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Price Ceilings and Floors

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Presentation on theme: "Price Ceilings and Floors"— Presentation transcript:

1 Price Ceilings and Floors
Effects on market equilibrium; Assessing winners and losers; 1

2 SURVEY Have you worked in a minimum wage job?
If yes, what was the job? Do you support increasing the minimum wage by $1.00? 2

3 Outline Historical Evolution of Minimum Wage Conventional Analysis
How Do You Prove an Economic Theory? Empirical Evidence on the Minimum Wage Reconciling Results with Theory Assessing Costs & Benefits Policy Alternatives 3

4 Historical Perspectives
Establishment of Government’s Legal Authority to Regulate Labor Markets Minimum wage legislation passed by Connecticut, Illinois, New Hampshire, New Jersey, New York, Ohio, Utah and D.C. 1937. Fair Labor Standards Act established federal minimum wage of $0.25 1st year; $0.30, the next 6 yrs. Narrow coverage. Numerous exemptions. Increases in minimum wage in 1949,55,61. 4

5 More Coverage Post ‘66 The FLSA amended to cover agricultural workers and some public employees. Increased minimum wage to $1.40 an hour. Education Amendments established minimum wages for employees of public and private schools 1977. Minimum wage became $2.65 an hour effective 1978; $2.90 an hour in 1979, $3.10 an hour in 1980 and $3.35 in Congress established the Federal Minimum Wage Study Commission. Minimum wage increased to $4.25 5

6 Current Law As of 9/1/97, minimum wage is $5.15.
Some employees are not covered. Special exemptions available for student learners, full time students, persons with disabilities Penalties for violations can include criminal prosecution. Typical penalty is $1000 fine. 6

7 The Minimum Wage 7

8 Who Earns the Minimum Wage?
57.9% Are Women 25.6% Are Teens 47.2% Work Full-Time 44.3% Work in Retail Trade 38.8% Are the Only Wage Earner 11.7% Are Teens in Families with Above Average Incomes 39.6% Are in Families in the Bottom Fifth of Income Distribution. Source: Mischel, L. et al, 1993, “Who Wins With A Higher Minimum Wage?” EPI briefing paper. IWPR, “Women and the Minimum Wage, 1995 8

9 The Conventional Analysis

10 The Conventional Analysis
Wage rate increases with binding constraint Increase in the quantity supplied of labor Decrease in the quantity demanded Fall in employment rate; Increase in unemployment rate Increase in costs of production for affected industries Increase in prices paid by consumers More elastic demand for labor, the greater the fall in employment

11 Elasticity of Labor Demand

12 How Do We Prove This Theory?
The “Economist’s Laboratory’ Defining a control group Regression Analysis Time Series Data Other Factors affect employment and unemployment. Minimum Wage increases not independent of labor market conditions. Cross Sectional Data Case Studies of States/Industries 10

13 Cross Sectional Studies Card and Krueger book
Empirical Evidence Time Series data Cross Sectional Studies Card and Krueger book Response to Card and Krueger Neumark and Wascher 11

14 Card and Krueger 4

15 Criticisms of Card and Krueger
Their data is fatally flawed. They focus only on short term effects. Employers may be slow to adjust to higher minimum wage. Consumers may substitute between more expensive restaurant food and fast food. The increase in demand would offset the effects of higher minimum wage. 5

16 Employment Policy Institute

17 Neumark and Wascher 7

18 Card and Krueger Revisited

19 What Do We Know? Effects on teenage employment, if negative, are small
Studies suggest the effect is smaller today than years ago. School enrollment decreases as minimum wage increases. 9

20 Why Isn’t There a Bigger Effect?
Minimum Wage not binding Neumark and Wascher, 1996 Brown, 1996. Heterogeneity of teenagers Monopsony Model Card and Krueger, 1995 10

21 Reconciling Results with Theory
Data is wrong Minimum Wage not binding Labor Markets are not competitive Labor supply and demand not measured in quality units. 12

22 Policy Issues Why Is the Minimum Wage Popular with Politicians?
Does the Minimum Wage Reduce Poverty? Alternatives to Increasing the Minimum Wage 13

23 The Minimum Wage and Poverty
With no employment consequences, increase in minimum wage increases incomes of minimum wage workers. Not all minimum wage workers are poor. Estimated impact on poverty rate is small. 16

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