1 Chapter 29 Minimum Wages

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3 Why Have a Minimum Wage? 3 The 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 work –Living Wage: a wage sufficient to keep a family out of poverty

4 Minimum Wage Relative to the Poverty Line 4

5 Nominal and Real Minimum Wage 5

6 Minimum Wage Increases 6 The Federal minimum wage was originally set at 25 cents per hour. There have been 21 increases. July 2009 it became $7.25 per hour (and still is) To be equal to its 1968 high in inflation-adjusted terms it would need to be $11 per hour in 2009.

7 Minimum Wages in States and Cities Cities 7 28 states have minimum wages laws Many cities have their own minimum wages laws 8 states index their minimum wages for inflation

8 The Model 8 Wages Labor Supply If Minimum Wage here nothing happens: there would be a shortage of workers and firms would raise wage However if min wage is here we get a surplus, firms would like to lower wage but they can’t Surplus L Deadweight loss Many workers are happier though, they earn more money than before

99 Elasticity Just like the tax case the size of the deadweight lost depends on the elasticity The bigger the elasticity of demand the bigger the deadweight loss To see this consider a case with perfectly inelastic demand

10 The Model 10 Wages Labor Supply No deadweight loss There is still a surplus though

11 What’s Wrong with the Minimum Wage? 11 The gain to the workers who keep their jobs is less than the loss to the losers who -workers who lose their jobs -firm owners who have to pay higher wages -consumers who may have to pay higher prices One estimate says 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. Someone has to pay for it: some of the cost is passed on to consumers who are probably relatively low income

12 The EITC Alternative to the Minimum Wage 12 The earned income tax credit (EITC) –is a targeted tax credit to the working poor. –was, in 2009, as much as $4,824 for a working poor family with two children. –70% of benefits go to households in poverty –70% of minimum wage benefits go to households not in poverty

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14 Pro-minimum wage arguments The Macroeconomic Argument –The money that is transferred from employers to employees in more likely to be spent than saved thereby increasing GDP. The Work Effort Argument –People 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 Argument –If the demand for labor is inelastic then there is less of a loss in employment and a smaller deadweight loss. Political -Want to help poor people however we can, why not minimum wage and EITC? -The costs of this are hidden-doesn’t cost government anything while EITC does

15 Where are Economists Now? 15 Many economists 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-though think the elasticity is not very high