A price floor is a legally minimum price. What is a common outcome in the labor market when such a price floor is set?

A price floor is a legally minimum price. What is a common outcome in the labor market when such a price floor is set?

• A. Lower wages for workers
• B. Higher consumer surplus
• C. Shortage of labor
• D. Surplus of labor (unemployment)

Answer: (D)

When a price floor is set above the level that balances supply and demand in the labor market, it keeps wages higher than workers and firms would agree to in a free market. More people are willing to work at that higher wage, but employers hire fewer workers because the cost of labor is higher. The result is a surplus of labor—the number of people wanting jobs exceeds the number of jobs available—which shows up as unemployment. Other outcomes like higher consumer surplus don’t fit this situation, because the higher wage raises costs for firms and reduces the number of positions available, not the benefits to workers or consumers.

When a price floor is set above the level that balances supply and demand in the labor market, it keeps wages higher than workers and firms would agree to in a free market. More people are willing to work at that higher wage, but employers hire fewer workers because the cost of labor is higher. The result is a surplus of labor—the number of people wanting jobs exceeds the number of jobs available—which shows up as unemployment. Other outcomes like higher consumer surplus don’t fit this situation, because the higher wage raises costs for firms and reduces the number of positions available, not the benefits to workers or consumers.