CASE STUDY THE MINIMUM WAGE
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 1999 the
minimum wage according to federal law was $5.15 per hour, and some state
laws imposed higher minimum wages.
To examine the effects of a minimum wage, we must consider the market
for labor. Panel (a) of Figure 6-5 shows 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
doesn’t intervene, the wage normally adjusts to balance labor supply and
labor demand.
Panel (b) of Figure 6-5 shows 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 those workers who have jobs, but it
lowers the incomes of those 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 wages are well above the minimum. For these workers,
the minimum wage is not binding
CASE STUDY THE MINIMUM WAGEAn important example of a price floor is the minimum wage. Minimum-wagelaws 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 of1938 to ensure workers a minimally adequate standard of living. In 1999 theminimum wage according to federal law was $5.15 per hour, and some statelaws imposed higher minimum wages.To examine the effects of a minimum wage, we must consider the marketfor labor. Panel (a) of Figure 6-5 shows the labor market which, like allmarkets, is subject to the forces of supply and demand. Workers determinethe supply of labor, and firms determine the demand. If the governmentdoesn’t intervene, the wage normally adjusts to balance labor supply andlabor demand.Panel (b) of Figure 6-5 shows the labor market with a minimum wage. If theminimum wage is above the equilibrium level, as it is here, the quantity of laborsupplied exceeds the quantity demanded. The result is unemployment. Thus,the minimum wage raises the incomes of those workers who have jobs, but itlowers the incomes of those workers who cannot find jobs.To fully understand the minimum wage, keep in mind that the economycontains not a single labor market, but many labor markets for different types ofworkers. The impact of the minimum wage depends on the skill and experienceof the worker. Workers with high skills and much experience are not affected,because their equilibrium wages are well above the minimum. For these workers,the minimum wage is not binding
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