HOT TOPIC: Increasing the Minimum Wage:
Sounds Good – But Will It Work?

Undoubtedly the most sensational result of the 2006 mid-term elections was captured this month in news pictures of Nancy Pelosi, a Democrat, calling the House of Representatives to order in the first session of the 110th Congress. However, as January wanes and Congress settles in, another, less-noted result of November polling is likely to get increasing attention:  Six states voted to join the 22 that have already raised the minimum wage above the federally mandated $5.15/hr., and Congress looks ready to raise the federal level for the first time since 1997.  While all of you who work minimum-wage jobs are saying, “YESSS! It’s about time!” you might want to hold the cheers for a minute. Think about this:  Scrooge and all the other mean old employers weren’t the only ones opposed to increasing the minimum wage, so you have to wonder:  “If it’s such a good idea, why haven’t all 50 states raised it?”  And then there’s this question: “If raising the federal rate to $7.25/hr. is a good idea, why don’t we make it a better idea and raise it to $20 or even $100?”

Time to get out your economic reasoning tool kit.   

Part I: On Markets & Morals
Minimum wage is one of those issues that strikes the chord of “fairness” in most of us; we wish people didn’t suffer in poverty and it seems as if requiring employers to pay them more would be an easy enough solution.  Additionally, some people’s feelings of empathy are bolstered by their conviction that morality demands paying people “enough to live on.” Colorado’s Amendment 42 was one of the 6 minimum wage increases adopted in November.  In this excerpt from an opinion essay published in the Denver Post shortly before the election, authors Jann Halloran and Wade Buchanan make a strong statement of the moral case:

That’s a pretty compelling argument, isn’t it?  It doesn’t seem right or fair to most of us that people can work full time jobs and still be very poor. But, isn’t there another dimension to the moral argument; don’t we have to ensure that the solution we’re proposing will actually do what we intend it to do?  Will raising the minimum wage help make ends meet as the authors claim it will?

Let’s look at what we know about how markets operate as we attempt to answer that question.

What Are Wages and How Are They Determined?
Before we can continue to talk about minimum wages, it is useful to consider how wage rates are derived in the first place. Consider what one renowned Austrian economist from the last century, Ludwig von Mises, had to say:

Von Mises is essentially telling us that labor is like everything else sold in markets; if the price is too high, fewer people buy. In the case of a labor market, the price is the wage, and a wage that’s too high means “buyers” purchase less. Since the “buyers” of labor are employers, that means fewer jobs available to workers, the “sellers” of labor. 

That seems to be pretty straight-forward economic reasoning. But wait! Apparently, not everyone agrees with Von Mises, and some of those who disagree are respected economists in their own right. In fact some are Nobel prize winners. Last October, the Economic Policy Institute (EPI) announced on its web page:

Take that, Von Mises!  How do we sort out this “econ fight”?  Start by re-reading the economists’ statement above. Then read excerpts from the Denver Post’s opposing viewpoints columns and the Chicago Tribune report on outcomes in the 22 states that have already raised their minimum wages above the federal level. Pay special attention to the bold text in the quoted excerpts.

Armed with the clues from the articles and your knowledge of how markets work, you now have the tools and data to analyze the state minimum wage increase issue and formulate your own educated opinion.  Work through the discussion guide below before taking a position on the question we started with: 

Will minimum wage increases actually do what they are intended to do?

 

Discussion Questions

1. The purpose of minimum wage legislation is to make employers pay more than they would otherwise – that is, more than they would in a market.  Look again at the explanation from Von Mises about how labor markets work. Predict what should happen when the minimum wage is set above the “natural wage” that would occur in a market:

• What happens to the quantity of labor demanded? (Remember that quantity demanded in a labor market is the number of jobs offered at a particular wage.)

• What happens to the quantity of labor supplied? (Remember that quantity supplied in a labor market is the number of people willing to work at that wage.)

2. Now, think about a different set of circumstances.  What happens when the minimum wage is below the natural wage?
   
   
• That evidence from the reading suggests that this is actually the case in some places?
  
  
• Suppose that the minimum wage and the natural wage were the same in June, 2007. What economic conditions in the next 10 years would allow the government to raise the minimum wage in June, 2017, without causing unemployment? 
  
  
3. The Economic Policy Institute signed by the famous economists says that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.”
   Is this a contradiction of the Von Mises prediction that charging too-high wages results in unemployment? Explain. 
   
   
4. How are some states raising the minimum wage without raising unemployment?
   
   
   
5. If raising the minimum wage is indeed a good idea- and moral, to boot- why stop at seven dollars an hour? Wouldn’t the very people such action was intended to help benefit even more if they could earn, say, $50 an hour?  (Hint:  Why do you think that the Economic Policy Institute statement is supporting a modest increase in the minimum wage?)
   
   
   
6. Regardless of where you stand on the morality of the issue, how is it possible to argue that “it depends” is the best answer to the question of whether raising the minimum wage will produce the desired outcome?
   
   

Teacher Guide

Lesson Overview

This lesson provides a student reading and discussion questions on recent efforts to raise state and/or federal minimum wage rates. The reading considers both moral and economic arguments for such a proposition, and asks students to take a stance based on economic analysis.

The discussion questions target higher-order thinking skills; students are asked to apply economic reasoning skills they have already been taught in class. Specifically, they will practice using their knowledge of supply, demand, and price in the context of labor markets. If reading comprehension is a concern, consider using the addendum of optional document interpretation questions before assigning the discussion questions.

Teachers wishing to learn more about economists’ analysis of minimum wages as an example of price floors may find the following essay useful as background for direct instruction:  http://www.econlib.org/library/Enc/MinimumWages.html

Procedures

1. Distribute the reading handout as an in-class assignment or for homework.

• Note:  If using the optional document comprehension questions (see addendum below), distribute them with the reading handout.  Go over the document interpretation questions before proceeding to step 2.

2. Divide the class into small groups for discussion. Distribute the discussion question handout.

OR

• Conduct a class discussion, displaying the questions on an overhead transparency.

3. After debriefing the discussion questions, conduct a large group discussion, encouraging students to offer their opinions (supported by evidence and reasoning!) on the question posed by the reading: 

Will minimum wage increases actually do what they are intended to do?

Suggested Responses for Discussion Questions:

1. The purpose of minimum wage legislation is to make employers pay more than they would otherwise – that is, more than they would in a market.  Look again at the explanation from Von Mises about how labor markets work. Predict what should happen when the minimum wage is set above the “natural wage” that would occur in a market:

• What happens to the quantity of labor demanded? (Remember that quantity demanded in a labor market is the number of jobs offered at a particular wage.)  Employers would offer fewer jobs – that is, they would have a demand for fewer workers – than they would at the lower (natural) wage. See graph below.

• What happens to the quantity of labor supplied? (Remember that quantity supplied in a labor market is the number of people willing to work at that wage.) There would be more workers looking for jobs than at the lower (natural) wage.  When the wage rises, more people are willing to work.



2. Now, think about a different set of circumstances. What happens when the minimum wage is below the natural wage?  The minimum wage doesn’t impact the labor market because employers have to pay more than that to attract enough workers.  See graph below.

• What evidence from the reading suggests that this is actually the case in some places? Quote from the Chicago Tribune excerpt: “In Nevada, for example, the labor market is so tight that most employers already pay more than minimum wage to attract workers – even dishwashers and pizza delivery drivers . . . .”



• Suppose that the minimum wage and the natural wage were the same in June, 2007. What economic conditions in the next 10 years would allow the government to raise the minimum wage in June, 2017, without causing unemployment?  Economic growth, causing shifts (increases) in demand and supply could cause the natural wage rate to rise over the 10 year period, allowing the government to raise the minimum wage somewhat without reducing employment opportunities.



3. The Economic Policy Institute signed by the famous economists says that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment.”
   Is this a contradiction of the Von Mises prediction that charging too-high wages results in unemployment? Explain. Not necessarily.  If (as demonstrated in question 1, above) the natural wage is above the minimum wage, raising the minimum wage to the level of the natural wage would have no impact on the number of jobs being offered. (Note however, that wages are still a refection of productivity and if there were people working at the old, lower minimum wage, they are likely to lose their jobs at the higher minimum wage, even though the total number of jobs may not be affected.)
   

4. How are some states raising the minimum wage without raising unemployment? From Tom Clark excerpt:
   “. . . many other states that have increased the minimum wage exempt small businesses, teenagers, babysitters and those seeking entry-level jobs . . .”  Note:  This is a good place to reinforce for students that wages are related to productivity. When people without many skills enter the market, they get lower wages until they become more productive through experience and education.  States that exempt these workers from the minimum wage recognize that being able to earn low wages allows people to work and begin gaining experience.

 

5. If raising the minimum wage is indeed a good idea- and moral, to boot- why stop at seven dollars an hour? Wouldn’t the very people such action was intended to help benefit even more if they could earn, say, $50 an hour?  (Hint:  Why do you think that the Economic Policy Institute statement is supporting a modest increase in the minimum wage?) If it’s moral to pay people a little more, then, logically, it would be even better to pay them a lot more, right? However, students generally won’t accept the $50/hr. proposal; there tends to be a limit to how high they’ll go.  Try to get them to articulate their cut-off point and how they determined what it should be.  They generally recognize that there’s a problem with this type of thinking.  Help them to see that their discomfort comes from understanding that the money to pay workers has to come from somewhere, and that if an employer can’t sell his product for a price high enough to pay workers $50/hr., then the company will fail and the workers’ will lose their $50/hr. jobs.  Students also generally recognize and accept that people’s labor isn’t equally valuable, and though they find it hard to believe that labor isn’t worth, for example, at least $8/hr., most readily agree that not everyone is worth $50/hr.  At this point, ask them to think of the consequences of letting “someone” decide rather than leaving it to the market. Note again, that the EPI economists can support a modest increase in minimum wage because they believe either that the natural wage is above the current minimum wage, or because they think that the economy is growing fast enough that the market will quickly pull the natural wage to the level of the new minimum wage.
   

6. Regardless of where you stand on the morality of the issue, how is it possible to argue that “it depends” is the best answer to the question of whether raising the minimum wage will produce the desired outcome? The economics content standards remind us that economic change creates winners and losers; not everyone is affected in the same way – so “it depends” on which group of people we’re talking about. Groups that may benefit include those low-wage workers who are able to keep their jobs; politicians whose constituencies favor minimum wage legislation; and activists and lobbyists for poor workers. Groups that may be hurt include lower-skilled workers who were not productive enough to be hired at the lower rate and certainly won’t be hired now; low-skilled workers who lose their jobs to someone with higher skills who is lured into the labor market by the higher minimum wage; and businesses whose products sell mainly to affected groups like teenagers (whose average unemployment rate is 15.1% compared to approximately 4% for adults). Also hurt may be future workers who do not get jobs because the higher minimum wage kept the economy from growing as fast as it otherwise would have or because firms may not be willing and able to bring them on at the higher wage. Because such people aren’t losing jobs they already have, this effect tends to be invisible.

Addendum

Document Interpretation Questions

1. In the market for labor, who represents “supply” and who represents “demand”? What does “price” signify? Markets for labor function just like any other market- via the interaction of supply and demand. In this case, “supply” is the workers, who are willing to supplying units of labor for a price - which we generally refer to as a wage. This is often counterintuitive to students as they’re accustomed to thinking of “supply” in terms of products, and not persons. The “demanders” in a labor market are the firms/employers seeking units of workers. Again, this is somewhat counterintuitive as students naturally think of firms as suppliers. The “price” in a labor market signifies the price of labor, or the wage being paid to workers.

2. Summarize the arguments from the newspaper editorials in favor of and opposed to increasing the minimum wage. The argument in favor of the increase is that we have a moral obligation to make sure people are paid a “living wage” by raising their annual income above the poverty level.  Additionally, proponents argue that increases in the minimum wage will not hurt the economy, and they point to the EPI statement as evidence. The arguments against focus primarily on increasing production costs for firms that will reduce employment and hurt the economies of the states that enact higher minimum wages, in addition to hurting lower-skilled workers by reducing the number of jobs available to them and by encouraging outsourcing.

3. According to Mises, how are wage rates determined? What should be the course of action undertaken in the face of “low” wages? Wages are determined by the process of negotiation between the worker and his employer, and a worker faced with a wage lower than what he desires must either lower the wage he is willing to accept, or he may choose to remain unemployed. (Or, although not mentioned in this Von Mises excerpt, the worker can get experience and training to make himself more productive so that employers will be willing to pay him more.)  Efforts by outside institutions, such as government, to intervene in this process will only prevent some workers from finding jobs.  If people aren’t worth the wage the employers must pay, they will substitute machines or find cheaper labor elsewhere.

4. Why does the reading suggest that the Nevada minimum wage law is somewhat irrelevant for employers? This suggests that most low-skill level jobs already command a wage higher than the mandated minimum. The labor market in Nevada appears to have strong enough demand (on the part of employers) that the worker-suppliers are able to negotiate higher rates of pay.