposes a minimum wage making it illegal for an employer to pay a worker less than a certain amount per hour. Because this is the most popular and recognizable example of a price floor, we will concentrate on it The analysis generally applies to other goods or services.

As with price ceilings, price floors have many unintended consequences, which should make the proponents of the minimum wage reconsider whether they are really helping unskilled workers. The consequences include:

Immediate Surplus (or Glut)

The market-clearing price (wage) for unskilled labor equates the quantity demanded by employers, with the quantity supplied by unskilled workers. If the government sets a floor above the market-clearing level, then it will induce a surplus of unskilled labor. There will be a supply glut, meaning more workers are trying to find jobs at the going wage than employers want to hire. This situation is more popularly known as unemployment.

Market for Low-Skill Labor Services

if the equilibrium wage is $5 per hour. At this wage, employers want to hire 100,000 workers, and 100,000 people apply for these types of low-skill jobs. When the government comes in and artificially raises the wage rate to $8 an hour, the quantity of workers seeking jobs rises to 120,000, while the quantity demanded falls to 80,000. Thus there is a shortage of 40,000 workers. These 40,000 unskilled people are willing to work at the going wage of $8 an hour, but no matter how many applications they fill out, they simply cannot get a job.

Even at this stage, it is not obvious that the minimum wage law is helping unskilled workers. It’s true, the 80,000 who retain their jobs now make $3 more per hour, but there are 20,000 people who would have been happy to work at $5 an hour and yet now can’t get a job at all. In addition, there are 20,000 other workers who are frustrated by the inability to find a job at $8 an hour, but they wouldn’t be working in any case since $5 an hour would be unacceptable to them.

It is crucial to realize that the minimum wage law does not compel an employer to hire a low-skilled applicant. It simply makes it illegal to hire the applicant for less than the minimum wage. Far from penalizing the rejection of a job application, the minimum wage law actually makes it more burdensome for an employer to give someone a job.

An employer hires a worker because he expects the worker to bring in enough extra revenues to justify the paycheck. By artificially raising the bar of the minimum paycheck, the government effectively makes it impossible for people with productivities below a certain level to get a job.

Keep in mind that some unskilled workers simply do not produce $8 worth of extra output for every hour they are on the job. If someone’s labor only produces, say, $7 of output per hour, then an $8 minimum wage would force an employer to lose $1 for every hour this person works. If the employer wants to maximize his profits, it would be smarter not to hire this person at all.

Lower Demand in the Long Run

If the government enacts a minimum wage law that takes employers by surprise, they will respond immediately by cutting back on the number of employees. In the longer run (so long as they expect the minimum wage to remain in force) the employers will alter their businesses in ways that will reduce their demand for labor. For example, the employers can install more equipment and better tools to allow each (retained) worker to perform more duties. This raises his or her productivity on the margin; a given worker can produce more output per hour if his workplace has more machinery.