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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Chapter Outline • TRADITIONAL ECONOMIC ANALYSIS OF A MINIMUM WAGE • REBUTTAL TO THE TRADITIONAL ANALYSIS • WHERE ARE ECONOMISTS NOW?   McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved F - T M in W /P o v e r ty L i Full-Time Minimum by family size 1.8 1.6 1.4 1.2 0.8 0.6 0.4 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 Year One   McGraw­Hill/Irwin   Two ThreeFour © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Nominal and Real M W age 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 Year Nominal Real McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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 inflationadjusted terms it would need to have been close to $8 per hour in 2001   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved The Labor Market without a Minimum Wage W Supply A • • W* C • B • L*   McGraw­Hill/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 â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Demonstrating the Case Against the Minimum Wage W Supply A E Wmin W* C F B Lmin L* LS   McGraw­Hill/Irwin Demand 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* â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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     McGraw­Hill/Irwin © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Demonstrating the Inelasticity Argument W Supply E Wmin W* F C B Demand   McGraw­Hill/Irwin Lmin L* Labor â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved  ... 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*... © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Demonstrating the Case Against the Minimum Wage W Supply A E Wmin W* C F B Lmin L* LS   McGraw­Hill/Irwin Demand Labor   • Value to the firms: • 0AELmin • Firms... McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Minimum Wage Increases The Federal minimum wage was originally set at 25 cents per hour • There have been 18 increases • In 2001