A price floor is a barrier preventing
prices of goods or services from falling further which is being enforced by
a governing body. Minimum wage is a good example of price floors, this is the
lowest price workers should get paid otherwise the employer is in deep trouble
if caught. If a worker is currently paid $8 an hour and the minimum wage set
by the government is at $5 then the price floor is nothing but a guideline.
During times when consumers spend lightly, revenues of businesses are on a decline.
If the government thinks that increasing pay would boost spending they might
raise the price floor for wages. If the new rate set by the government is now
higher than the current wage businesses pay their workers, for example
a company pays their employees $7 an hour and a price floor for the minimum
wage was increased to $9. This new rate might put a heavy pressure on a company's
revenue since they would have to increase the amount of their payroll, therefore
forcing them to layoff some of their workers to compensate for that higher wage
set by the government. This creates a surplus in the labor pool because there
are now more people looking for jobs all because the minimum wage was raised.
If the minimum wage is low enough then companies might increase productivity
by hiring more people but this scenario reduces the quality of output.