Poverty Lecture 10: Why are wage rates so low? Today’s Readings Schiller Ch. 6: The Working Poor DeParle, Ch. 6: The Establishment Fails: Washington, (Optional, Newman, “ Working Lives, ” eReserves, Ehrenreich, “ Serving in Florida, ” eReserves)

Today’s topics Who are the working poor? Why are wage rates so low? Will raising minimum wages help the poor? Will raising the living wages help the poor? Summary--why work doesn’t work

Who are the working poor? (all data refer to 2006) 7.4 million Americans lived in 4.0 million poor families where at least on adult spent 27 weeks in the labor force, working or looking for work 70 % were White workers Black and Hispanic workers were overrepresented (as usual) The working poor rate was higher for women Source: US Bureau of Labor Statistics,

The working poor: Why are wage rates so low? Wage determination in a perfect market –See handout, Graph 1 and Graph 2 –Firms and workers are price takers –Perfect information –Perfect mobility

Will raising the minimum wage help the poor? Let’s take a look at the “basic facts”

Basic facts about the minimum wage (As seen by Opponents of increases) Most minimum wage workers aren’t poor” –Who earns the minimum wage? –View the Slide show, Minimum wage Misconceptions!!! only 1.5% of employees above the age of 25 average family income of a minimum wage employee is over $43,000. Single parent or single earner in a family with kids account for only 15% of minimum wage earners.

Basic facts about the minimum wage Opponents view, cont. Minimum wage increases cause job losses –Teenagers from well-to-do families crowd out low-skill employees –Black teenagers and young adults experience four times more employment loss than non-blacks.

Basic facts about the minimum wage Opponents view, cont. The vast majority of minimum wage workers move on to higher paying jobs as they accumulate experience. –Two-thirds of minimum wage workers receive raises within 1-12 months of hiring –Annual median real wage growth for minimum wage employees is nearly 7%

Basic facts about the minimum wage Opponents view, cont. Raising the minimum wage decreases benefits and increases taxes. –Minimum wage workers lose government benefits like EITC, FS, and health insurance. –The effective marginal tax rate sometimes exceeds 100%

Basic facts about the minimum wage (As seen by Proponents of increases) s_minwage_minwagefactshttp:// s_minwage_minwagefacts Print the 3 pages of facts!!!! The minimum wage increase to $7.25 (July 2009) will raise the wages of millions of workers. –13.0 million workers (10% of the workforce) Minimum wage increases benefit the children of working families. –Approximately 6.4 children under 18 will benefit.

Proponents View, cont. Minimum wage increases benefit disadvantaged workers. –59% of beneficiaries are women, the largest group of beneficiaries –12% of working women would benefit directly –African Americans represent 11% of the total workforce, but are 16% of workers affected –Hispanics represent 14% of the total workforce, but are 19% of workers affected

Proponents View, cont. –38% of the benefits would go to households in the bottom 20% that receive 5% of national income –Among families with children and a low-wage worker on average, the minimum wage worker contributes (59%) of the family's earnings. 46% of minimum wage workers contribute 100% of their family's earnings. –Southern and Mid-Western states would benefit most.

Proponents View, cont. A minimum wage increase would help reverse the trend of declining real wages for low-wage workers. The inflation-adjusted value of the minimum wage is 30% lower in 2006 than it was in [The source for the next three slides is, Jared Bernstein and Isaac Shapiro, “BUYING POWER OF MINIMUM WAGE AT 51-YEAR LOW,” Economic Policy Institute,

Proponents View, cont. A minimum wage increase is part of a broad strategy to end poverty. –Antipoverty effectiveness of the combination of minimum wages and EITC falls when neither is indexed (see next slide)

Proponents View, cont. There is no evidence of job loss from the last minimum wage increase. –Study by David Card and Alan Krueger most often cited –How do these authors explain this contradiction to economics theory?

Where do economists stand on raising the minimum wage? See:

State minimum wages 24 states have minimum wage rates higher than the federal minimum 14 states set their minimum wage rate at the federal rate 7 states have minimum wage rates lower than the federal rate. 5 states have no minimum wage laws than the federal rate. Source:

Why do some states raise their minimum wages above the federal level? You tell me

Living wages Basic facts –See ngwage_livingwagefacts ngwage_livingwagefacts –The living wage level is usually the wage a full- time worker would need to earn to support a family above federal poverty line, ranging from 100% to 130% of the poverty measurement. –71 municipalities have enacted living wage laws to date

Living wage as a solution to poverty Should Notre Dame pursue living wages as a solution to poverty? –For the two different sides of the story, see – andhttp:// – ngwage_livingwagehttp:// ngwage_livingwage –To see what labor economists think about living wages, see – group=lwhttp:// group=lw

Recap: Why Work Doesn’t Work Earnings = hours X wage rate Too few hours –Lack of commitment –Physical and mental challenges –Dependents needs –Inadequate demand –(Unfair) employer practices (Walmart) Discrimination on basis of race, gender, creed, sexual orientation, physical appearance

Recap: Why Work Doesn’t Work Earnings = hours X wage rate Wages rates are too low –Market values contributions, not needs Slack demand Abundant supply –Lack of soft skills (work readiness) –Lack of hard skills (education, training) –Unfair employer practices Declining strength of unions –Absence of societal and hence governmental commitment to adequate minimum wages –(Unfair) employer practices Unequal pay for equal work

Review The remaining slides are a supplemental presentation about the traditional effects of increasing minimum wages on individual labor supply. Be sure to ask if you cannot explain predicted changes in hours worked for increases and decreases in wage rates, and also in nonwage income.

theory of labor force participation for groups Changes in average wage$ How would an decrease in the minimum wage affect the LFPR of poor single mothers? An increase? Explain –1998$6.31 per hour (2006$) –2006$5.15 per hour –2007 $7.25 per hour Source: Jared Bernstein and Isaac Shapiro, “BUYING POWER OF MINIMUM WAGE AT 51-YEAR LOW,” Economic Policy Institute,

Effects of Wage Changes on LFP and Hours Worked Substitution effect –%∆L/%∆w –If income is held constant, and increase in the wage rate will increase the price of leisure and reduce the amount demanded thereby increasing work incentives. –The substitution effect is positive: wages and hours move in the same direction %∆L/%∆w > 0

Wage increase with substitution effect dominating: The observed change 0 Work Hours (maximum leisure hours) Leisure hours (l) Work hours (L) 0 Leisure hours (maximum work hours) A C D observed change U2U2 U1U1 N1N1 N2N2 Y

Wage increase with substitution effect dominating: The income effect 0 Work Hours (maximum leisure hours) Leisure hours (l) Work hours (L) 0 Leisure hours (maximum work hours) A C D income effect U2U2 U1U1 N1N1 N3N3 Y

Wage increase with substitution effect dominating: The substitution effect 0 Work Hours (maximum leisure hours) Leisure hours (l) Work hours (L) 0 Leisure hours (maximum work hours) A C D substitution effect U2U2 U1U1 N3N3 N2N2 Y

Effects of Wage Changes on LFP: Substitution effect cause LF entry 0 Work Hours (maximum leisure hours) Leisure hours (l) Work hours (L) Income (Y) 0 Leisure hours (maximum work hours) U3U3 U2U2 U1U1 A B C D E Raising the wage from the slope of BE to the slope of BC increases hours from 0 to d: Substitution effect > income effect d