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 | 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.
With demand W = 12 − 0.04L and supply W = 2 + 0.04L, what surplus does a wage floor of 9 create?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
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.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
A floor binds only above equilibrium; at 6 the market still clears at 7.
Every minimum wage destroys the same number of jobs in every labour market.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
The surplus size depends on the elasticities, and monopsony structure can reverse the sign of the employment effect.
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?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
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.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
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.