Raising the Minimum Wage
1. Videos and Key Arguments, History of Minimum Wage, Basic Facts about Minimum Wage
2. Basic Textbook Treatment
3. Popular Press Reports
4. Advanced Arguments from Popular and Specialized Media
5. Advanced Textbook Treatment
6. Empirical Tests of Advanced Models
8. Papers and other external links
1. Videos and Key Arguments, History of Minimum Wage, Basic Facts about Minimum Wage
Videos and Key Arguments
President Obama on MW during SoTU:
President Obama's Arguments:
Minimum wage workers who work full time live below poverty line.
19 states have already increased minimum wage since last federal mandate to increase MW.
Increasing the MW will increase incomes of working families.
Living below poverty line means working families must choose between rent/eviction, food bank/buying groceries, etc.
Increasing MW puts money in peoples' pockets, which will increase aggregate demand and boost economy.
Increasing MW pushes people off of welfare programs.
CEO pay is high.
Should tie MW to inflation.
Questions: What arguments does President Obama offer in support of raising the minimum wage? (Be specific.)
ABC Nightly News Notes:
2/3 of MW earners are women. 50% are young.
Single parent earning MW enjoys income below poverty line-- $15,130 versus $15,510.
After the last MW increase, youth unemployment increased.
Pizza Man's Arguments:
Unemployment is higher in those states that require minimum wage levels above the national average.
Increasing the MW will result in fewer hours worked or less hiring.
$9/hour is not enough to lift someone out of poverty.
Increasing MW hurts those workers who have the least skills and who need MW jobs the most.
Increasing MW will force businesses to pass on higher costs to consumer.
Due to recent costly legislation and to the nature of small business structure, many businesses are already earning very low profit margins, so increasing MW will force small businesses to pass along costs or cut workers and/or hours worked.
Increasing MW increases all wages.
Should allow free market to determine wage rate, which even without government interference could be higher than dictated level.
Question: What arguments does the Herman Cain offer against raising the minimum wage?
Sonic CEO arguments:
Increasing MW will put pressure on profit margins and increased costs will be shifted onto consumer.
Different firms will adapt differently to MW increase; which implies that the impact of MW increase will vary across firms and industries.
Questions: Are all firms equally affected by an increase in the minimum wage? Why, or why not?
Professor of Economics, University of Texas, Daniel Hamermesh:
Almost everybody gets something wrong about minimum wage.
Liberals correct that real value of minimum wage has fallen over time.
Liberals wrong that increasing MW won't affect job creation--it will kill off some jobs.
Conservatives overestimate effect of MW law, especially given real decline in MW over long term.
Increasing MW will give some workers slighly higher earnings.
Indexing of MW most important part of PO's proposal.
EIC creates jobs, while MW kills jobs.
Even though MW kills some jobs, this economist concludes that he favors increasing MW and indexing future MW.
Increasing MW will reduce poverty but increase unemployment. Since it is hard to measure and compare these two effects it is difficult to conclude whether increase MW reduces/increases poverty.
Questions: According to Professor Hamermesh, who fails to properly understand the debate regarding the minimum wage? What are the main points conveyed by Professor Hamermesh? Does he advocate increasing the minimum wage? Why is it difficult to study and advocate for/against an increase in the minimum wage?
Alan Krueger, on MW until 6 minutes 30 seconds
Bendheim Professor of Economics and Public Affairs at Princeton University and Research Associate at the National Bureau of Economic Research, Council of Economic Advisors to President Obama, Alan Krueger:
Empirical evidence shows that increasing MW increases workers take-home pay, increases worker productivity, and lowers worker turnover which is good for workers and employers.
Empirical studies show that increasing MW does not result in job losses.
Increasing MW puts more money in workers' pockets, which increasing aggregate demand (which is good for everyone).
Proposed increase would raise minimum wage in real terms to same level as 1981.
AK balks at claiming that increasing MW will create jobs, but he claims that increasing MW will be good for the economy.
What is Professor Krueger's role in government? What are his qualifications regarding the minimum wage debate? Is Professor Krueger in favor of raising the minimum wage? Why, or why not?
Professor of Economics, Director of Graduate Studies, and Director, Center for Economics and Public Policy at UC, Irvine and research fellow National Bureau of Economic Research, David Neumark:
Totality of empirical evidence is quite clear that increase MW leads to some job loss among least skilled workers.
We must compare costs (in terms of lost jobs) to benefits (in terms of increased wages). The key question to be answered, when considering any policy: Do the combined benefits outweigh the combined costs?
We should think about the trade-offs!!!
Questions: What are Professor Neumark's arguments regarding the minimum wage? What key factor does Professor Neumark say that we should consider when examining a proposed minimum wage increase?
History of Minimum Wage:
"In 1912, Massachusetts organized a commission to recommend non-compulsory minimum wages for women and children. Within eight years, at least thirteen U.S. states and the District of Columbia would pass minimum wage laws. The Lochner era United States Supreme Court consistently invalidated compulsory minimum wage laws. Such laws, said the court, were unconstitutional for interfering with the ability of employers to freely negotiate appropriate wage contracts with employees.
The first attempt at establishing a national minimum wage came in 1933, when a $0.25 per hour standard was set as part of the National Industrial Recovery Act. However, in the 1935 court case Schechter Poultry Corp. v. United States (295 U.S. 495), the United States Supreme Court declared the act unconstitutional, and the minimum wage was abolished.
The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act), once again at $0.25 per hour ($4.10 in 2012 dollars). The minimum wage had its highest purchasing value ever in 1968, when it was $1.60 per hour ($10.64 in 2012 dollars). From January 1981 to April 1990, the minimum wage was frozen at $3.35 per hour, then a record-setting wage freeze. From September 1, 1997 through July 23, 2007, the federal minimum wage remained constant at $5.15 per hour, breaking the old record.
Congress then gave states the power to set their minimum wages above the federal level. As of July 1, 2010, fourteen states had done so. Some government entities, such as counties and cities, observe minimum wages that are higher than the state as a whole. One notable example of this is Santa Fe, New Mexico, whose $9.50 per hour minimum wage was the highest in the nation, until San Francisco increased its minimum wage to $9.79 in 2009. Another device to increase wages, living wage ordinances, generally apply only to businesses that are under contract to the local government itself.
On November 7, 2006, voters in six states (Arizona, Colorado, Missouri, Montana, Nevada, and Ohio) approved statewide increases in the state minimum wage. The amounts of these increases ranged from $1 to $1.70 per hour and all increases are designed to annually index to inflation.
Some politicians in the United States advocate linking the minimum wage to the Consumer Price Index, thereby increasing the wage automatically each year based on increases to the Consumer Price Index. So far, Ohio, Oregon, Missouri, Vermont and Washington have linked their minimum wages to the consumer price index. Minimum wage indexing also takes place each year in Florida, San Francisco, California, and Santa Fe, New Mexico.
Basic Facts about Minimum Wage:
See Department of Labor page on Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) , which prescribes standards for the basic minimum wage and overtime pay, affects most private and public employment. It requires employers to pay covered employees who are not otherwise exempt at least the federal minimum wage and overtime pay of one-and-one-half-times the regular rate of pay. For nonagricultural operations, it restricts the hours that children under age 16 can work and forbids the employment of children under age 18 in certain jobs deemed too dangerous. For agricultural operations, it prohibits the employment of children under age 16 during school hours and in certain jobs deemed too dangerous. The Act is administered by the Employment Standards Administration's Wage and Hour Division within the U.S. Department of Labor.
From the Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey
In 2011, 73.9 million American workers age 16 and over were paid at hourly rates, representing 59.1 percent of all wage and salary workers. Among those paid by the hour, 1.7 million earned exactly the prevailing Federal minimum wage of $7.25 per hour. About 2.2 million had wages below the minimum. Together, these 3.8 million workers with wages at or below the Federal minimum made up 5.2 percent of all hourly-paid workers. Tables 1 through 10 present data on a wide array of demographic and socioeconomic characteristics for hourly-paid workers earning at or below the Federal minimum wage. The following are some highlights from the 2011 data.
- Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 23 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over. (See table 1 and table 7.)
- About 6 percent of women paid hourly rates had wages at or below the prevailing Federal minimum, compared with about 4 percent of men. (See table 1.)
- About 5 percent of White hourly-paid workers earned the Federal minimum wage or less, compared with about 6 percent of Blacks and about 3 percent of Asians. Among hourly-paid workers of Hispanic ethnicity, about 5 percent earned the minimum wage or less. (See table 1.)
- Among hourly-paid workers age 16 and over, about 11 percent of those who had less than a high school diploma earned the Federal minimum wage or less, compared with about 5 percent of those who had a high school diploma (with no college) and about 2 percent of college graduates. (See table 6.)
- Never-married workers, who tend to be young, were more likely than married workers to earn the Federal minimum wage or less (about 9 percent versus about 2 percent). (See table 8.)
- Part-time workers (persons who usually work less than 35 hours per week) were more likely than full-time workers to be paid the Federal minimum wage or less (about 13 percent versus about 2 percent). (See table 1 and table 9.)
- By major occupational group, the highest proportion of hourly-paid workers earning at or below the Federal minimum wage was in service occupations, at 13 percent. About 6 in 10 workers earning the minimum wage or less in 2011 were employed in service occupations, mostly in food preparation and serving related jobs. (See table 4.)
- The industry with the highest proportion of workers with hourly wages at or below the Federal minimum wage was leisure and hospitality (22 percent). About one-half of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in restaurants and other food services. For many of these workers, tips and commissions supplement the hourly wages received. (See table 5.)
- The states with the highest proportions of hourly-paid workers earning at or below the Federal minimum wage were Georgia, Mississippi, and Texas (all between 8 and 10 percent). The states with the lowest percentage of workers earning at or below the Federal minimum wage were Oregon, California, Washington, and Alaska (all under 2 percent). It should be noted that some states have minimum wage laws establishing standards that exceed the Federal minimum wage. (See table 2 and table 3.)
- The proportion of hourly-paid workers earning the prevailing Federal minimum wage or less declined from 6.0 percent in 2010 to 5.2 percent in 2011. This remains well below the figure of 13.4 percent in 1979, when data were first collected on a regular basis. (See table 10.)
Source: U.S. Department of Labor, Bureau of Labor Statistics (BLS). These data on minimum wage earners are derived from the Current Population Survey (CPS), a monthly nationwide survey of households. Data in this summary are 2011 annual averages.
Data are for wage and salary workers age 16 and over and refer to earnings on a person's sole or principal job. Hourly earnings for hourly-paid workers do not include overtime pay, commissions, or tips received. All self-employed persons are excluded whether or not their businesses are incorporated.
The presence of a sizable number of workers with wages below the Federal minimum does not necessarily indicate violations of the Fair Labor Standards Act, as there are exemptions to the minimum wage provisions of the law. The estimates of the numbers of minimum and subminimum wage workers presented in the accompanying tables pertain to workers paid at hourly rates; salaried and other non-hourly workers are excluded. As such, the actual number of workers with earnings at or below the prevailing Federal minimum is undoubtedly understated. Research has shown that a relatively small number and share of salaried workers and others not paid by the hour have earnings that, when translated into hourly rates, are at or below the minimum wage. However, BLS does not routinely estimate hourly earnings for non-hourly workers because of data concerns that arise in producing these estimates.
Characteristics of Minimum Wage Workers: 2011, Tables 1 - 10
Characteristics of Minimum Wage Workers: 2011 (PDF)
2. Basic Textbook Treatment
"...the following analysis yields some surprising insights. Policies often have effects that their architects did not intend or anticipate."
Examples of unintended consequences: abortion and crime, seat belt laws and increased deaths, minimum wages and unemployment, rent control and housing shortage/quality, helmet laws and cycling, WW2 helmets and brain damage, prohibition and organized crime, etc. (Find examples of policies that resulted in outcomes not anticipated by policymakers that countered the original intention of the policy for extra credit. Must include links to articles for the extra credit.)
"The Impact of Legalized Abortion on Crime" by Levitt and Donohue.
Question: When we examine policies should we consider the intentions of proponents? If not, what implications does the irrelevance of intentions have on the examination and use of rhetoric when analysing policy?
Questions: What are the assumptions of the perfectly competitive market model? Are these assumptions realistic? Does it matter if model assumptions are realistic? What determines the efficacy of a model? List, define, and explain the various assumptions underlying the perfectly competitive market model. What is the effect of a non-binding price floor on the market? What is the effect of a binding price floor? Draw a supply/demand graph of the market for labor with a binding price floor, label the surplus. What type of worker is most likely to be affected by a minimum wage increase? What type of worker will not be affected? Who suffers the most from a minimum wage increase? Studies have found that minimum wage increases of ten percent result in an increase in unemployment of how much? Increasing the minimum wage decreases the quantity of labor demanded; does a minimum wage increase also affect supply? Does an increase in the minimum wage encourage some students to drop out of high school? What ensues as a result of this particular outcome? Are economists unanimous in their views on the minimum wage? What are the intentions of those who advocate an increase of the minimum wage? Do advocates of the minimum wage accept the argument that increasing the minimum wage results in some unemployment? What arguments do opponents of the minimum wage offer?
3. Popular Press Reports:
First, note that Obama's proposal enjoys broad support, even among Republicans. The WSJ notes: "In the poll from USA Today/Pew Research Center, 71% of Americans back increasing the minimum wage to $9 an hour from $7.25 currently, with 26% opposed. The plan, introduced by Mr. Obama in his State of the Union address, has 87% support among Democrats and 68% support among independents. Among Republicans, 50% back the measure, with 47% opposed."
Pro: "President Obama called on Congress to raise the federal minimum wage to $9 an hour from $7.25 and to automatically adjust it with inflation, a move aimed at increasing the earnings of millions of cooks, janitors, aides to the elderly and other low-wage workers." (NYT, 2013)
Pro: "The proposal directly addresses the country’s yawning levels of income inequality, which the White House has tried to reduce with targeted tax credits, a major expansion of health insurance, education and other proposals." (NYT, 2013)
Pro: "The proposal would see the federal floor on hourly wages reach $9 in stages by the end of 2015. Tying the minimum wage to inflation would allow it to rise along with the cost of living. If enacted, the measure would boost the wages of about 15 million low-income workers, the White House estimated." (NYT, 2013)
Pro: "The White House also pointed to companies like Costco, the retail discount chain, and Stride Rite, a children’s shoe seller, that have previously supported increasing the minimum wage as a way to reduce employee turnover and improve workers’ productivity." (NYT, 2013)
Pro: "The White House said that the $1.75 increase in the minimum wage would be enough to offset roughly 10 to 20 percent of the increase in income inequality since 1980. According to data compiled by the economists Thomas Piketty, at the Paris School of Economics, and Emmanuel Saez, at the University of California, Berkeley, inequality has worsened considerably during that time, and many metrics show that wages have stagnated or declined for millions of working families. The income share of the top 1 percent of earners has doubled, to 20 percent in 2011 from 10 percent in 1980. Between 1980 and 2008, according to analysis by the Economic Policy Institute, the top 10 percent of earners captured 98 percent of all income gains." (NYT, 2013)
Con: "Many companies that hire low-wage workers — both small businesses and large businesses — have in the past vociferously opposed raising the minimum wage, as it increases their cost of business. By making employees more expensive for companies to hire, some economists argue that higher minimum wages increase the unemployment rate — a particularly toxic possibility given the high levels of joblessness that remain long after the recession has ended.
Moreover, some economists, like David Neumark of the University of California, Irvine, have even argued that minimum wages are counterproductive at reducing poverty.
On top of that, conservatives have often argued that higher minimum wages burden job creators, especially during times when the economy is weak." (NYT, 2013)
Con: "Rep. Jack Kingston (R., Ga.) said the idea on its own would gain little support as the companies most affected by it, such as fast-food restaurants, were already struggling to absorb higher costs from the health-care overhaul. But he said Mr. Obama's proposal might advance "if you tie it into a bigger tax package, which is traditionally the way we do it."" (WSJ, 2013)
Con: "Business groups eyed the proposal warily, but some stopped short of rejecting it. The U.S. Chamber of Commerce said it was considering the idea but criticized the president for not mentioning the added costs the wage increase would impose on companies. "Too often, that reality is left out of the discussion, as it was last night," said Randy Johnson, the organization's senior vice president of labor, immigration and employee benefits.
Sandy Trent, owner of Helping Hand Chauffeur Service in Ladoga, Ind., said she would be forced to cut her 11 employees to working no more than 20 hours a week if the minimum wage increased. "When I heard the president say that, I looked at my husband, and I said, 'There goes my business,' " Ms. Trent said." (WSJ, 2013)
4. Advanced Arguments from Popular and Specialized Media:
Con: "For many low-wage employees, single parents in particular, the minimum wage is already above $9 an hour.
That is because of the Earned Income Tax Credit, which boosts wages for workers at the bottom of the pay scale without putting their jobs or incomes at risk—which is one consequence of hiking the minimum wage. If Mr. Obama is dead set on using the government to boost wages, the EITC is the place to start, as the evidence suggests that minimum wage increases have no appreciable impact on poverty." (WSJ, 2013)
Con: "Republicans have supported this tax credit because eligibility is based on working and earning income. Democrats hail the EITC because it's refundable, meaning that a low-wage family without any tax liability nevertheless can file a tax return and get a check from the government. In a state such as New York, a single parent raising two children on the minimum wage would see their annual wage of $15,080 jump to $21,886 with the EITC, for an effective hourly wage of $10.52." (WSJ, 2013)
Con: "Compared with the EITC, government-mandated minimum wage increases have major flaws. One is targeting: According to the Census Bureau, 60% of people living below the poverty line didn't work last year. They don't need a raise; they need a job, period. And among those who do work and earn the minimum wage, researchers at Cornell and American University have found that the vast majority live in households above the poverty line. This partially explains why numerous studies have found no relationship between a higher minimum wage and lower poverty rates—because, unlike the EITC, the benefits generally aren't accruing to those in poverty." (WSJ, 2013)
Con: "Another reason a higher minimum wage doesn't reduce poverty rates is that a hike in hourly pay doesn't necessarily translate to an annual income bump. If employers faced with suddenly higher labor costs reduce hours or employment, take-home pay will decline. Economists writing in the Journal of Human Resources in 2005 found that to be the case, with the "losers" from a higher minimum wage—who moved closer to the poverty line after the policy was passed—outnumbering the winners." (WSJ, 2013)
Con: "The EITC has a very different research track record. In a study published by the Employment Policies Institute last year, economists Joseph Sabia at San Diego State University and Robert Nielsen at the University of Georgia found a 1% drop in state poverty rates associated with each 1% increase in a state's EITC. A 2007 study by Mr. Sabia found that a higher Earned Income Tax Credit can boost the wages and employment of single mothers. But the employment of single mothers dropped by 6% for each 10% hike in the minimum wage." (WSJ, 2013)
Con: "But some business groups, including the National Federation of Independent Business, a conservative-leaning small-business advocacy group, denounced the proposal as hurtful to small firms and the economy.
"Small firms are going to pass on the cost," said Bill Dunkelberg, chief economist at the NFIB. "Every dollar more a minimum wage worker gets will come out of a customer's pocket."" (WSJ, 2013)
Con: "For many business owners, the devil is in the details, such as whether part-time workers or "tipped employees" would be permitted to work for less.
David Koch of Rockford, Ill. hopes a higher minimum wage would only impact full-time employees. His 10 food franchises -- seven Culver's restaurants and three Taco John's restaurants – have about 375 employees, most of whom are part-time college and high-school students.
"Nine dollars for a no-experience high-school student would not be appropriate," he said. "We'd have to use fewer employees and more technology to offset the cost and that would damage the opportunities for young people."" (WSJ, 2013)
Con: "Carl Schanstra, owner of Automation Systems LLC, a parts-assembly factory in the Chicago suburbs, has 24 full-time minimum-wage workers who are paid $8.25. Illinois is one of nineteen states that have a higher minimum wage than the federal threshold.
"Raising the minimum wage will raise the cost of everything else in the country," he said. "It takes more money out of [my] savings."
An increase to $9 would cost roughly $60,000 more in payroll each year, he estimates, but it could be more when taxes and unemployment compensation are factored in because those costs are determined based on wages.
"It will have a cascading effect," says Mr. Schanstra." (WSJ, 2013)
Con: "In the real world, setting a floor under the price of labor creates winners and losers. Some workers will get a $1.75 raise. Great. But others—typically the least educated and skilled—will be priced out of the job market and their pay won't rise to $9. It will be zero." (WSJ, 2013)
Con: "University of California at Irvine economist David Neumark has looked at more than 100 major academic studies on the minimum wage, and he says the White House claim of de minimis job losses "grossly misstates the weight of the evidence." About 85% of the studies "find a negative employment effect on low-skilled workers."" (WSJ, 2013)
Con: "The minimum wage is also an ineffective way to reduce poverty. Most families in poverty don't have someone who works, so making it more difficult to get a job exacerbates poverty... ...most minimum-wage earners are not the primary bread winner. Nearly 40% live with a parent or relative. The average family income of a household with a minimum-wage worker is about $47,023—which is far above the poverty line of $23,550 for a family of four." (WSJ, 2013)
Con: "A full-time minimum-wage worker earns roughly $15,000 a year. But that worker also receives a cash supplement from the earned income tax credit of roughly $5,000, and many states provide benefits on top of that to reward working. That doesn't count government benefits like food stamps, Medicaid, child care and more." (WSJ, 2013)
Con: "The last (minimum wage) increase hit in July 2009 just after the recession ended, and as the nearby chart shows, the jobless rate jumped for teens and black teens especially. For black teens, the rate has remained close to 40% and was still 37.8% in January.
A study by economists William Even of Miami University and David Macpherson of Trinity University concludes that in the 21 states where the full 40% wage increase took effect, "the consequences of the minimum wage for black young adults without a diploma were actually worse than the consequences of the Great Recession."" (WSJ, 2013)
Con: "Mr. Obama's economists know all this, but then the minimum wage has nothing to do with poverty or unemployment. It's a political play to reward unions and box in Republicans. The minimum wage polls well because Americans naturally want everyone to make more money, and the damage in foregone jobs isn't obvious." (WSJ, 2013)
Con: "Employers can respond by cutting back on benefits or hours or training: Yes, a higher minimum wage means that companies have to pay their low-wage workers more. But that doesn’t mean they have to hire fewer workers. Perhaps businesses adapt by cutting back on other things, like health-care benefits or hours. Schmitt notes, however, that there’s little conclusive evidence that employers do this." (WONKBLOG, 2013)
Con: "The origins of many minimum wage policies within the progressive and labour movements are not ones which any decent person would be quick to endorse. One such case is documented by the African American economist Walter Williams in his 1989 book, South Africa's War against Capitalism.
He documents how during the apartheid era the most ardent proponents of the minimum wage were white racist unions seeking to protect their jobs from honest competition with black South Africans. He quotes one South African union leader as saying:
''There is no job reservation left on the building industry, and in the circumstances I support the rate for the job (minimum wages) as the second best way of protecting our white artisans''
It is clear why racist employers favour the minimum wage. Once a statutory minimum wage is set the employer no longer pays the price for his discriminating on the grounds of race.
If all low skilled workers are to be paid $9 an hour and a racist employer has two candidates for a position – one black and one white – and he chooses the white candidate, he is at no disadvantage. But if there is no minimum wage, non-racist employers can hire anyone of any race and these prospective workers have the freedom to get their first chance in the labour market by undercutting what the racist employers pay their staff.
If the non-racist employer can hire the previously rejected black candidate for $7 an hour instead of $9 then the racist employer is paying a price for his prejudice. The racist employer is at a huge disadvantage amongst his competitors as he is paying his workers more, not for their productivity, but for the colour of their skin. The minimum wage removes the market’s ability to punish prejudice." (The Commentator, 2013)
Con: "In an article for the Freeman, economists Steven Horwitz and Art Caden examine the relationship between Eugenics and the progressive movement. They cite a journal article written by Thomas C. Leonard published in the journal of economic perspectives.
We see that historically the progressive left, who were strongly sympathetic and even outright advocates of the new science of Eugenics, agreed with the arguments made by classical liberal free market economists that the minimum wage would create unemployment and deprive opportunity to the most vulnerable in society. But the difference was the classical liberals thought this an abomination; the progressive left thought this was a positively good thing.
Leonard writes that:
''The progressive economists believed that the job loss induced by minimum wages was a social benefit as it performed the eugenic service ridding the labour force of the unemployable.''"
Pro: "Except that the real world seems to be much murkier. Yes, a number of studies have found a link between a higher minimum wage and higher unemployment. But many others, such as this recent paper from U.C. Berkeley that exploited differences across state borders, have found no effect at all. Quite often, hiking the minimum wage by a buck or two doesn’t appear to worsen unemployment in any noticeable way." (WONKBLOG, 2013)
Pro: "Employers can respond by cutting wages for other, higher-paid workers. One survey found that half of employers faced with a minimum-wage hike “would delay or limit pay raises/bonuses for more experienced employees.” If that actually happens, then the minimum wage might help low-wage workers at the expense of better-paid workers. This could even boost GDP in the short run if poorer workers are more likely to spend the cash." (WONKBLOG, 2013)
Pro: "Companies can raise their prices in response. One obvious possibility is that firms with lots of low-wage workers — say, fast-food restaurants — simply pass along their extra costs to customers. One major literature review found that a 10 percent hike in the minimum wage leads, on average, to a 4 percent increase in prices at companies affected." (WONKBLOG, 2013)
Pro: "Companies can just settle for fewer profits. Another possibility is that companies just take the hit and accept lower profits rather than laying people off. Research on whether this happens is pretty inconclusive, however." (WONKBLOG, 2013)
Pro: "Employers can respond by becoming more efficient. If minimum-wage workers suddenly cost a bit more, perhaps businesses will react by trying to squeeze more productivity out of them. Schmitt notes that there’s some evidence that this happened in fast-food chains in Georgia and Alabama. Managers started requiring better attendance and asking their employees to take on extra duties in response to a minimum-wage hike." (WONKBLOG, 2013)
Pro: "Workers themselves might respond by voluntarily working harder. Schmitt notes that there have been plenty of theoretical papers written about how people might work harder and be more productive if they’re suddenly paid more. Some of these models could even explain why a hike in the minimum wage doesn’t lead to higher unemployment. But, Schmitt adds, there’s not much empirical evidence here." (WONKBLOG, 2013)
Pro: "Companies might actually save money from a minimum-wage hike because there’s less employee turnover. If minimum-wage workers get a raise, they’re far more likely to stay on the job longer. And that’s good for employers. After all, constant worker turnover is a pain — there’s the cost of screening, of training, of vacancies. Schmitt notes that lower turnover could ease the costs of higher wages. That could explain why employment levels don’t really change." (WONKBLOG, 2013)
Pro: "Economists love to tell people that who pays a tax is independent of who Congress wants to pay it. The "Tax These Evil Corporations Act" might fall entirely on people buying stuff from those firms instead of their shareholders. (Or you like the jargon, economists say the tax incidience is independent of legislative intent.)
But suddenly when the tax is a tax credit, specifically an earned income tax credit, that tax magically goes exactly where Congress wants it to go. Technically it means that economists just assume that demand is perfectly elastic in low-wage markets, which is a bold assumption. If not, part of the tax is passed on, in this case to employers, who capture it in the form of lower wages. And since those who get the EITC are in the same labor market as those who don't, these wage declines extend to people who don't even get the EITC! Jesse Rothstein did an estimate finding that for every dollar of EITC, a worker's wage only goes up 73 cents. That's a big capture by employers." (Next New Deal, 2013)
Pro: "It's going to increase the cost of production and, as a result, employers may be expected to cut back on employment. But they'll also be able to pass on some of the costs to consumers. So to what extent, even in a competitive market, the minimum wage causes a loss in employment, as opposed to an increase in price, is theoretically ambiguous." (The American Prospect, 2013)
Pro: "To the extent that the minimum wage makes the lowest paid jobs better, it tends to reduce turnover and reduce vacancies. So an increase in the minimum wage may not kill jobs but kill vacancies in a low-end labor market. This is consistent with the more realistic models of the labor market. Our new work shows this for the U.S., but there is evidence from other countries as well. So minimum-wage laws may make jobs more stable while raising wage." (The American Prospect, 2013)
Pro: "There are some opponents of minimum wages who point to the EITC as a better alternative. But here's the thing. Research by Berkeley economist Jesse Rothstein shows that roughly 27 cents on the dollar from the EITC is passed on to employers. So there's some leakage there. And for some people, the presence of EITC acts as a multiplier for a hike in the minimum wage." (The American Prospect, 2013)
Pro: "Another point goes back to the nature of low-wage labor markets. We understand that the low-wage labor market has a lot of turnover and frictions. A minimum wage can reduce churning while not reducing employment. So those together point to the idea that a higher minimum wage not only increases wages but may also improve the functioning of the labor market." (The American Prospect, 2013)
Pro: "There are reasons to believe that, for instance, in a high turnover environment, firms may be less willing to invest in training. There are good theoretical reasons why that would the case. With a higher minimum wage reducing turnover and increasing job stability, they might be more incentivized to do that which may increase productivity." (The American Prospect, 2013)
Pro: "Let's go back to 1968. In 1968 the minimum wage was around 50 percent of the average production-worker wage. If that were true today, that minimum wage would be around $10 an hour. So from that perspective, raising it to $9 is well within, indeed under, the historical norm between the minimum and average wage of production workers." (The American Prospect, 2013)
Pro: "We can't say, based on historical evidence in the United States, what a $40 minimum wage would do, but we can say a lot about what a $9 or $10 minimum wage would look like." (The American Prospect, 2013)
Pro (Indexing): "One thing that I would do is makes wage changes more predictable. At the federal level, we have gone through extended periods when the nominal minimum wage has been stagnant, then there's a big fight about it followed by a sizable increase, and then it stays there for a while. I don’t know of any economic model which says this is a good way to go. This creates uncertainty about the timing and extent of the wage increases, and it generally not a great way of setting the minimum wage, no matter what level you think it should be." (The American Prospect, 2013)
Pro (Indexing): "We could disagree about the level of the minimum wage, but it seems like a no-brainer to me that no matter what level we pick, we should have a relatively smooth adjustment process. A natural adjustment process is tying the rate of cost of living increases, like many items including Social Security payments. It makes a lot of sense. Daniel Hammermesh—a well-known labor economist who in general is not in favor of high minimum wages—has nonetheless come out supporting indexation." (The American Prospect, 2013)
Pro: "Here's an important thing to keep in mind. What does the minimum wage do in a competitive labor market? If the law of demand holds without any frictions then employment falls. But by how much? And does it mean that if it falls, we shouldn't do it? Absolutely not. Before the debate that started on minimum wages in the mid 1990s, when the consensus of the discipline was that there were detectible effects of minimum wages on jobs, many economists still supported the minimum wage!
And their idea was that the costs were there, in terms of jobs, but the benefits were nevertheless higher. Now the debate has shifted to whether there are any costs in terms of employment, while there is still the benefit." (The American Prospect, 2013)
5. Advanced Textbook Treatment
(MIT Lecture may prove worth reading to some; but, it is not required reading.)
Questions: What assumption of the perfectly competitive model is "relaxed" in the advanced/monopsonoy/price-making model? How does a firm determine the optimal output of its products? What is a fixed cost? What is a variable cost? What are some examples of fixed and variable costs? As a firm hires more workers, while holding everything else constant, does the marginal product of each added laborer increase, decrease, or stay the same? Does the assumption of declining marginal product of labor neccesarily imply that hiring more workers is bad, i.e., a profit losing action? How does a firm determine the optimal number of workers that it would optimally hire? What is the difference between a price-taker and a price-maker? Will monopsony (price-making) firms hire more or less than perfectly competitive firms, ceteris paribus? Assuming a monopsony market, can the impositition of a binding minimum wage increase employment? If the monopsony model of firms holds true, what are the implications regarding the arguments of those who argue that minimum wage laws increase unemployment? What are some examples of firms that might be price-takers/monopsonies with respect to the labor market? Without considering the data--which we never examined in our lectures--which model of labor markets is more theoretically sound, the perfectly competitive model or the monopsony model? Explain. (Many of these questions are not answered explicitly in the notes. Think about it.)
6. Empirical Tests of Advanced Models
Not tested for Spring Semester. Skip!
Not tested for Spring Semester. Skip!
8. Papers and other external links
Not tested for Spring Semester. Skip!
END OF PAGE
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Kennan, John. "The Elusive Effects of Minimum Wages." Journal of Economic Literature 33, no. 4 (1995): 1950-1965.
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Russell S. Sobel, Theory and Evidence on the Political Economy of the Minimum Wage, Journal of Political Economy, Vol. 107, No. 4 (August 1999) (pp. 761-785)