Wage floors and ceilings
Introduced| English | Meaning |
|---|---|
| minimum wage/ˈmɪnɪməm weɪdʒ/ | The lowest wage rate that an employer is legally permitted to pay covered workers. |
| maximum wage/ˈmæksɪməm weɪdʒ/ | A legal ceiling on the wage that may be paid. |
A decision you can investigate
- A government wants to help low-paid workers without pricing them out of jobs.
- Where should a wage floor sit relative to the market equilibrium?
Build the explanation
- A minimum wage 最低工资 is a legal wage floor; it binds only above the free-market equilibrium, where it contracts labour demand and extends labour supply, the gap being the surplus of labour. A maximum wage 最高工资 is a legal ceiling; binding below equilibrium, it creates a shortage of labour.
- Effects soften when demand for labour is inelastic, when higher pay raises motivation and productivity, or when the employer is a monopsonist: a floor can then raise both the wage and employment within limits.
Work through the evidence
- With demand W = 12 − 0.04L and supply W = 2 + 0.04L, equilibrium is 0.08L = 10, so L = 125 workers at W = 7 per hour.
- A floor at W = 9 gives demand 75 (9 = 12 − 0.04L) and supply 175 (9 = 2 + 0.04L): a surplus of 100 workers. A ceiling at W = 5 instead gives demand 175 and supply 75: a shortage of 100.
A wage floor above equilibrium
With W = 12 − 0.04L and W = 2 + 0.04L the market clears at W 7 with 125 workers. A minimum wage of 9 cuts labour demanded to 75 and raises labour supplied to 175: 100 workers want jobs they cannot find. A ceiling of 5 gives a shortage of 100.
With demand W = 12 − 0.04L and supply W = 2 + 0.04L, what surplus does a wage floor of 9 create?
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At W = 9 demand is 75 and supply 175, so the surplus is 100.
Test the limits
- A wage-floor diagram for an increase must show the floor moving up; examiners reject diagrams that introduce a brand-new floor. The size of job losses depends on the elasticities, which the diagram alone does not give.
- Wage controls miss other margins: employers can cut hours, benefits or training, and executives under a maximum wage can leave or take non-pay benefits, as Egypt’s 2015 public-sector cap showed.
A minimum wage of 6 binds when the equilibrium wage is 7.
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A floor binds only above equilibrium; at 6 the market still clears at 7.
The employment effect of a minimum wage depends on labour-market elasticities and structure.
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True. The size of any surplus depends on the elasticities, and under monopsony a minimum wage can even raise employment.
Apply and explain your answer
- With the numbers above, what does a minimum wage of 6 do?
- Nothing: 6 is below the equilibrium wage of 7, so the floor does not bind and the market stays at L = 125, W = 7.
Which condition can let a wage floor raise employment?
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Against a monopsonist, a moderate floor can raise both the wage and employment within limits.
Use the terms precisely
- minimum wage: A legal floor under the wage, binding only above equilibrium.
- maximum wage: A legal ceiling on the wage, binding only below equilibrium.
Match the terms to their meanings.
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Use each term for its stated economic relationship.
With demand W = 12 − 0.04L and supply W = 2 + 0.04L, equilibrium is 0.08L = 10, so L = 125 workers at W = 7 per hour. A floor at W = 9 gives demand 75 (9 = 12 − 0.04L) and supply 175 (9 = 2 + 0.04L): a surplus of 100 workers. A ceiling at W = 5 instead gives demand 175 and supply 75: a shortage of 100.
A wage-floor diagram for an increase must show the floor moving up; examiners reject diagrams that introduce a brand-new floor. The size of job losses depends on the elasticities, which the diagram alone does not give. Wage controls miss other margins: employers can cut hours, benefits or training, and executives under a maximum wage can leave or take non-pay benefits, as Egypt’s 2015 public-sector cap showed.
A minimum wage is a legal wage floor; it binds only above the free-market equilibrium, where it contracts labour demand and extends labour supply, the gap being the surplus of labour. A maximum wage is a legal ceiling; binding below equilibrium, it creates a shortage of labour.
Write from a surplus of 80
- Demand is a wage of 20 minus 0.1L. Supply is a wage of 4 plus 0.1L.
- Compare the free-market result with a floor of 16 and a ceiling of 8.
Demand is a wage of 20 minus 0.1L and supply is a wage of 4 plus 0.1L. What is the free-market employment and wage? What surplus or shortage follows a floor of 16 and a ceiling of 8?
A floor above equilibrium creates excess supply of labour. A ceiling below equilibrium creates excess demand.
What labour-market gap does a wage floor of 16 create?
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At a wage of 16, supply is 120 and demand is 40. The surplus is 80.