A Living Wage: Example of a Price Floor

The wage is on the vertical axis because the wage is the price in a labor market. Before the living wage law, the equilibrium wage is $10 per hour and the city hires 1,200 workers, point E.

A living wage law then requires employers to pay no less than $12 per hour. At the higher wage, 1,600 workers look for jobs with the city, but the city as an employer is willing to hire only 700. At the price floor the quantity supplied exceeds the quantity demanded, and a surplus of labor exists. For workers who keep a job at the higher wage, life has improved; for those who would have worked at the old wage but lost their jobs, it has not.

Lower the floor below $10 and it stops binding: the market simply clears at E.