Minimum Wage

Gay Lynn HillEconomics(ML), Mini Lessons

From: Common Sense Economics eBook: What Everyone Should Know about Wealth and Prosperity:

Minimum wage rates are perhaps the most commonly imposed price control throughout the world. A minimum wage rate establishes a price floor that pushes the hourly wage of some workers (and jobs) above the market level. It is currently a hot topic in the United States. Several leaders of both major political parties have called for a higher federal minimum wage. Moreover, several cities including Seattle, San Francisco, and Los Angeles recently adopted $15 per hour minimum wage rates.

The basic postulate of economics indicates that a higher minimum wage will reduce the employment of low-skill workers. There is some controversy about the size of the employment reduction, but the weight of the empirical evidence indicates that each 10 percent increase in the minimum wage will reduce employment by between 1 and 2 percent. Because the wage increases are substantially larger than the reductions in employment, a higher minimum wage will nearly always increase the total earnings of low-skill workers. The proponents of higher minimum wages believe that the higher total earnings are well worth the cost of the relatively small reductions in employment.

Many supporters of a higher minimum wage also believe that it will reduce the poverty rate. At first glance, this appears to be true, but examination of the data indicates it is highly questionable. There are three major reasons why this is the case. First, the bulk of minimum wage employees—about 80 percent—are members of households with incomes above the poverty level; one-third live in households with above average incomes. Half of the minimum wage workers are between the ages of 16 and 24 years and most of these work part-time. Only one out of every seven minimum wage workers (about 15 percent) is the primary earner for a family with one or more children. Thus, the typical minimum wage worker is a single, youthful, part-time secondary worker in a household with an income above the poverty level. Second, there will be unintended effects of the higher minimum. Employers will take steps to control (or compensate for) their higher wage costs. These will include a reduction in hours worked, fewer training opportunities, a less convenient work schedule, and fewer fringe benefits. Further, many of the minimum wage workers are also consumers of products impacted by the higher minimum wage. These workers will have to pay higher prices for goods such as fast food. Thus, the actual compensation of the minimum wage workers will increase by less than the expansion in the minimum.[10]  Finally, more than half of the poor families in the United States do not have anyone in the labor force, and therefore a higher minimum wage will not help them. The data presented here are from government sources and widely accepted by professional economists.

When thinking about the effects of the minimum wage on youthful low-skill workers, it is important to consider the impact in both the short and long run. Work experience provides youthful workers with an opportunity to develop self-confidence, good work habits, and skills and attitudes that will make them more valuable to future employers. This opportunity is particularly important for high school dropouts and others with weak educational backgrounds. Unless these young people are able to prove their value to employers and develop on-the-job skills, it is unlikely that they will be able to move up the job ladder and realize higher earnings in the future.



Questions:
  1. If minimum wage laws are so bad, why do you think that politicians keep voting for them?
  2. How important do you think job experience is in developing habits and skills that will allow you to earn more money in the future?
  3. The same people who often push for higher minimum wages, also advocate for required “volunteer” work on the part of young people. Does this make sense?
  4. It has been argued that minimum wage laws intentionally hurt the poor. What might be some arguments (whether right or wrong) for this position?

This reading is an excerpt from Certell’s Common Sense Economics eBook.  Certell offers curriculum materials and eBooks free of charge for students and teachers.  Click Here to download the Common Sense Economics Materials.


Citation:

[10] For a comprehensive analysis of the impact of minimum wage legislation on the poor, see Thomas MaCurdy, “How Effective Is the Minimum Wage at Supporting the Poor?” Journal of Political Economy 123 (2015): 2.www.jstor.org/stable/full/10.1086/679626.

Image Citation:

Gary Varvel.  23, Feb. 2014, Minimum wage cartoon [Digital image].  Retrieved from <editorialcartoonists.com>.