Micro question. Price ceilings.

What is the most likely result of a price ceiling set below prevailing prices in the labor market? a. The supply of labor will exceed demand. b. The demand for labor will exceed supply. c. Costs associated with search activity will make the pairing of workers with employers less efficient. d. There will be no impact on the labor market. ---- Stalla says that correct is d. I understand price ceiling in labour market as restriction “not to pay more than statutory wage”. As a result this will lead to labour shortage in the market.

Konstantin, I agree with you. It can’t be d. If the price ceiling is set below the market price, there will be an excess demand at the ceiling price (or as you pointed out labour shortage, even though it’s unusual to set wage celings. Those are usually subject to price floors).

It is definitely not d. though it is possible to have a ceiling on wages for high-earning individuals (salary cap in sports could make athletes to move to sport without salary cap), also incentive based jobs in government should be limited by price ceilings.

Siberian_Golfer, I completely agree that it is possible to have wage ceilings and you have listed some great examples. However, when we talk about wage restrictions, it is usually in the context of a minimum wage legislation. Not that this matters to the original question any.

D is incorrect, if the wage-ceiling is set above the equilibrium wage, then there is no impact on the labor market. B and C seems equally good to me, but would bet on ‘B’. - Dinesh S

lola, i am totally with you on wage restrictions. Stalla could not be correct here. i wonder whether we should start a thread “incorrect questions in study guides”

this may be a reach, but what if the supply of and demand for labor cancel eachother out - leaving net/net of no impact. also, i tried to analyze each answer choice to rationalize how D could be correct. bottom line for me is that econ can be confusing… a. The supply of labor will exceed demand. - incorrect b/s supply of labor will be lower than demand. Potential workers are not encouraged to work at lower wage rates, whereas demand for labor potentially increases since employers can hire at cheaper wage rates. b. The demand for labor will exceed supply. - basically looks tru, but after thinking it thru more: does a price ceiling on wages rates automatically mean employers will demand more labor? not totally sure. other things would factor into this, ie quality of labor at the lower wage rate may not be as good as at equil wage rate, so employers do not adjust their demand for labor. c. Costs associated with search activity will make the pairing of workers with employers less efficient. - not sure how price ceiling is related to costs associated with search activity. d. There will be no impact on the labor market. - process of elimination or the supply/demand netting eachother out theory.

xavier1 Wrote: ------------------------------------------------------- > b. The demand for labor will exceed supply. - > basically looks tru, but after thinking it thru > more: does a price ceiling on wages rates > automatically mean employers will demand more > labor? not totally sure. other things would > factor into this, ie quality of labor at the lower > wage rate may not be as good as at equil wage > rate, so employers do not adjust their demand for > labor. Consider a boutique M&A firm with 100 employees, 60 MD’s out of those hundred, suppose their actual worth in the market is $300K, but due to price-ceiling (of say: $300K) on wage, those 60 big-shots are getting $100K less than what they actually should have got, dismay causes the labor to switch jobs to industries where there is no such caps observed, and obviously supply decreases, demand increases. But this could also mean than the cost of searching the employee to fill up those 60 spots increases, and hence cause inefficiency in the Search-Activity. damm, I agree on your bottom line conclusion … economics is soo confusing… - Dinesh S

The answer is B, no doubt. xavier1, I think you’re thinking about this too much. Just assume that if there is a price ceiling that is below the market wage, employers will want to employ more workers (they will move away from employing capial, which is now more expensive relative to workers and will prefer to employ more of the cheaper factor of production, in this case labour). At the same time, less workers will want to work for the going wage (remember labour supply is positively sloped, so the lower the wage, the lower the supply). Siberian_Golfer, good idea re starting a thread with wrong questions.

good points. thx for ur insight…agree that B is the best choice. was just trying to come up with how the heck D could be right. makes me nervous if these prep providers are stating incorrect answers b/c we rely on them so much.

> Consider a boutique M&A firm with 100 employees, > 60 MD’s out of those hundred, suppose their actual > worth in the market is $300K, but due to > price-ceiling (of say: $300K) on wage, those 60 > big-shots are getting $100K less than what they > actually should have got, dismay causes the labor > to switch jobs to industries where there is no > such caps observed, and obviously supply > decreases, demand increases. > Price celiing is 200K and not 300K, my typo… - Dinesh S

Hi all Please refer to the Stalla Update - and make sure you have updated your PassMaster software. There is an errata update for this very question as follows: 2/7/07 4 Markets in Action: The Effects of Government-Imposed Market Impediments L1-03923 The question should read as: “What is the most likely result of a price ceiling set above prevailing prices in the labor market?” The solution should read as: “Choice “d” is correct. Since the price ceiling was set above the prevailing price, there will be no impact on the labor market.” Question has “Below” – which has been updated to “ABOVE” – which makes a hell of a difference to the answer… CP