1. Poverty Lecture 10: Why are wages so low? Today’s Readings Schiller Ch. 5: The Working Poor DeParle, Ch. 6: The Establishment Fails: Washington, 1992-1994 (Optional, Newman, “ Working Lives, ” eReserves, Ehrenreich, “ Serving in Florida, ” eReserves)

2. Today’s topics Why are wages so low? Will raising minimum wages help the poor? Will raising the living wages help the poor?

3. The working poor: why are wages 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

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

5. Basic facts about the minimum wage (As seen by Opponents of increases) Who earns the minimum wage? –http://www.epionline.org/index_mw.cfmhttp://www.epionline.org/index_mw.cfm View the Slide show!!! –only 2.8% of employees above the age of 30 –average family income of a minimum wage employee is $44,331. –Single parent or single earner in a family with kids account for only 15% of minimum wage earners.

6. Basic facts about the minimum wage (As seen by Proponents of increases) http://www.epinet.org/content.cfm/issueguide s_minwage_minwagefactshttp://www.epinet.org/content.cfm/issueguide s_minwage_minwagefacts Print the 3 pages of facts!!!! A minimum wage increase would raise the wages of millions of workers. –14.9 million workers (11% of the workforce) Minimum wage increases benefit working families. –Approximately 3.9 million parents with children under 18 would benefit.

7. Proponents View, cont. Minimum wage increases benefit disadvantaged workers. –59% of beneficiaries are women –14% 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

8. Proponents View, cont. –38% of the benefits would go to households in the bottom 20% receive only 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.

9. 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 1979. [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, http://www.epinet.org/issuebriefs/224/ib224.pdf] http://www.epinet.org/issuebriefs/224/ib224.pdf

13. 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 There is no evidence of job loss from the last minimum wage increase.

14. Where do economists stand on raising the minimum wage? See: http://www.epi.org/minwage/epi_minimum _wage_2006.pdf

15. State minimum wages 29 states have minimum wage rates higher than the federal minimum 15 states set their minimum wage rate at the federal rate 1 states have minimum wage rates less 5 states have no minimum wage laws than the federal rate. Source: http://www.dol.gov/esa/minwage/america.htm http://www.dol.gov/esa/minwage/america.htm

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

19. Living wages Basic facts –See http://www.epinet.org/content.cfm/issueguides_livi ngwage_livingwagefacts http://www.epinet.org/content.cfm/issueguides_livi 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

20. 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 –http://www.epionline.org/index_lw.cfm andhttp://www.epionline.org/index_lw.cfm –http://www.epinet.org/content.cfm/issueguides_livi ngwage_livingwagehttp://www.epinet.org/content.cfm/issueguides_livi ngwage_livingwage –To see what labor economists think about living wages, see –http://www.epionline.org/study_detail.cfm?sid=13& group=lwhttp://www.epionline.org/study_detail.cfm?sid=13& group=lw

21. 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.

22. 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, http://www.epinet.org/issuebriefs/224/ib224.pdf http://www.epinet.org/issuebriefs/224/ib224.pdf

23. 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

24. 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

25. 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

26. 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

27. 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