price floors are a legal limit on the minimum price you can charge for something price floors are only binding if they're set above the equilibrium price if the price floor were set below equilibrium it wouldn't matter since everyone would be charging the equilibrium price which is more than the legal minimum only when we lock in a price above equilibrium is there any effect on the market when the price floor is set high like this it legally stifles the market pressures which are trying to push that price back down holding it up on the power of the government but no matter how much We Wish It Isn't So or how desperately we plead with people to buy this product the bitter truth is that there's going to be a surplus a surplus means resources are misused and producers must use other tactics to try and attract customers which can be inefficient but there's one very famous price floor which is the subject of a lot of debate in the United States and around the world the minimum wage sets a price floor on the hourly wage paid for labor let's take a look at what economic theory has to say about the minimum wage the federal government has set a minimum wage which prevails in all 50 states and Washington DC though many states set their own higher minimum wage we can assess the effect of the minimum wage by looking at the market for labor in the market for labor the price is the wage paid the demand for labor is determined by the marginal product of labor and the supply of labor is determined by people's willingness to work at different wages of course the minimum wage only impacts labor markets where the equilibrium wage is below the minimum wage in the U.S this affects only about two or three percent of workers nevertheless at the minimum wage this is the number of workers firms will want to hire while this is the number of people who will be willing to work at that wage with many more people looking for work than there are jobs available the result of the minimum wage is unemployment we can compare this outcome to the equilibrium and assess the welfare effects of the minimum wage for the workers who are able to get a job there is a substantial benefit they're earning wages in excess of the equilibrium wage that means a better standard of living for those with low incomes but there's also dead weight loss which is by now you're pretty familiar with these are workers who want to work even at the lower equilibrium wage but firms cannot profitably hire them at the minimum wage count me as someone who wants to see the wages go up for those on this end of the income distribution but I also find it hard to think of reasons we should prohibit people from working for less if they're voluntarily willing to do so but this might not be the whole story workers who earn the minimum wage are very small per portion of the workforce and the jobs which pay the minimum wage are often at places like fast food restaurants which are run by large corporations we talked previously about firms with monopsony power these would be firms which are able to lower the price they pay for something without the fear that other buyers enter the market and push that price back up for labor markets these would be firms that could suppress the wages of their workers without competitors swooping in to hire them away at higher wages in a market where employers have monopsony power the minimum wage could increase wages but also increase the number of hours worked much like how a price ceiling can improve on the market outcome of a monopoly a price floor can improve on the market outcome of a monopsony in 1995 two economists named David card and Alan Krueger published one of the most famous papers in economics they identified a natural experiment where the effects of the minimum wage could be empirically tested in 1992 the minimum wage in both Pennsylvania and New Jersey was four dollars and 25 cents however New Jersey passed a law raising their minimum wage which would go into effect in September of that year raising their minimum wage to five dollars and five cents card and Krueger surveyed fast food restaurants in eastern Pennsylvania and New Jersey both before and after the minimum wage went into effect allowing them to implement a difference in differences design if you want a refresher on difference in differences designs go back to chapter two in their first survey restaurants in Pennsylvania had an average of 23.33 employees while restaurants in New Jersey had an average of 20.44 employees after the minimum wage in New Jersey went up the average in Pennsylvania fell to 21.17 employees while the average in New Jersey Rose to 21.03 employees this was a very surprising result both to the researchers and to all economists who read their paper we would expect the opposite to be true suppose you own a couple of McDonald's restaurants one in Pennsylvania and one in New Jersey when the state of New Jersey requires you to give your employees a raise economists would expect you to reduce the number of employees you have in New Jersey perhaps if your stores are close enough to each other you would transfer employees from the New Jersey store to the Pennsylvania one so you wouldn't have to increase their wages it makes plenty of sense that more workers would want to work in New Jersey now but it makes no sense that the employers would actually hire them we can look at the differences to estimate the impact of the minimum wage in Pennsylvania our control group the minimum wage did not change but stores lost around 2.16 employees on average in New Jersey our treatment group the minimum wage went up almost 19 percent and stores hired 0.59 workers on average if we take 0.59 and subtract negative 2.16 we get the treatment effect or the difference in differences estimate which is positive 2.75 card and Krueger who carefully controlled for other factors and looked at the data that they had to show that the minimum wage was effective and prominent among these employees found that increasing the minimum wage actually increased employment a lot of Studies have been done since this one and many confirm these results While others find a small disemployment effect but the evidence actually points to an explanation different from monopsony Power many people respond to wage increases with a productivity increase they get a raise and start working harder than they worked previously economists call these Efficiency wages of course we should be careful not to accept these results without any critical thought in 1938 the U.S introduced the minimum wage and set it at 25 cents per hour this was pretty good in an economy where the average wage was 62 and a half cents per hour it was 1938 after all but Congress forgot to make an exception for Puerto Rico which had an average wage of around 4 cents per hour the minimum wage devastated the Puerto Rican economy many firms went bankrupt and Puerto Rican leaders went to Washington and begged for an exemption from the law which they got it's easy to see that if the U.S set a minimum wage today of 100 per hour or one thousand dollars per hour that almost everyone would lose their jobs the marginal worker simply isn't that productive at some point increasing the minimum wage harms the very workers it's supposed to help