Minimum Wage

The Low Wage Labor Market

• New labor-saving technologies become available every year, which mainly replace low-skilled labor.
• Examples: Wawa, McDonald’s, self-checkout
• The immediate effect of these technological advances is a drop in the demand for low-skilled labor which results in a fall in the wage rate, and a decrease in the quantity of labor supplied.

Quantity of labor

Q

Wage

Demand₁

Supply

Demand₂

The Low Wage Labor Market

W₁

W₂

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Q₁

Q₂

The Federal Minimum Wage

• The Fair Labor Standards Act of 1938 established the hourly minimum wage rate in the United States at $.25 for covered workers.
• There have been 22 increases.
• The last increase was in July 2009 when it was raised to $7.25 per hour.
• To be equal to its 1968 high in terms of buying power it would need to have been $10.66 per hour in 2017.
• Many states have set minimum wages above the federal minimum wage rate.
• Most economists believe that raising the minimum wage will increase the unemployment rate of low-skilled workers.

The Minimum Wage by State**

• Eighteen states began 2018 with higher minimum wages. 
• Eight states (Alaska, Florida, Minnesota, Missouri, Montana, New Jersey, Ohio, and South Dakota) automatically increased their rates based on the cost of living.
• Eleven states (Arizona, California, Colorado, Hawaii, Maine, Michigan, New York, Rhode Island, Vermont and Washington) increased their rates due to previously approved legislation or ballot initiatives.  

The Minimum Wage is a Price Floor

• A price floor is a government regulation that makes it illegal to conduct a transaction at a price lower than a specified level.
• The minimum wage is the application of a price floor to labor markets.
• If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no minimum wage (e.g., $1.00 an hour).
• If the minimum wage is set above the equilibrium wage rate, it has powerful effects (e.g., $25.00 an hour).

The Minimum Wage and Unemployment

• If the minimum wage is set above the labor market’s equilibrium level, it creates a surplus of labor (another way of saying that raising minimum wage creates unemployment).
• Although the minimum wage has benefited some workers (those who are able to find jobs and receive higher wage), it has harmed other workers (those who become unemployed).
• Valid for only low-skill occupations (or is it?)
• Ripple effect

Wage Rate

Number of Workers (millions)

Demand

Supply

$12.00

8

$8.00

12

10

Impact of Raising the Minimum Wage (from $8/hr. to $12/hr.)

Unemployed

(4 million)

Job Loss

(2 million)

Nominal Wage vs. Real Wage

• Nominal wage: your pay per hour, per week, per month
• The amount listed on your paycheck.
• Examples: $10 per hour, $500 per week, $2,500 per month.
• Real wage: the buying power of your nominal wage
• If the increase in your nominal wage (for example, 4 percent) is less than the inflation rate (for example, 6 percent) your real wage will fall.

Nominal and Real Minimum Wage (2011 dollars)

Minimum Wage / Poverty Line (by family size)

Inefficiency of the Minimum Wage

• A minimum wage (if it is above the equilibrium wage) leads to an inefficient use of resources.
• Why? Because the quantity of labor employed (8 million) is less than the efficient quantity (10 million).

A Living Wage

• The living wage model is a market-based approach of basic needs that draws upon geographically specific expenditure data related to a family’s likely minimum food, childcare, health insurance, housing, transportation, and other basic necessities costs.
• Basically, a living wage, if you work a forty hour week, allows you to spend no more than 30 percent of your income on housing, and have enough income to purchase food, clothing, utilities public transportation and have access to health care.
• Living wage laws already operate in many cities in the United States.
• The effects of a living wage are similar to those of a minimum wage. Living Wage Calculator

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The Case Against Having or Raising a Minimum Wage

• Economist Milton Friedman once said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.”
• It increases unemployment.
• Short-run impacts may be negligible, but long-run impacts my be substantial.
• An increase in the minimum wage by 10% decreases the number of jobs held by teens by 1% to 3%.
• Negatively affects minorities more than whites.
• Negatively affects small businesses more than large businesses.
• Increases the rate of automation (replacing workers with machines).
• It can result in higher prices for consumers.
• Example: a 10% increase in the minimum wage raises food prices by up to 4%.

The Low Wage Labor Market

16

The Case Against Having or Raising a Minimum Wage�(continued)

• An increase in the minimum wage is an inefficient mechanism for helping poor working families.
• In 1939, 85% of low-wage workers were in poor families.
• Today, only 18% of low-wage workers are in poor families.
• A majority of minimum wage workers are young adults who are not supporting families.
• Nearly two-thirds of low-wage workers live in households with incomes over twice the poverty line, and 40% live households with incomes over three times the poverty line.

The Case For Having or Raising a Minimum Wage

Increased earnings

• The preference of the dignity of a living wage rather than a government handout.
• Assuming a minimum wage earner does not suffer a loss of employment, hours, or other wage supplements, as a result of an increase, then an increase in the minimum wage should close the gap between earnings and the poverty line.
• Example: a single parent with two children who works full-time at the current minimum wage has earnings of about 78% of the poverty line.
• An increase to $9 per hour would raise the family’s earnings to 97% of the poverty line.
• An increase to $12 per hour would raise the family’s earnings to 129% of the poverty line.

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The Case For Having or Raising a Minimum Wage

Increases Aggregate Demand

• A higher minimum wage that transfers money from employers to employees results in more money likely to be spent rather than saved thereby stimulating the economy and increasing GDP.

Reduces Employee Turnover and Increases Productivity

• If workers are paid more, they may work harder. This may return some of the increased wage paid by employers back to them in terms of lower turnover and increased productivity.

The Inelasticity of Labor Demand Argument

• If the demand for labor is more inelastic then there will be less of a loss in employment.
• Could be a size of firm issue
• Short-run vs. long-run

Wage Rate

Number of Workers (millions)

Demand

Supply

$12.00

8

$8.00

12

10

Impact of Raising the Minimum Wage (from $8/hr. to $12/hr.)

Unemployed

(4 million)

Job Loss

(2 million)

Wage Rate

Number of Workers (millions)

Demand

Supply

$12.00

9

$8.00

12

10

Impact of Raising the Minimum Wage with a More Inelastic Demand Curve

Unemployed

(3 million)

Job Loss

(1 million)

Alternatives to the Minimum Wage

The earned income tax credit (EITC)

• is a targeted tax credit to the working poor.
• In 2012, average family earnings for those receiving the EITC was $24,017.
• In 2012, minimum wage workers were in families with average incomes of $48,861.
• was, in 2014, as much as $5,460 for a working poor family with two children.
• 58% of benefits of EITC go to households in poverty.
• 85% of minimum wage benefits go to households not in poverty.
• Political hurdles

Negative income tax

Guaranteed National Income

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Where are Economists Now?

• Economists have long been against the minimum wage and for minimum income policies such as the EITC.
• A study by Card and Kruger challenged many of the long-held conclusions in the 1990s with research verifying the inelasticity argument.
• For most labor economists, subsequent research has re-verified the original pro-EITC, anti-minimum wage argument.
• More talk of minimum income policies.

What Now?

As the minimum wage increases

• What will happen to the rate of technical substitution of capital equipment for labor?
• What will happen to the rate of outsourcing of labor?
• What will happen to the success/failure rate of small businesses?