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Principles of Economics- Mankiw (5th) 122

Principles of Economics- Mankiw (5th) 122 - 126 PA R T T W...

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126 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK 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 mar- ket 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
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