1. Today Minimum wage background
Theory: what happens to employment when the minimum wage increases?
Empirical evidence: Card and Krueger (1994)
Does the minimum wage fight poverty?

2. Minimum wage background
Federal minimum wage started in 1938 at 25 cents an hour
Covered about 43% of wage and salary workers
Low wage sectors such as agriculture, retail trade, and services were excluded
Coverage expanded over time – by 1974, about 85% of private sector hourly workforce covered

3. Nominal vs Real Value
The minimum wage is set in nominal terms, and has been periodically increased

4. Nominal vs Real Value

5. Who earns the federal minimum wage?
Few are paid at or below the federal minimum
2.56 million Americans
3.3% of all workers who are paid hourly earn the minimum wage
63% are women
About half of all minimum wage earners work in the food industry and retail

6. Who earns the federal minimum wage?
Minimum wage earners are generally young
Though the majority are older than 25
Source: BLS, 2015

10. State minimum wage
States can set minimum wages that are higher than the federal minimum wage
As of this past January, 29 states have minimum wages that are higher than the federal minimum wage
California’s minimum wage is $10.50 as of January 1, 2017
Washington state has the highest minimum wage, currently set at $11.00 and is annually indexed for inflation

11. Cities also have minimum wages
33 cities have minimum wages above their state minimum wage.
Seattle $13, LA $12, San Francisco $13, Oakland $12.86
Often they have different minimum wages depending on the size of the employer.

12. What does CEA cite as reasons to raise the minimum wage?
What does AEI cite as reasons not to raise the minimum wage?

13. What facts do they seem to disagree about?

14. Employment effects: textbook theory
Initially, the competitive labor market is in equilibrium at E0 and w0
Now the government imposes a minimum wage of wm
Assume has universal coverage

15. Employment effects: textbook theory
As a result, (E0 – Em) workers are displaced and become unemployed
Further, the higher wage encourages (Sm – E0 ) workers to enter the labor market, but they cannot find jobs
Unemployment rate = (Sm – Em) / Sm

16. If this theory is correct…
Larger employment effect with more elastic demand and supply curves
Doesn’t mean the minimum wage is bad - means there are tradeoffs

17. Model assumes:
Compliance – many firms actually pay less than the minimum wage
Ignores migration between covered and uncovered sectors
Perfect competition

18. Migration between sectorsSU
Dollars SC
Employment EU EC
(b) Uncovered Sector E w w* DU DC
(If workers migrate to covered sector)
(If workers migrate to uncovered sector)
Covered sector:
Experiences increase in the minimum wage
Uncovered sector:
Could experience workers migrating in or out

19. Theoretically, what could explain zero disemployment effects of minimum wage hikes?

20. Possible stories Inelastic labor demand Hiring and firing costs
Labor/Labor substitution
Monopsony

21. Perfect Comp vs Monopsony
Workers
Wage
Tacos
MPL
MRPL
total costs MC 1 10 8 16 2 15 7 14 20 3 21 6 12 30 4 26 5 40 50 33 60 35 70 36 80
Workers
Wage
Tacos
MPL
MRPL
total costs MC 1 4 8 16 2 6 15 7 14 12 3 21 24 10 26 5 40 30 60 20 33 84 35
112 28 18 36
144 32

22. Empirical evidence: what happens when the minimum wage goes up?
George Stigler 1946
Early studies focused on low wage industries:
Peterson 1957 criticized a BLS report finding no effect on unemployment
Lester 1960 criticized Peterson saying he cherry picked results

23. Empirical evidence: what happens when the minimum wage goes up?
Next wave of studies used changes over time in the federal minimum wage
Welch 1974 found large statistically significant effects data from
Siskind 1977 found data error in Welch (he was only actually using 16-19) and can no longer differentiate the effect from 0.
Welch 1977 said essentially “yeah, yeah I meant yr olds all along.”
Also found no statistically significant effects for the population as a whole.
Brown, Gilroy, & Kohen 1983 noted a problem with the inference and try to correct for it using more data Find marginally significant effect: -.09
Wellington duplicated BGK and finds no statistically significant effect with even more data : -.06

24. Now: Try to use better methods to answer this question.
YOU WON’T BELIEVE THE METHODS THAT PARTISAN IDEOLOGUES HATE!!!!

25. Is the minimum wage an effective anti-poverty program?
Empirical evidence shows that the dis-employment responses to the minimum wage are definitely not large
So increases in the minimum wage tend to lead to increases in the earning among low wage workers
Doesn’t cost the government because employers pay wages not the government
BUT!

26. Is the minimum wage an effective anti-poverty program?
When the minimum wage increases, this raises the wage for low-income individuals, not low-income families
Evidence suggests that minimum wage not an effective (or efficient) way of combating poverty in the U.S. because not well-targeted