Minimum Wage As of July 2009, minimum wage rate is $7.25/hour (non- tipped), tipped $2.13 First attempt for a minimum wage rate was in 1938 ($0.25) 21 states & D.C minimum wage > $ states & VI minimum wage = $ states minimum wage < $ states no established minimum wage. Economic jargon- price floor Economic controversy (classical vs. Keynesian)

Hidden costs of minimum wage (Casey Mulligan) that economists do not agree on the employment effects of historical minimum- wage changes and do not agree on whether minimum wage increases confer benefits on the poor.do not agree We agree that minimum wage do some economic damage, but some times reasonable economists believe that damages can be offset (outweighed) by benefits. The extent of the damage can be increased in relation to the gap between minimum wage and market wage, the bigger the difference the bigger the damage So since market wages increase over time with increase productivity and inflation so why not index it to inflation. To keep damage from federal minimum wage constant, the federal minimum wage needs not an increase but an automatic reduction over the next couple of years in order for it to stay in parallel with market wages.

Classical view According to the classical view the higher the wage the lower the quantity demanded of labor (down ward slopping demand curve), which means the higher the minimum wage the lower the employment (higher unemployment). Firms are looking to maximize profit, so the hiring decision is related to how much profit will be produced from this extra worker. Comparison between costs and benefits of the extra worker hired. So based on this logic the higher the wage the less likely the firms will higher more workers and unemployment will increase. Increase turnover. Labor saving technology. Encourage employers to cut benefits, hire illegal workes

Raise that wage (Paul Krugman) President state of the union address proposed to increase the minimum wage from $7.25 to $9 with subsequent increase in line with inflation. Would this be a good policy? The answer perhaps surprisingly YES, because simply this is an attempt to legislate market outcome (government intervention). There is a strong believe that this small increase in the minimum wage would have overwhelmingly positive effect. The current minimum wage is very low by any reasonable standard. For about four decades, increases in the minimum wage have consistently fallen behind inflation, so that in real terms the minimum wage is substantially lower than it was in the 1960s. Meanwhile, worker productivity has doubled. Isn’t it time for a raise?real terms the minimum wageworker productivity has doubled So would increase minimum wage cost jobs? because the minimum wage is one of the most studied issues in all of economics. U.S. experience, it turns out, offers many “natural experiments” here, in which one state raises its minimum wage while others do not. And while there are dissenters, as there always are, the great preponderance of the evidence from these natural experiments points to little if any negative effect of minimum wage increases on employment.little if any negative effect

Real value of the minimum wage, 1960–2011 Source: Authors' analysis of U.S. Department of Labor Wage and Hour Division (2009) - See more at:

What this means, in turn, is that the main effect of a rise in minimum wages is a rise in the incomes of hard-working but low-paid Americans — which is, of course, what we’re trying to accomplish.

Keynesian view from the second graph, since 1960 the real value of the minimum wage is decreasing, which means the purchasing power is decreasing (decreasing real wages decrease aggregate demand) Keynesian tell you that to way out of recession is to increase aggregate demand, and one way to do that is by purchasing more products. More consumption means more production (supply of products), which can be done by hiring more workers. More workers means more disposable income and the cycle repeats it self. Also higher wages will increase aggregate demand through Multiplier effect. for the one who is interested in reading more look at : Why Does the Minimum Wage Have No Discernible Effect on Employment? By John Schmitt