Question

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living raise be a binding price floor?

Short answer

A minimum wage would be a nonbinding price floor when it is set below the market equilibrium wage or when there is high labor demand, leading to naturally higher wages. A living wage would be a binding price floor when it is set above the market equilibrium wage, especially in cases of high labor supply where the market wages are too low to cover workers' basic needs. In this situation, the living wage causes a labor market surplus as employers may be less willing to hire workers at the higher wage level.

Step-by-step solution

Definition of Price Floor

A price floor is a government-imposed minimum price that should be paid for a good or service, regardless of market forces. A price floor is often set to protect producers or workers from prices that are too low.

Binding and Nonbinding Price Floor

A binding price floor occurs when the government-imposed minimum price is above the market equilibrium price. This creates a surplus of the good or service, as sellers are willing to provide more than the consumers are willing to buy at the price floor level. In contrast, a nonbinding price floor occurs when the minimum price is below the market equilibrium price, which means that it doesn't affect the market since the market forces have already set the price above the mandated minimum.

Minimum Wage

Minimum wage is a type of price floor set by the government, specifying the minimum amount that workers must be paid per hour. It aims to ensure that workers receive a fair wage for their labor. If the minimum wage is set above the market equilibrium wage, it becomes a binding price floor, potentially leading to unemployment. If it is set below the market equilibrium wage, it is a nonbinding price floor, meaning it doesn't affect the labor market.

Living Wage

A living wage is a wage rate that is high enough to allow workers to meet their basic needs and maintain a decent standard of living. It is often higher than the minimum wage and is considered a binding price floor if it is set above the market equilibrium wage. Now that we have a basic understanding of these concepts, let's answer the questions.

When a Minimum Wage would be a Nonbinding Price Floor

A minimum wage would be a nonbinding price floor under the following circumstances: 1. The minimum wage is set below the market equilibrium wage. This means that the market forces have already set a wage rate that is higher than the mandated minimum wage, making the minimum wage nonbinding. 2. High labor demand: If there is strong demand for labor, employers may naturally offer higher wages to attract workers, making the minimum wage nonbinding.

When a Living Wage would be a Binding Price Floor

A living wage would be a binding price floor under the following circumstances: 1. The living wage is set above the market equilibrium wage. This means that the market wage rate is below what is considered necessary for workers to meet their basic needs and maintain a decent standard of living. Thus, the living wage becomes a binding price floor, causing a labor market surplus as employers may be less willing to hire workers at the higher wage level. 2. High labor supply: If there is an oversupply of labor, and the market wages are pushed down due to competition for jobs, then a living wage would be binding, as it would be above the market equilibrium wage. This is because the equilibrium wage would be too low to cover workers' basic needs, so the government might impose a living wage, which becomes a binding price floor.