Poverty Lecture 10:Why are wage rates so low?

Today’s Readings•Schiller Ch. 6: The Working Poor •DeParle, Ch. 6: The Establishment Fails: Washington, 1992-1994•(Optional, Newman, “Working Lives,” eReserves, Ehrenreich, “Serving in Florida,” eReserves)

Today’s topics

• What is the definition of working poor?• Who are the working poor?• Why are wage rates so low?• Will raising minimum wages help the

poor?• Will raising the living wages help the

poor?• Summary--why work doesn’t work

What does working poor mean?(all data refer to 2007)

• USDOL definition of working poor: individuals who spend at least 27 weeks in the labor force, working or looking for work– 7.5 million Americans lived in 4.2 million working

poor families

• Definition of working poor rate: the ratio of working poor individuals to all individuals in the labor force for at least 27 weeks– Equaled 5.1 percent in 2007

• Source: US Bureau of Labor Statistics, www.bls.gov/cps/cpswp2008.pdf

Who are the working poor?Employment Status

Subgroup Number(thousands)

Percent of all working poor

Working poor rate

All working poor >26 weeks

7,521 100 5.1

FT-FY workers 4,371 58 3.6

Part-time workers

2,759 37 11.9

White 5,357 71 4.5

Black 1,612 22 9.7

Latino 1,239 16 10.5

Who are the working poor?Educational Attainment

Subgroup Number(thousands)

Percent of all working poor

Working poor rate

Educational attainment

<High School 2,474 33 16.5

High school, no college

2,696 36 6.3

Assoc College Dg

393 5 2.8

Bachelor’s Dg+ 595 8 1.3

Who are the working poor?Family Status

Subgroup Number(thousands)

Percent of all working poor

families

Working poor rate

Family Status

All families 4,169 100 6.4

Married-couples 1,709 41 3.5

Female heads 2,077 50 18.2

Male heads 382 9 8.5

The working poor: Why are wage rates so low?

• Wage determination in a perfect market– See handout, “Minimum Wage Effects,”

Graph 1 and Graph 2– Firms and workers are price takers– Perfect information– Perfect mobility

Will raising the minimum wage help the poor?

• Let’s take a look at the “basic facts”

Basic facts about the minimum wage (As seen by Opponents of increases)

• Most minimum wage workers aren’t poor”– Who earns the minimum wage?

• http://www.bls.gov/cps/minwage2008.htm• http://www.epionline.org/index_mw.cfm • Minimum wage workers tend to be young--only 2% of

employees above the age of 25• average family income of a minimum wage

employee is over $43,000. • Single parent or single earner in a family with kids

account for only 15% of minimum wage earners.

Basic facts about the minimum wageOpponents view, cont.

• Minimum wage increases cause job losses– Teenagers from well-to-do families crowd

out low-skill employees– Black teenagers and young adults

experience four times more employment loss than non-blacks.

• elasticity of employment with respect to the minimum wage for young minority males = -0.8

Basic facts about the minimum wageOpponents view, cont.

• The vast majority of minimum wage workers move on to higher paying jobs as they accumulate experience.– Two-thirds of minimum wage workers

receive raises within 1-12 months of hiring – Annual median real wage growth for

minimum wage employees is nearly 7%

Basic facts about the minimum wageOpponents view, cont.

• Raising the minimum wage decreases benefits and increases taxes.– Minimum wage workers lose government

benefits like EITC, FS, and health insurance.

– The effective marginal tax rate sometimes exceeds 100%

Basic facts about the minimum wage(As seen by Proponents of increases)

• http://www.epi.org/publications/entry/issue_guide_on_minimum_wage/

• The minimum wage increase to $7.25 (July 2009) raised the wages of millions of workers.– 4.5 million workers (4% of the workforce)

• Minimum wage increases benefited the children of working families.– ~ 2.6 million children under 18

Proponents View, cont.

• Minimum wage increases benefited disadvantaged workers.– 63% of beneficiaries are women, the largest group

of beneficiaries – 12% of working women would benefit directly – African Americans represent 11% of the total

workforce, but are 18% of workers affected – Hispanics represent 14% of the total workforce,

but are 19% of workers affected– 76% of the beneficiaries are 20 years or older

Proponents View, cont.

– 38% of the benefits went to households in the bottom 20% that receive 5% of national income

– More than half of families with a minimum wage worker earn less than $35,000 per year

– 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 benefited most.

Proponents View, cont.

• The recent minimum wage increase reversed the trend of declining real wages for low-wage workers.– The inflation-adjusted value of the minimum wage

is 17% lower in 2009 than it was in 1968, and is less than through most of the period from 1961-1981.

• Go to http://www.epi.org/publications/entry/tables_figures_data/ and study Table 3

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 (see next slide)

Proponents View, cont.

• There is no evidence of job loss from the last minimum wage increase.– Study by David Card and Alan Krueger

most often cited– How do these authors explain this

contradiction to economics theory?

State minimum wages

• 14 states have minimum wage rates higher than the federal minimum

• 26 states set their minimum wage rate at the federal rate

• 5 states have minimum wage rates lower than the federal rate.

• 5 states have no minimum wage laws than the federal rate.

• Source: http://www.dol.gov/esa/minwage/america.htm

Why do some states raise their minimum wages above the federal level?

• You tell me

Living wages

• Basic facts– http://www.epionline.org/index_lw.cfm– 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

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 and– http://www.epinet.org/content.cfm/

issueguides_livingwage_livingwage • (I couldn’t access the epinet.org url. Don’t worry if you have

problems.)

– To see what labor economists think about living wages, see

– http://www.epionline.org/study_detail.cfm?sid=13&group=lw

Recap: Why Work Doesn’t WorkEarnings = hours X wage rate

• Too few hours– Lack of commitment– Physical and mental challenges– Dependents needs– Inadequate demand– (Unfair) employer practices (Walmart)

• Discrimination on basis of race, gender, creed, sexual orientation, physical appearance

Recap: Why Work Doesn’t WorkEarnings = hours X wage rate

• Wages rates are too low– Market values contributions, not needs

• Slack demand• Abundant supply

– Lack of soft skills (work readiness)– Lack of hard skills (education, training)– Unfair employer practices

• Declining strength of unions• Unequal pay for equal work

– Absence of societal and hence governmental commitment to adequate minimum wages

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.

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

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

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

Dobserved changeU2

U1

N1

N2

Y

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 effectU2

U1

N1

N3

Y

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 effectU2

U1

N3

N2

Y

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)

U3

U2

U1

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