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Price Ceilings and Floors

Price Ceilings and Floors. Effects on market equilibrium; Assessing winners and losers;. 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?. Outline. Historical Evolution of Minimum Wage Conventional Analysis

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Price Ceilings and Floors

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

  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?

  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

  4. 1888-1916. Establishment of Government’s Legal Authority to Regulate Labor Markets 1931-36. 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. 1949-1966. Increases in minimum wage in 1949,55,61. Historical Perspectives

  5. 1966. The FLSA amended to cover agricultural workers and some public employees. Increased minimum wage to $1.40 an hour. 1972. 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 1981. Congress established the Federal Minimum Wage Study Commission. 1990. Minimum wage increased to $4.25 More Coverage Post ‘66

  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.

  7. The Minimum Wage 1938-00

  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

  9. The Conventional Analysis

  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 Demand

  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

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

  14. Card and Krueger

  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.

  16. Employment Policy Institute

  17. Neumark and Wascher

  18. Card and Krueger Revisited

  19. What Do We Know? • Effects on teenage employment, if negative, are small • Studies suggest the effect is smaller today than 15-20 years ago. • School enrollment decreases as minimum wage increases.

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

  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.

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

  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.

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