1. Price Ceilings and Floors
Effects on market equilibrium; Assessing winners and losers; 1

2. SURVEY Have you worked in a minimum wage job?
If yes, what was the job?
Do you support increasing the minimum wage by $1.00? 2

3. Outline Historical Evolution of Minimum Wage Conventional Analysis
How Do You Prove an Economic Theory?
Empirical Evidence on the Minimum Wage
Reconciling Results with Theory
Assessing Costs & Benefits
Policy Alternatives 3

4. Historical Perspectives
Establishment of Government’s Legal Authority to Regulate Labor Markets
Minimum wage legislation passed by Connecticut, Illinois, New Hampshire, New Jersey, New York, Ohio, Utah and D.C.
1937. Fair Labor Standards Act established federal minimum wage of $0.25 1st year; $0.30, the next 6 yrs. Narrow coverage. Numerous exemptions.
Increases in minimum wage in 1949,55,61. 4

5. More Coverage Post ‘66
The FLSA amended to cover agricultural workers and some public employees. Increased minimum wage to $1.40 an hour.
Education Amendments established minimum wages for employees of public and private schools
1977. Minimum wage became $2.65 an hour effective 1978; $2.90 an hour in 1979, $3.10 an hour in 1980 and $3.35 in Congress established the Federal Minimum Wage Study Commission.
Minimum wage increased to $4.25 5

6. Current Law As of 9/1/97, minimum wage is $5.15.
Some employees are not covered.
Special exemptions available for student learners, full time students, persons with disabilities
Penalties for violations can include criminal prosecution. Typical penalty is $1000 fine. 6

7. The Minimum Wage 7

8. Who Earns the Minimum Wage?
57.9% Are Women
25.6% Are Teens
47.2% Work Full-Time
44.3% Work in Retail Trade
38.8% Are the Only Wage Earner
11.7% Are Teens in Families with Above Average Incomes
39.6% Are in Families in the Bottom Fifth of Income Distribution.
Source: Mischel, L. et al, 1993, “Who Wins With A Higher Minimum Wage?” EPI briefing paper. IWPR, “Women and the Minimum Wage, 1995 8

9. The Conventional Analysis9

10. The Conventional Analysis
Wage rate increases with binding constraint
Increase in the quantity supplied of labor
Decrease in the quantity demanded
Fall in employment rate; Increase in unemployment rate
Increase in costs of production for affected industries
Increase in prices paid by consumers
More elastic demand for labor, the greater the fall in employment

11. Elasticity of Labor Demand4

12. How Do We Prove This Theory?
The “Economist’s Laboratory’
Defining a control group
Regression Analysis
Time Series Data
Other Factors affect employment and unemployment.
Minimum Wage increases not independent of labor market conditions.
Cross Sectional Data
Case Studies of States/Industries 10

13. Cross Sectional Studies Card and Krueger book
Empirical Evidence
Time Series data
Cross Sectional Studies
Card and Krueger book
Response to Card and Krueger
Neumark and Wascher 11

14. Card and Krueger 4

15. Criticisms of Card and Krueger
Their data is fatally flawed.
They focus only on short term effects. Employers may be slow to adjust to higher minimum wage.
Consumers may substitute between more expensive restaurant food and fast food. The increase in demand would offset the effects of higher minimum wage. 5

16. Employment Policy Institute6

17. Neumark and Wascher 7

18. Card and Krueger Revisited8

19. What Do We Know? Effects on teenage employment, if negative, are small
Studies suggest the effect is smaller today than years ago.
School enrollment decreases as minimum wage increases. 9

20. Why Isn’t There a Bigger Effect?
Minimum Wage not binding
Neumark and Wascher, 1996
Brown, 1996.
Heterogeneity of teenagers
Monopsony Model
Card and Krueger, 1995 10

21. Reconciling Results with Theory
Data is wrong
Minimum Wage not binding
Labor Markets are not competitive
Labor supply and demand not measured in quality units. 12

22. Policy Issues Why Is the Minimum Wage Popular with Politicians?
Does the Minimum Wage Reduce Poverty?
Alternatives to Increasing the Minimum Wage 13

23. The Minimum Wage and Poverty
With no employment consequences, increase in minimum wage increases incomes of minimum wage workers.
Not all minimum wage workers are poor.
Estimated impact on poverty rate is small. 16