The Effects of a Price Floor
- The Effects of a Price Floor
- Introduction
- Cause: Employment vs. Unemployment
- Reaction: Poverty
- Solution: Businesses
- Conclusion
- References
Introduction
In the United States of America, full-time workers earning the current federal minimum wage of $7.25 only earn about $14,500 a year in wages - below the poverty line for a family of two. Many variables play in the amount earned in a year, but when an individual is not making enough money in the first place, it is tough to support a case of cutting costs. In terms of a free market economy, which is “where the government imposes few or no restrictions and regulations on buyers and sellers” (Economics 2015). In a free market, participants determine “what products are produced, how, when and where they are made, to whom they are offered, and at what price—all based on supply and demand” (Economics 2015). This is where a free market economy is compared with our economy. Price floors affect the government in several ways, but for a general-purpose, it results in increased supply and reduced demand.
Cause: Employment vs. Unemployment
The overall impact on employment, especially for small businesses, is the increase in unemployment. The majority of small businesses struggle to pay for labor as it is. When there is a price floor surpassing a two-year job, signs tell that businesses will have a hard time meeting the price floor. This doesn’t go for every business, as many businesses may benefit from this due to the average pay of the workers. For example, if there was a business that pays their employees $27 an hour and the price floor is at $15, this will create competition in that certain workforce. This variable shows two groups of workers: unskilled workers and skilled/educated workers. With unskilled workers, pay should typically be less due to no specific skill upon employment. In the skilled and educated workers, the pay is typically more due to one’s nature to acclaim to know satisfactory information about a specific skill. Flat rates for these two different groups could work, but working out specific floors for each industry would work better. According to Berman of 2017, he states that “The amount a human being has to give to a company will always vary, but that humans contributions are at least $10 an hour”. This is right to a certain extent. When a worker produces, they are recognized as a contributor and must be paid. If the floor is too high for a company to afford little production, it will drive the company crazy.
Reaction: Poverty
Price floors will impact unemployment, and the impact on the poverty rate will decrease. A slim checkup of the world today shows that there is poverty. This poverty has real issues for living-standards and life-expectancies. Market breakdowns (Berman 2017) show that the least amount of poverty exists in the free market. The free market is considered the best for stability because it is a system focused on money exchanged. This includes interventions on price floors. We do have global markets and capitalism in most of the world. Careful studies show that capitalism has lessened the consequences of poverty long-term and that the main issue with capitalism in most countries is that it has too many factors of government regulations.
Poverty is not an option for workers and businesses, so both parties need to know how to work with the price floors. There are options that business owners can take because of the minimum wage. Reducing costs for a better return on incomes is the first thing all business owners should do to reduce the impact of a minimum wage. Reducing costs can free up money all over the place, and it’s worth a shot. Increasing prices can also lead to another way around minimum wage. By increasing prices, more money can be allocated to workers while still maintaining a profit. Reducing operating hours can make a huge impact on how much money a company saves. (Economics 2015) states that when a company breaks down the costs of operating a business, usually the biggest concern is how often the company is open. The longer the company is open, the more it costs over time. Last but not limited to, reducing staff can impact your short term goals. Freeing up initial capital can make a company more flexible to make changes.
Solution: Businesses
The business themselves are the ones paying for the increase in business costs. It would be foolish to say anyone else should take on that responsibility. The government wouldn’t be a useful resource, while they demand an individual approach. Inelastic product demand occurs when the product isn't selling to its margin (or its breakeven point). When companies are inelastic product demand, they have a hard time selling the product. When both inelastic demand and increased business costs come upon a company, this makes it rather difficult to get out.
Conclusion
As you can see, a price floor in a free market economy can have both good and bad effects on the economy as a whole. The overall impact on employment, especially for small businesses, is the increase in unemployment. Price floors will impact unemployment, and the impact on the poverty rate will decrease. There are options that business owners can take because of the minimum wage. The business themselves are the ones paying for the increase in business costs.
References
- Berman, C. (2017, November 21). What Happens When a Government Imposes a Price Floor? Retrieved May 6, 2018, from http://smallbusiness.chron.com/happens-government-imposes-price-floor-81340.html
- Economics, B. (2017, March 1). Government Intervention and Disequilibrium. Retrieved May 5, 2018, from https://courses.lumenlearning.com/boundless-economics/chapter/government-intervention-and-disequilibrium/
- Wage Determination: Chapter 15 from Microeconomics: Principles, Problems, and Policies, 20th Edition by McConnell, Brue, Flynn, 2015