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Isues in economics today 6th by guell chapter31

Chapter 31
Minimum
Wage

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Outline
• Traditional Economic Analysis
Of A Minimum Wage
• Rebuttal To The Traditional
Analysis
• Where Are Economists Now?
• Kick It Up A Notch

McGraw-Hill/Irwin

©2012 The McGraw-Hill Companies, All Rights Reserved


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Why Have a Minimum Wage
• 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
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©2012 The McGraw-Hill Companies, All Rights Reserved

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Minimum Wage
Relative to the Poverty Line

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Nominal and Real Minimum Wage
(1999 dollars)

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Minimum Wage Increases
• The Federal minimum wage was
originally set at 25 cents per hour.
• There have been 21 increases.
• July 2011 it was $7.25 per hour.
• To be equal to its 1968 high in
inflation-adjusted terms it would
need to be $11 per hour in 2009.

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©2012 The McGraw-Hill Companies, All Rights Reserved

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

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©2012 The McGraw-Hill Companies, All Rights Reserved

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The Labor Market without a Minimum
Wage


W
Supply

A

W*

C





B

0

L*

McGraw-Hill/Irwin

Demand •
Labor

Value to the firms:
• 0ACL*
Firms pay workers:
• OW*CL*
The opportunity cost to workers:
• OBCL*
Surplus to firms:
• W*AC
Surplus to workers:
• BW*C

©2012 The McGraw-Hill Companies, All Rights Reserved

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Minimum Wage Relevance
• A 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.

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©2012 The McGraw-Hill Companies, All Rights Reserved

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What’s Wrong with the
Minimum Wage
• The gain to the workers who
keep their jobs is less than the
loss to the losers who
• lose their jobs and
• are firms who have to pay higher
wages.

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The 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.

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©2012 The McGraw-Hill Companies, All Rights Reserved

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The EITC Alternative
to the Minimum Wage
• The earned income tax credit (EITC)
• is a targeted tax credit to the working poor.
• was, in 2011, 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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The Rebuttals to the Traditional
Analysis

• 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.
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©2012 The McGraw-Hill Companies, All Rights Reserved

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Where are Economists Now
• 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.
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©2012 The McGraw-Hill Companies, All Rights Reserved

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Kicking it Up a Notch: Demonstrating the Case
Against the Minimum Wage


Value to the firms:
• 0AELmin



Firms pay workers:
• 0WminELmin



The opportunity cost to workers:
• 0BFLmin



Surplus to firms:
• WminAE

Demand



Labor

Surplus to workers:
• BWminEF



Unemployed workers
• Who had jobs
• L*-Lmin

W
Supply

A
E

Wmin
W*

C
F

B

0 Lmin L* LS

McGraw-Hill/Irwin

• Who are now looking
• LS-L*

©2012 The McGraw-Hill Companies, All Rights Reserved

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Demonstrating the Inelasticity Argument

W
Supply
E

Wmin
W*

F

C

B

Low level of DWL

Demand
0

Lmin L*

Labor

Small number of displaced workers

McGraw-Hill/Irwin

©2012 The McGraw-Hill Companies, All Rights Reserved

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