EC321-Topic #1: Minimum Wages

In a recent survey published by the Employment Policies Institute , labor economists express their beliefs that the minimum wage is an inefficient tool at alleviating poverty, while the Earned Income Tax Credit is seen as a much more efficient tool. The goal of increasing the minimum wage is often said to be a poverty fighting tool.

The federal minimum wage increased to $5.85 on July 24, 2007, and will increase to $6.55 after one year, and finally rise to $7.25 after two years. The increase in the minimum wage represents a 40.8% increase in the hourly wage for the lowest skilled laborers. On January 1, 2007 the minimum wage in New York state increased to $7.15, and is set to be replaced by the federal minimum wage of $7.25 on July 24, 2009. Typically, economists assume that a full-time employee works about 2000 hours per year (40 hours a week, for 50 weeks). At full time, the minimum wage annual salary will have risen from $10,300 per year to $14,500 in just over two years, an increase of almost 41%.

Beginning in 1994, some cities and municipalities began enacting ordinances dubbed “living wages” that go above and beyond the national and state minimum wages. The living wage ordinances that have been enacted to date have gone so far as creating wage floors greater than $12.00 per hour of work in some areas. Most of these ordinances are very limited in scope, and usually only apply to firms working on city contracts, and subcontractors of those firms. In many cases, firms that are unionized can opt out of the living wage law by paying wages as specified in their union contracts.

Questions:
I would like you to discuss some pros and cons of a minimum wage and/or living wage law.

  • Can you find any examples in your hometown or locally for an employer paying the statutory minimum wage?
  • What type of jobs are typically associated with minimum wage or near minimum wage pay, and why?
  • What incentives are created for employees already working at the minimum wage by raising the statutory wage or enacting living wages with the stipulations I have outlined?
  • Why would unions let firms opt out of paying the living wage if they allowed workers to unionize?
  • Given that minimum wage and living wage campaigns are typically very expensive to organize, who is footing the bill for these campaigns and why?

Please try to limit your comments to 100 words with a maximum of 200 words. Additionally, I would like you to state something more than the obvious economic prediction in this posting. You can also try to discuss the different positive and normative statements that are related to this topic?

A notable source for this assignment is “The State of Working America 2004/2005” by the Economic Policy Institute which is on reserve at Scribner Library. Many other on line sources will provide you ample factual information. To see examples of how a blog comment should look, you can see the following examples.

NOTE: Read other students comments before posting, and please leave your name with your posting.

AN

10 thoughts on “EC321-Topic #1: Minimum Wages”

  1. Is Increasing the Minimum Wage an Effective Antipoverty Program?I would argue that it is most definitely not. The minimum wage increases the wage for workers at the bottom of the wage distribution, but may reduce employment opportunities for some of those workers. This trade-off between the benefits accrued from the higher minimum wage and the potential employment losses is the ultimate question. Now, I believe that forcing laborers into unemployment (direct cause of the increase of minimum wage – hourly wage increase, # of laborers decreases in order to maintain the firm’s costs of production) guarantees that those unemployed will fall below the poverty line (unless they find another job or have a significant amount of savings, which is unlikely for the lowest skilled laborers). On the other hand, if the minimum wage is held at $5.85 and not raised to $7.25, more laborers have the chance to live above or at least closer to the poverty line than if the minimum wage were raised. However, where the poverty line exactly lies is extremely difficult to determine. [Maybe that is why living wages exist.]*Source: Our text book

  2. I agree with Rob that minimum wage increase is not an effective anti-poverty tool. However, we have to look at the workers who earn minimum wage per hour. The majority of them are the teenagers with little or no skills and job experience holding part-time jobs and low skill adults, mostly women. The first group is still in the process of gaining education and skills and the possibility for them to reach higher wages are still open. The second group, adults, makes $10,300 a year plus EITC, which is 40% of the yearly income that gives them $14,420 total income. After minimum wage increase, income will be 41% higher- $14,500 per year but at the same time some of them may face job lose or cut in working hour. The number of working poor or unemployment rate or both may increase. On the other hand, holding minimum wage as it is creates dependency on the welfare assistance and perpetuates poverty. Minimum wage applies to workers in different sectors in the economy, e.g. services where jobs are created while new businesses arise. In this sector job lose can be less harmful than for example, in production sector where firms use job outsourcing to developing countries in order to decrease production costs. The possibility to send production abroad also lowers union’s bargaining power. Roma.

  3. In my home town, the main grocery stores are Foodtown and The A&P. Because of the selling of a nearby Grand Union, these two stores became the main distributors for our town. While searching for a summer job three years ago, I noted the differences between the two jobs. At Foodtown, they paid exactly minimum wage, and I inferred later that they could not take full time employees (at least from teenagers).. At the A&P, however, I found that I could practically name my price for a pay check. My point is that, should the minimum wage go up, Foodtown would be faced with a few options. First, they could raise their prices, which would make it difficult for them to compete with A&P (not to mention making food cost more). Second, they could lay off workers, or shorten hours even more than before. Either of these options could also lead to the closing of A&P, which would shut out many jobs and most likely give a monopoly to the A&P chain, which would likely create pricing problems due to lack of competition. This can result in the standard of living going up for people with jobs, but the number of jobs available going down.-Rich

  4. One of the ideas of increasing minimum wage is that it will give workers incentives. For one, it undoubtedly increases the standard of living (for those that keep their jobs), but as far as incentives go the idea is that at low wages it seems a lot more reasonable to choose leisurely activities instead of working. Their wages don’t seem worth the time. However, once the wages (nominal or real) start increasing it becomes increasingly more difficult to choose leisure over labor and eventually it is just foolish for most individuals. It becomes too expensive for the individual to forego their wages to perform a leisurely activity, and so therefore the individual’s productivity increases with increased wage. Also, the same holds true if a worker’s real wage decreases (if the price level increases but their wage remains the same). If someone in x year makes $2 an hour and a candy bar costs $4, and then 2 years later than year x, they are still making $2 an hour and a candy bar costs $6 – their incentive to work is going to decrease. They have to work 150% as long to receive the same rewards due to the price level increasing and their wages remaining the same. That being said, not in the United States, but in general an increase in minimum wage in a country with a high inflation rate could certainly be a very useful tool for increasing productivity of workers.-Dan

  5. Roma states: “However, we have to look at the workers who earn minimum wage per hour. The majority of them are the teenagers with little or no skills and job experience holding part-time jobs and low skill adults, mostly women.”Although, I don’t necessarily disagree with this statement, I would like to know the source. I think that in order to make progress in this discussion we must properly define the group of individuals who benefit from a minimum wage.-Eric

  6. Workers should be paid in proportion to the rate of their productivity and output. Unfortunately, there are jobs in the United States that do not allow for people to increase their productivity (agriculture: there are only so many apples one can pick in an hour). If the state increases the minimum wage, labor will be rewarded despite an increase in productivity. The employer will then feel the burden of the wage increase, but will pass the extra expense along to consumers (if the employer were inclined to maintain the same margin). The artificial wage increase by the state, may cause inflationary pressures. And then, after time, may push wages back down in real terms, making the laborer no better then it was before (relatively).If the United States wants to maintain its position as an economic super power, it cannot create market-distorting inefficiencies in arenas in which it does not have a competitive advantage.Originally the minimum wage was emplaced in order to protect labor exploitation from corporations. BUT, given global labor competitiveness, is the government putting the nation at a disadvantage by having a minimum wage? Of course poverty should be dealt with, but I do not believe that the minimum wage is the answer. You cannot throw money at a problem and expect it to go away.-Eric

  7. Fluctuating minimum wage may not be the answer to the poverty questions in our country. But bill was passed, and a $2.10 increase in the minimum wage will take place. To add, the current administration supports the increase and did not threaten to veto the action. One of the links Prof. Neveu provided us; the EPI surveyed 280 labor economists. When they were asked to rate the three proposed policies which address the income needs of poor families, increasing the minimum wage was the least efficient. Both the Earned Income Tax Credit and general welfare supports were seen are more effective ways to deal with poverty, before touching the minimum wage.Agreeing with Rob’s statement, firms today are so profit driven that the increase in minimum wage will actually result in employment losses. Because these nations will continue to be solely focused on profits, they will decrease the amount of workers and run a stricter ship when the minimum wage is increased.One potentially result from this increase is that we will continue to see a widening gap between the upper and lower classes. The diminishing middle class will be more evident with the potential results of the implementation of this policy. Finally, I would like to reiterate the ideas of a classmate, who stated, that the minimum wage should be set where individuals choose to receive the lowest amount of pay for a specific job. This can be a very controversial issue for discussion-Nick

  8. I agree with Dan and Rob. I do not believe that simply raising the minimum wage can affect the overall poverty in our country. Dan has a good point in saying that workers need incentive to join the work force. It must be value adding to their life and allow a certain level of comfort to the individual or family. I agree that of the individuals who work for minimum wage it is mostly teenagers and low skilled workers. However, for those who have a more permanent job working for minimum wage the government should help create enticements to stay in the work force. If taxes could be lower for those only working for minimum wage, then the individuals could save more money or use it for self improvement. To increase employment, the government could try decreasing welfare benefits and put them to use for those making minimum wage. Increased benefits from the welfare program and more tax payback, the unemployment and discouraged workers could choose to join the work force. Once workers have increased their utility from benefits and earn more money because of fewer taxes then it is more likely they will stay in the work force.

  9. Though increasing the minimum wage may seem like it could only help the economy and benefit those minimum wage workers; it in fact could have the exact opposite effect. Raising the minimum wage could cause thousands to lose their jobs, which in turn would cause more Americans to fall below the poverty line. It has been estimated that 100,000 jobs will be lost for every ten percent increase in the minimum wage. This could cause more families to turn to welfare which would only end up hurting our economy. In addition, many argue that a large majority of minimum wage workers are teenagers who are not the primary bread earners in their families. Many small businesses are against raising the minimum wage because it would force them to lay off workers; they would not be able to survive in this economy without doing so. It is difficult to argue why raising the minimum wage would be beneficial to our economy when there would be no change in the productivity. In turn I see it as having little, to no beneficial effect on our economy as a whole. Yes, it may benefit a few million households, but it also may hurt a few million households. -Aimee

  10. The recent increases in the minimum wage have stirred up a fair bit of controversy. Economists have been generally against it, due to labor demand issues, and competitive pressures on smaller firms (which cannot afford the higher wages) among others. Looking at the three options presented in the survey, Earned Income Tax Credit, general welfare suppose, and a minimum wage hike, I do not believe that any would be a truly effective solution. Functionally, they are the same: all give more money to those in the lowest income brackets, without solving some of the problems that poverty has to begin with. Poverty is a structural issue that needs to be tackled, and none of the three ‘poverty alleviation’ programs addresses those issues. Rising healthcare costs, the inability and even lack of incentive to get a good education, public funding being diverted away from welfare programs that facilitate retraining, and more, are just some of the causes of poverty in the US.So, is raising the minimum wage the best course of action? No, but it does move the burden of dealing with poverty over to the private sector. Would any of the other options be better? Not really, since the government would probably have to raise taxes to fund welfare programs and hand out more tax credits. Does something need to be done? Absolutely.Kail Jethmalani

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