Chapter 33 Minimum Wage


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Chapter 33Minimum WageChapter OutlineTRADITIONAL ECONOMIC ANALYSIS OF A MINIMUM WAGEREBUTTAL TO THE TRADITIONAL ANALYSISWHERE ARE ECONOMISTS NOW?Why Have a Minimum WageThe argument for a minimum wage is that people who work full time should not be in poverty. This combines two concepts:Minimum Wage: the lowest wage that may legally be paid for an hour’s workLiving Wage: a wage sufficient to keep a family out of povertyMinimum Wage IncreasesThe Federal minimum wage was originally set at 25 cents per hour. There have been 18 increases.In 2001 it was $5.15 per hour.To be equal to its 1968 high in inflation-adjusted terms it would need to have been close to $8 per hour in 2001.The Labor Market without a Minimum WageLaborWDemandSupplyAW*BC0 L*Value to the firms: 0ACL*Firms pay workers: OW*CL*The opportunity cost to workers: OBCL*Surplus to firms: W*ACSurplus to workers: BW*CMinimum Wage RelevanceA minimum wage is only relevant if it is above the market wage.A minimum wage below the market wage is irrelevant.The company must pay the market wage to attract workers.Paying below the market wage is not in its interests because such a wage would not attract sufficient workers to the company. What’s Wrong with the Minimum WageThe gain to the workers who keep their jobs is less than the loss to the losers wholose their jobs andare firms who have to pay higher wages.Demonstrating the Case Against the Minimum WageLaborValue to the firms: 0AELminFirms pay workers: OWminELminThe opportunity cost to workers: OBFLminSurplus to firms: WminAESurplus to workers: BWminEFUnemployed workersWho had jobs L*-LminWho are now lookingLS-L*WDemandSupplyAW*BC0 L*WminLminLSEFThe Case Against (continued)An increase in the minimum wage by 10% decreases the number of jobs held by teens by 1% to 3%.A minimum wage increase negatively affects small businesses more than larger firms. minorities more than whites.A majority of minimum wage workers are young adults who are not supporting families. An increase in the minimum wage is an inefficient mechanism for helping poor working families.The EITC Alternative to the Minimum WageThe earned income tax credit (EITC)is a targeted tax credit to the working poor.was, in 2000, as much as $3,888 for a working poor family with two children.The Rebuttals to the Traditional AnalysisThe Macroeconomic ArgumentThe money that is transferred from employers to employees in more likely to be spent than saved thereby increasing GDP. The Work Effort ArgumentPeople who are paid more may work harder than people who are paid less. This may return some of the increased wage paid by employers back to them in terms of increased productivity.The Inelasticity of Labor Demand ArgumentIf the demand for labor is inelastic then there is less of a loss in employment and a smaller deadweight loss.Demonstrating the Inelasticity ArgumentLaborWDemandSupplyW*BC0 L*WminLminEFWhere are Economists NowEconomists have long been against the minimum wage and for the EITC.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.