Final answer:
A minimum wage below the equilibrium rate is a nonbinding price floor, having no impact on wages already above it. A living wage can act as a binding price floor when it is set above the market equilibrium to ensure workers can maintain a standard of living.
Step-by-step explanation:
A minimum wage acts as a price floor in the labor market; it sets the lowest legal hourly pay rate for employees. A nonbinding minimum wage occurs when the market equilibrium wage is higher than the minimum wage. This means that even without the minimum wage law, employees would earn a higher hourly wage, therefore the minimum wage does not affect the market. An example would be if the equilibrium wage is $10 per hour and the minimum wage is set at $7.25.
Conversely, a binding minimum wage is one which is set above the market equilibrium. In this case, the legally imposed minimum wage affects employment because it is higher than what employers would typically pay based on supply and demand. A living wage is considered a form of a binding price floor when it is set above the current market rates in an effort to allow individuals to cover their basic needs and maintain a reasonable standard of living.