The Minimum Wage Lecture

New labor-saving technologies become available every year, which mainly replace low-skilled labor.
- Examples: self-checkout
The immediate effect of these technological advances is:
- A drop in the demand for low-skilled labor

The Fair Labor Standards Act of 1938: established hourly minimum wage rate in the United States at $0.25 for covered workers.
22 increases since
Many states have their own
Last increase was in July 2009 to $7.25/hour
To be equal to its 1968 high in terms of buying power it would need to have been $11.20 per hour in 2020.
Many economists believe that raising the minimum wage will increase the unemployment rate of low-skilled workers.

Price floor: A government regulation that makes it illegal to conduct a transaction at a price lower than a specified level.
The minimum wage is the application of a price floor to labor markets.
If set below equilibrium: Non-binding, no effects
If set above equilibrium: Binding, effects

If minimum wage is above equilibrium wage level, surplus of labor in the low-skilled labor market (raising minimum wage creates unemployment)
Benefits some workers (those who are able to find jobs and receive higher wage) but harms others (those who those who lose jobs and those who like to find a job but cannot)
Ripple effect is the effect an increase in the minimum wage has on other wages

If the minimum wage is set at $12/hr:
- Quantity of labor demanded falls from 10 million to 8 million
- Quantity of labor supplied rises from 10 million to 12 million
- Unemployed: 4 million
- Job Loss: 2 million
If the minimum wage were $6.00/hr., the quantity of labor demanded would be 10 million because the minimum wage ($6/hr.) is below where the market wants to set the wage rate ($8/hr.), the minimum wage has no effect on the market.

Nominal wage: your pay per hour, per week, per month
- The amount listed on your paycheck.
Real wage: the buying power of your nominal wage
- If nominal wages go up by 4 percent, but inflation is 7 percent, your real wage will fall.
For every year the minimum wage does not increase, the buying power of that minimum wage decreases because of inflation.
- E.g. $7.25 in April 2023 has the same buying power as $5.10 in April of 2009 (Bureau of Labor Statistics)

Past studies have shown:
- It increases unemployment.
- Short-run impacts may be negligible, but long-run impacts may be substantial.
- Negatively affects minorities more than whites.
- Negatively affects small businesses more than large businesses.
- Increases the rate of automation (replacing workers with machines).
- It can result in higher prices for consumers.
- Note: Arguments against raising the minimum wage are always same regardless of the increase
An increase in the minimum wage is an inefficient mechanism for helping poor working families
- In 1939, 85% of low-wage workers were in poor families.
- Today, only 18% of low-wage workers are in poor families.
- A majority of minimum wage workers are young adults who are not supporting families.
- 2/3 of low-wage workers live in households with incomes over 2x poverty line, and 40% live in households with incomes over 3x the poverty line.

Increased earnings
Preference for the dignity of a living wage rather than a government handout
Minimum wage closes the gap between income and the poverty line
- Example: a single parent with two children, full time work at minimum wage: earnings of about 78% of the poverty line.
- An increase to $9: earnings of about 97% of the poverty line.
- An increase to $12: earnings of about 129% of the poverty line.
More money -> More spending: Better for overall economy Increases Aggregate Demand
More pay -> harder working employees -> lower turnover/increased productivity: better for firms Reduces Employee Turnover and Increases Productivity
The Inelasticity of Labor Demand Argument
- If the demand for labor is more inelastic (steeper) then there will be less of a loss in employment.
- If labor markets are not competitive, then conclusions change