I wrote a post some time ago titled: 30 Basic Points on Economics.
Point #9 was:
“Price floors cause surpluses.”
Limiting prices from moving higher, in the form of a price ceiling, has the consequence of producing a shortage.
In this same way, there are also consequences to limiting prices from moving lower, in the form of a price floor.
So what is a price floor?
It is simply a law that states prices may not be below a certain level.
“It is against the law for cotton to be sold for less than 40 cents per pound.”
“The price for a government contract may not be less than cost, plus five percent.”
This restriction on price distorts the market, and consequently, has a result.
The result is a surplus.
The most obvious example of price floors today is with labor.
Take a low skilled worker as an example. His or her skill level may-be such that no employer is willing to pay them more than $5 per hour. The government steps in and by law states that no employer may hire someone for less than $7 per hour.
Now we have an issue.
Many unskilled workers wish to work for $7 per hour, and fewer employers will wish to hire for that.
We have a surplus of unskilled workers.
A surplus of workers also goes by another name: unemployment.
Like I said, price floors cause surpluses.