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 WageConventional AnalysisHow Do You Prove an Economic Theory?Empirical Evidence on the Minimum WageReconciling Results with TheoryAssessing Costs & BenefitsPolicy Alternatives

Historical Perspectives

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.

More Coverage Post ‘66

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

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.

The Minimum Wage 1938-00

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1938 1941 1944 19471950 1953 1956 1959 19621965 1968 1971 1974 19771980 1983 1986 1989 1992 19951998

Year

Dollars

Nominal

2000 Dollars

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

The Conventional Analysis

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0 1 2 3 4 5 6Units of Labor

Demand

SupplyPrice Floor

Quantity Supplied Exceeds Quantity Demanded.

LD LS

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

Elasticity of Labor Demand

Estimated Effect of a 10% Increase inMinimum WageStudy% Δ in TeenEmploymentElasticityKaitz (1970)-.98 -.098Kosters-Welch (1972)-2.96 -.296Freeman(1979) -2.46 -.246Brown-Gilroy-Kohen (1983)-1.14 -.0114Wellington(1991) -.63 -.063

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

Empirical Evidence

Time Series dataCross Sectional StudiesCard and Krueger bookResponse to Card and KruegerNeumark and Wascher

Card and Krueger

29.8 30

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Employment

New Jersey Pennsylvania

BeforeAfter

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.

Employment Policy Institute

17.319.9

16.9

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Employment

New Jersey Pennsylvania

Before After

Neumark and Wascher

Effect of 21% Increase in Minimum Wageon Proportion Making TransitionIn School/Em-ployed to Notin School/Em-ployedNot inSchool/Em-ployed to NotIn School/NotEmployedAll teenagers0.03a 0.02aInitial wage ator above newminimum0.040.01Initial wagebelow newminimum-0.010.04ba. Effect is based on estimates significant at the 5% level.b. Effect is based on estimates significant at the 10% level.

Card and Krueger Revisited

37.2 37.8

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Employment

New Jersey Pennsylvania

BeforeAfter

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.

Why Isn’t There a Bigger Effect?

Minimum Wage not bindingNeumark and Wascher, 1996Brown, 1996.

Heterogeneity of teenagersNeumark and Wascher, 1996

Monopsony ModelCard and Krueger, 1995

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.

Policy Issues

Why Is the Minimum Wage Popular with Politicians?

Does the Minimum Wage Reduce Poverty?

Alternatives to Increasing the Minimum Wage

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.