Read and consider the Minimum Wage case study presented in section 6.1. Evaluate the arguments presented for and against the minimum wage. States have the right to mandate a minimum wage that is higher than the federal minimum wage. Consider your own home state, research its current demographics, cost of living, minimum wage laws, unemployment history, etc. and write an argument for your state representatives supporting or contesting an increase in the minimum wage.
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The Minimum Wage
An important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally adequate standard of living. In 2015, the minimum wage according to federal law was $7.25 per hour. (Some states mandate minimum wages above the federal level.) Many European nations have minimum-wage laws as well, sometimes significantly higher than in the United States. For example, even though the average income in France is almost 30 percent lower than it is in the United States, the French minimum wage is more than 30 percent higher.
To examine the effects of a minimum wage, we must consider the market for labor. Panel (a) of Figure 5 shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government doesn’t intervene, the wage normally adjusts to balance labor supply and labor demand.
Figure 5How the Minimum Wage Affects the Labor Market
Panel (a) shows a labor market in which the wage adjusts to balance labor supply and labor demand. Panel (b) shows the impact of a binding minimum wage. Because the minimum wage is a price floor, it causes a surplus: The quantity of labor supplied exceeds the quantity demanded. The result is unemployment.
Panel (b) of Figure 5 shows the labor market with a minimum wage. If the minimum wage is above the equilibrium level, as it is here, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, while the minimum wage raises the incomes of those workers who have jobs, it lowers the incomes of workers who cannot find jobs.
To fully understand the minimum wage, keep in mind that the economy contains not a single labor market but many labor markets for different types of workers. The impact of the minimum wage depends on the skill and experience of the worker. Highly skilled and experienced workers are not affected because their equilibrium wages are well above the minimum. For these workers, the minimum wage is not binding.
The minimum wage has its greatest impact on the market for teenage labor. The equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members of the labor force. In addition, teenagers are often willing to accept a lower wage in exchange for on-the-job training. (Some teenagers, including many college students, are willing to work as interns for no pay at all. Because internships pay nothing, minimum-wage laws often do not apply to them. If they did, these internship opportunities might not exist.) As a result, the minimum wage is binding more often for teenagers than for other members of the labor force.
Many economists have studied how minimum-wage laws affect the teenage labor market. These researchers compare the changes in the minimum wage over time with the changes in teenage employment. Although there is some debate about how much the minimum wage affects employment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment by 1 to 3 percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not raise the average wage of teenagers by 10 percent. A change in the law does not directly affect those teenagers who are already paid well above the minimum, and enforcement of minimum-wage laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is significant.
In addition to altering the quantity of labor demanded, the minimum wage alters the quantity supplied. Because the minimum wage raises the wage that teenagers can earn, it increases the number of teenagers who choose to look for jobs. Studies have found that a higher minimum wage influences which teenagers are employed. When the minimum wage rises, some teenagers who are still attending high school choose to drop out and take jobs. With more people vying for the available jobs, some of these new dropouts displace other teenagers who had already dropped out of school and now become unemployed.
The minimum wage is a frequent topic of debate. Advocates of the minimum wage view the policy as one way to raise the income of the working poor. They correctly point out that workers who earn the minimum wage can afford only a meager standard of living. In 2015, for instance, when the minimum wage was $7.25 per hour, two adults working 40 hours a week for every week of the year at minimum-wage jobs had a total annual income of only $30,160. This amount was 24 percent above the official poverty line for a family of four but was less than half of the median family income in the United States. Many advocates of the minimum wage admit that it has some adverse effects, including unemployment, but they believe that these effects are small and that, all things considered, a higher minimum wage makes the poor better off.
Ask the Experts
The Minimum Wage
“If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage U.S. workers will be substantially lower than it would be under the status quo.”
Source: IGM Economic Experts Panel, September 22, 2015.
Opponents of the minimum wage contend that it is not the best way to combat poverty. They note that a high minimum wage causes unemployment, encourages teenagers to drop out of school, and prevents some unskilled workers from getting on-the-job training. Moreover, opponents of the minimum wage point out that it is a poorly targeted policy. Not all minimum-wage workers are heads of households trying to help their families escape poverty. In fact, less than a third of minimum-wage earners are in families with incomes below the poverty line. Many are teenagers from middle-class homes working at part-time jobs for extra spending money.