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Lecture Issues in economics today - Chapter 33

The following will be discussed in this chapter: Derived demand, productivity, marginal revenue product, changes in resource demand, the substitution and output effects, optimum resource mix for the firm. | Chapter 33 Minimum Wage Chapter Outline TRADITIONAL ECONOMIC ANALYSIS OF A MINIMUM WAGE REBUTTAL TO THE TRADITIONAL ANALYSIS WHERE ARE ECONOMISTS NOW? 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 Minimum Wage Increases The Federal minimum wage was originally set at 25 cents per hour. There have been 18 increases. In 2001 it was $5.15 per hour. To be equal to its 1968 high in inflation-adjusted terms it would need to have been close to $8 per hour in 2001. The Labor Market without a Minimum Wage Labor W Demand Supply A W* B C 0 L* 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 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. 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. Demonstrating the Case Against the Minimum Wage Labor Value to the firms: 0AELmin Firms pay workers: OWminELmin The opportunity cost to workers: OBFLmin Surplus to firms: WminAE Surplus to workers: BWminEF Unemployed workers Who had jobs L*-Lmin Who are now looking LS-L* W Demand Supply A W* B C 0 L* Wmin Lmin LS E F 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. The EITC Alternative to the Minimum Wage The earned income tax credit (EITC) is a targeted tax credit to the working poor. was, in 2000, as much as $3,888 for a working poor family with two children. 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. Demonstrating the Inelasticity Argument Labor W Demand Supply W* B C 0 L* Wmin Lmin E F 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.