Question

Why is a living wage considered a price floor? Does imposing a living wage have the same outcome as a minimum wage?

Short answer

A living wage is considered a price floor because it sets a minimum wage that employers must pay their workers to cover basic needs, while considering factors like the local cost of living and family size. Both living wage and minimum wage act as price floors in the labor market, ensuring that workers receive a certain level of income. However, a living wage aims to provide a decent standard of living, whereas a minimum wage is the lowest legal wage that may not necessarily cover basic needs. The outcomes of imposing either are similar but may have varying consequences depending on their relation to the market equilibrium wage, which could include increased unemployment or reduced working hours.

Step-by-step solution

Define Living Wage and Price Floor

A living wage refers to the minimum income necessary for a worker to meet their basic needs, such as food, housing, and clothing. It is generally higher than the legally mandated minimum wage and takes into account factors such as local cost of living and family size. A price floor is a government-set minimum price for a particular good or service, which aims to prevent the price from falling below this level. In labor markets, a price floor can be applied to employees' wages to ensure they receive at least the minimum set amount.

Explain how a living wage works as a price floor

A living wage, as a higher level of minimum wage, effectively acts as a price floor in the labor market. If employers are required to pay a living wage, it means that they cannot pay their workers less than this set amount. This establishes a minimum price for labor that is higher than the prevailing market wages.

Compare living wage and minimum wage outcomes

Imposing a living wage and a minimum wage can have similar outcomes, as both establish a price floor for wages, ensuring that workers receive a certain level of income. The differences between these two concepts lie mainly in their intended goals and their actual levels. A living wage is aimed at providing workers with a wage that covers their basic needs and allows them to maintain a decent standard of living. A minimum wage, on the other hand, is the lowest amount that employers can legally pay their workers, which is often lower than the living wage and may not necessarily cover the basic needs of workers. Both policies can have similar consequences. If the living wage or minimum wage is set above the market equilibrium wage, it can lead to unintended consequences, such as increased unemployment, reduced working hours, or substitution of workers with automation. This occurs because employers are less inclined to hire workers at the higher living wage/minimum wage rate, especially if it demands a significant increase in labor costs. However, if the living wage/minimum wage is set closer to the market equilibrium wage, these negative effects might be minimized. In conclusion, a living wage is considered a price floor because it sets a minimum price for labor that employers must meet, similar to a minimum wage. Although both policies aim to improve workers' welfare and increase their income, a living wage is designed to cover the basic needs of a worker, whereas the legally mandated minimum wage may not necessarily do so. Both policies can have similar outcomes, but the particular consequences will depend on how the living wage/minimum wage is set in relation to the market equilibrium wage.