Minimum Wage - PowerPoint by 7X3Yv6k4

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									  Minimum Wage

Economics of Public Policy
      PADM 625
       Ben Muse

                             1
              Analysis
• The issues underlying the debate over
  the minimum wage can be illustrated
• using a simple market model (supply
  and demand)
• of the market for unskilled labor




                                      2
The axes




           3
Add demand




             4
Add supply




             5
Market wage and labor
     purchased




                        6
Add a minimum wage




                     7
Labor demanded




                 8
Labor supplied


   Excess supply




                   9
Marg Op cost of workers
       working




                          10
              Results:
• Employment drops
• Workers who continue to work
  receive higher pay
• Increase or decrease in overall
  revenues to workers?
• Efficiency losses


                                    11
Less work




            12
Higher wages




               13
Efficiency loss




                  14
Worker surplus without
   minimum wage




                         15
Worker surplus with
  minimum wage




                      16
Firm surplus without
   minimum wage




                       17
Firm surplus with minimum
           wage




                        18
             Tradoffs
• Higher wages for low income
  population
• lower employment
• efficiency losses
• To some extent these will depend on
  how you value these things
• to some extent on your perception of
  labor demand elasticity
                                     19
      Demand elasticities
• Demand elasticity > 1; earnings fall
• Demand elasticity < 1; earnings rise
• Actual estimates are highly variable,
  but Frank suggests just under one is
  common




                                      20
  Remember what elasticity
         means
• Percentage change in quantity
  demanded with a percentage change
  in price
• If elasticity > 1 then a one percent
  increase in price means a more than
  one percent decrease in labor
  demanded - revenue falls


                                         21
  Remember what elasticity
         means
• If elasticity < 1 then a one percent
  increase in price means a less than
  one percent decrease in labor
  demanded - revenue rises




                                         22
Elasticity and linear demand
            curve




                          23
Impact on employment and
wages will depend on labor
      demand curve




                         24
            Teenagers
• Frank points to a consensus among
  economists that the minimum wage
  reduces employment among teenagers
• Although in some studies the effect
  has been hard to find
• But is this due to high level of
  aggregation?

                                   25
    Neumark and Wascher
• Examined disaggregated teenage
  demands
• looks at two groups
  – teenagers in school
  – teenagers out of school and in work
    force



                                          26
    Neumark and Wascher
• Hypothesis:
• Minimum wage increases “induce”
  employers to substitute more highly
  educated teenagers (those in school)
  for those already out of school
• School participation drops
• stronger “disemployment effect” for
  “lower-wage teenagers”
                                     27
    Neumark and Wascher
• They tested the hypotheses with
  panel data
• minimum wage increases increase
  – the probability of teenagers leaving
    school
  – increase the probability that teenagers
    out of school become unemployed


                                          28
 A note on political economy
• Why are minimum wage laws enacted?
• An interest group analysis would point
  to the differential organizing abilities
  of different groups.
• In our case business obviously has a
  stake in lower minimum wages



                                       29
 A note on political economy
• Although lets pursue this a bit more
• only industries that use low wage low
  skilled industries have much at stake
• and if markets are competitive, and
  consumer demands are not totally
  elastic, they may be able to pass on
  much of the price increase on to their
  customers
                                     30
 A note on political economy
• Given the potential for price
  increases, consumers may have much
  at stake
• but are they going to be able to
  organize effectively?
• What about labor unions - they have
  an interest in reducing the
  competitiveness of unskilled labor
                                    31
 A note on political economy
• You might be able to do that by
  increasing the price for unskilled
  labor
• Unskilled laborers have an interest in
  a minimum wage if they think they will
  keep their jobs - are they in a
  position to organize?


                                     32
               Sobel
• Russell Sobel asked - have minimum
  wages been set consistently with the
  stated objectives of minimum wage
  programs?
• That is, “…maximization of the total
  income of minimum-wage workers and
  the level that would bring a typical
  minimum-wage family out of poverty.”
                                    33
               Sobel
• He projected minimum wage levels
  that would be consistent with that
  objective and found that through
  most of its history, the minimum wage
  had not been set at that level.




                                    34
                Sobel
• He used union membership as an index
  of union power and found the minimum
  wage was positively correlated with it
• He used the top marginal corporate
  income tax as a measure of business
  ability to influence legislation



                                     35
              Sobel
• He found that the minimum wage was
  inversely correlated with this
  measure of business power (as
  business power waxed - the minimum
  wage size waned, and vice versa)




                                   36
                 Sources
• Frank, Robert. Microeconomics and Behavior. 4th
  edition. Pages 508-510.
• Neumark, David, and William Wascher. “Minimum-
  wage effects on school and work transitions of
  teenagers.” American Economic Review 85(2):
  244-249. May 1995.
• Sobel, Russell S. “Theory and Evidence on the
  Political Economy of the Minimum Wage.” The
  Journal of Political Economy. 107(4): 761-785.
  August 1999.


                                              37
                  Sources
• Ehrenreich, Barbara. Nickel and Dimed. On (Not)
  Getting by in America. Owl Books. 2002.
  Recommended for a vivid description of life at the
  minimum wage.
• Freeman, Richard B. “The Minimum Wage as a
  Redistributive Tool.” The Economic Journal.
  106(436): 639-649. May 1996.
• Note: All journal articles listed are available to
  UAS students at the JSTOR web site.



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