Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 10 THE MINIMUM WAGE Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©David Levenson/Alamy Limited

 Define the minimum wage  Describe the history of the minimum wage  Describe the difference between the real and nominal values of the minimum wage  Assess the theoretical impacts of the minimum wage on the labor market  Explain why minimum wage laws are controversial  Describe research findings regarding impacts of the minimum wage Copyright © 2013 John Wiley & Sons, Inc. 2 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

 In 2006, Colorado passed a law that automatically adjusts Colorado’s minimum wage to keep pace with the prices of food, housing, and other goods and services.  In 2010, Colorado policymakers were bound by law to lower the minimum wage from $7.28 to $7.24 per hour. Copyright © 2013 John Wiley & Sons, Inc. 3 CONTROVERSIAL MINIMUM WAGE

 The Minimum Wage is the lowest wage that employers can legally pay workers. Copyright © 2013 John Wiley & Sons, Inc. 4 THE MINIMUM WAGE

 Fair Labor Standards Act (FLSA) in 1938  The FLSA also includes provisions mandating time and one-half overtime pay and restrictions on the use of child labor.  The Fair Minimum Wage Act of 2007  The Nominal Value of the minimum wage is expressed in current dollar values and is not adjusted for inflation.  The Real Value of the minimum wage is expressed in constant dollar or inflation- adjusted values. Copyright © 2013 John Wiley & Sons, Inc. 5 HISTORY OF MINIMUM WAGES

Copyright © 2013 John Wiley & Sons, Inc. 6 HISTORY OF FEDERAL MINIMUM WAGES

 States also have their own minimum wage laws.  Thirteen states higher than the federal level  Five states lower than the federal level  Other states the same as the federal level.  When state and federal minimum wages are different, workers are entitled to whichever minimum wage is higher. Copyright © 2013 John Wiley & Sons, Inc. 7 STATE-LEVEL MINIMUM WAGES

Copyright © 2013 John Wiley & Sons, Inc. 8 DEMAND FOR LABOR

Copyright © 2013 John Wiley & Sons, Inc. 9 SUPPLY OF LABOR

Copyright © 2013 John Wiley & Sons, Inc. 10 THE IMPACT OF A MINIMUM WAGE IN THE LABOR MARKET

Unemployment occurs when there is a surplus of labor in the market. Copyright © 2013 John Wiley & Sons, Inc. 11 UNEMPLOYMENT

Copyright © 2013 John Wiley & Sons, Inc. 12 BELOW-EQUILIBRIUM MINIMUM WAGE

Copyright © 2013 John Wiley & Sons, Inc. 13 IMPACTS OF MINIMUM WAGE: WORKERS, BUSINESS & CONSUMERS

 Minimum wages create winners and losers  Proponents’ Arguments:  It helps the poor by raising their income  No direct expense for taxpayers  Better employment incentives than welfare programs Copyright © 2013 John Wiley & Sons, Inc. 14 WHY ARE MINIMUM WAGES CONTROVERSIAL?

 Opponents’ Arguments: Minimum wages benefit few poor workers at the expense of other poor workers, businesses, and consumers.  Minimum wages create more unemployment  Discourage firms from investing in training for workers  Businesses tend to raise the prices of their products, increasing costs for consumers  Businesses tend to use substitute inputs like machines or lower-cost workers in foreign countries instead of domestic workers. Copyright © 2013 John Wiley & Sons, Inc. 15 WHY ARE MINIMUM WAGES CONTROVERSIAL?

Findings about Impacts of Minimum Wages on:  E mployment: somewhat mixed results  School enrollment: increases in minimum wage are associated with increased high school dropout rates.  Poverty: minimum wages are associated with slight increases rather than decreases in poverty. Copyright © 2013 John Wiley & Sons, Inc. 16 MINIMUM WAGE RESEARCH

QUESTIONS/DISCUSSIONS Copyright © 2013 John Wiley & Sons, Inc. 17 1)Why has the real value of the minimum wage declined since 1968, even though the nominal value of the minimum wage has increased several times since then? 2)Are teenagers better off when a higher minimum wage enables some to get higher wages but causes others to lose their jobs?

Copyright © 2013 John Wiley & Sons, Inc. 18 KEY CONCEPTS Minimum wage Nominal value of the minimum wage Real value of the minimum wage Unemployment