In article 2.6 in Dollars & Sense, current research reveals that minimum wage is

Question

In article 2.6 in Dollars & Sense, current research reveals that minimum wage is not set too high! In keeping with your reading of Mankiw's ch. 6, what does this mean in terms of minimum wage being a price floor? Is our current Washington State minimum wage ( $9:32/hr as of January 2014) a binding price floor? What effect does the minimum wage have on unemployment? Use the arguments in the article along with the model laid out in your textbook to help you answer the question. Give an example of a price floor (aside from minimum wage) that has an effect on a group of people. Should the price floor be maintained? Why or why not?

Explanation / Answer

Minimum wage (price floor) is a situation in the market where the government sets a minimum price that has to be charged. In terms of the minimum wage price floor, it is the minimum amount of wage that the employer is required to pay to the employee. This is done to ensure higher wages and better standard of living for the employees.

A binding price floor occurs when the government sets a required price on the goods above the equilibrium. The minimum wage set by Washington State is a binding price floor as it is officially set by the government and has to be followed by the employers.

As per a few economists, Minimum wage leads to an increase in unemployment. This is because a greater number of people will be willing to work at a higher wage, instead of which a fewer number of jobs will be available for higher wage and more number of jobs will be available at a lower wage.

E.g. of price floor: government might impose a price floor on alcoholic beverages with an aim to reduce alcohol consumption.

A price floor should be imposed, but it should be analyzed before whether the effects will come out to be positive or negative. For e.g. with respect to minimum-wage, unemployment increases, while with respect to alcohol pices, consumption falls. So, utmost care must be taken before implementing the price floor in order to achieve the desired results.

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