Minimum Wage

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Minimum Wage

• By Eric Hunter

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Background

• There are 9,886,158 people directly affected by
  the Minimum Wage Laws

• States have ultimate authority to set wage rates
  although the federal government provides a target
  average.

• Target citizens are young people, minorities,
  and women.

Bureau of Labor Statistics, U.S. Department of
Labor Unpublished Tabulations from the Current
Population Survey 1997 Annual Averages, Table
A-7 Washington D.C.
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Benefits of Min Wage

• Reduces low-paid work, which can be viewed as
  unfair and exploitative.
• Reduced dependency on state welfare which can
  lead to a reduction in the overall tax rate.
• Stimulate economic growth by discouraging
  labor-intensive industry and encouraging
  investment in capital and training.

Minimum wage laws are often argued to bring about
certain benefits
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• Possible increased unemployment for low-wage
  earners, as higher wage costs provide an
  incentive to reduce the number of workers
  employed.
• An increase in the cost of basic goods and
  services - much of the cost is labor.
• Possible increased wages for workers already
  earning above the minimum wage. For example, many
  Labor Union contracts are based on a fixed
  percentage or dollar amount above the minimum
  wage.

Min Wage Disadvantages
Minimum wage laws may have disadvantages
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• Minimum Wage explained in graphs and the mystery
  of stagnant employment changes.
• Prisoners Dilemma of supply and demand of
  labor.
• Positive externality and the reason for minimum
  wage in the first place.

Topics
This study will analyze three main concepts to
the United States minimum wage laws
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Labor Market
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The graph shows a price floor for the cost of
labor (Wage as shown as Wmin). The result is
that as wage is held above equilibrium we will
see a reduction in the quantity of labor demanded
below equilibrium.
Explanation of Graph
There is a deadweight loss caused by the price
floor in which a combination of artificially high
wage and lower levels of employment causes a loss
to social welfare.
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It is important to discuss the players in this
production. The demander of labor are businesses
that need warm bodies to run their line of
business. The suppliers of labor are people who
are in the labor force.
Who is the Labor Force?
For our purposes, the labor force includes those
who are unemployed as well as those who if the
price was right would leave their job of taking
care of kids and would go to work (maybe put kids
in daycare). Basically the labor force for this
graph is everyone who is capable of work.
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If there are not changes to employment when there
is changes in the wage level then you would
assume that the market price is above the price
floor. This has sometimes been observed in the US
minimum wage market. Occasionally there will be
no attributable effect after a policy change. Is
the price floor too low? Is the price floor
useless?
Stagnant Employment
Why would employment levels not change when
changing the unemployment levels?
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(No Transcript)
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• Lets assume that wage is able to be less than the
  minimum wage.
• Workers have an incentive when competing for
  jobs to undercut each other much like a business
  would undercut (they are labor supply).
• The price of labor supply falls.

Prisoners Dilemma
If both accept the hypothetical min wage then
minimum wage will be maintained. If person A
cheats and offers labor for less than minimum
wage then person As chance of getting a job will
go up. Next period, person B will reduce his
price of labor supply.
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Nash equilibrium will be that the price of labor
supply will always have a downward force and
workers will have to accept a low wage. This
problem is exacerbated when you take into account
the fact that people hold large amounts of debt
and have high overhead.
Prisoners Dilemma
Workers have a lot of pressure to find a job as
quickly as possible even if it means taking an
unfair wage. This represents market failure in
the market for labor (supply side) and highlights
the need for government intervention.
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Minimum wage laws cause a lot of external effects
on others. By design, minimum wage is a positive
externality seeking program in that it seeks to
reduce the necessity for welfare programs. As a
result, the government expects that people will
need less capital intensive services like
healthcare.
Externalities

• Costs of Positive Externalities
• Unemployment
• Deadweight loss
• Increased prices
• Various negative externalities

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• Raises the health standard for the lower wage
  people and thus lowers the costs of national
  health care for everyone.
• Reduces crime felt by others by increasing the
  standard of living for children of lower wage
  workers.
• Increases the entitlements for social security.
  (this may be more of an effect than an
  externality but is still an important angle)

Positive Externalities
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• Causes increases in the cost of doing business
  which leads to an artificial rise in the consumer
  price index.
• Causes less jobs to be available in the lower
  wage sector.
• Prevents lower wage workers and especially the
  unemployed from getting more skills.

Negative Externalities
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Overall, studies have not generally shown that
there is a wide positive effect of minimum wage
laws. What they have found is that most of the
time the benefits outweigh the costs. This
suggests that the law is something that will need
frequent attention from lawmakers to keep it up
to date with the ever changing world. Unfortunatel
y the minimum wage has not kept pace with
inflation (real Wmin has decreased over time).
Evaluation of Program
The program has its negative effects and its
positive effects which we have discussed.
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Decreasing Real Wage!!!
State-Level Estimates of Minimum Wage Effects
New Evidence and Interpretations from
Disequilibrium Methods William Wascher and
David Neumark, Journal of Human Resources,
vol. 37 (Winter 2002), pp. 35-62
The darker orange bars represent a child tax
credit not available to everyone.
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Minimum wage is a program that requires much
attention. Currently the political environment
is such that it is often troublesome to reach
decisions about what to do with minimum wage. As
a result, the program is slowly falling to decay
from inflation.
Conclusion
What may be needed are automatic yearly increases
relative to the inflation of the consumer price
index. This would start to remove political
inefficiencies from a soon to be failing
market. At the start of this assignment I was
very against minimum wage and wanted to make fun
of it through this project. By doing this
assignment I have learned that there are hidden
positive externalities and that those PEs are
the point of the program.