Supply and demand analySiS - Montana Council on ...econedmontana.org/resources/elms/files/10_minimum_wage.pdflaw increasing the state’s minimum wage to $6.15 per hour effective January

Supply and demand analySiS

The minimum wage:

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TEACHER’S GUIDEP. 305 DefinedP. 308 Content standardsP. 309 MaterialsP. 309 ProcedureP. 312 ClosureP. 312 AssessmentP. 312 Overheads

VISUAlS NVisuals for overhead projector.Copy to transparent paper for overhead.

P. 316 NVisual-1: Minimum WageP. 317 NVisual-2: Costs and BenefitsP. 318 NVisual-3: ExpensesP. 319 NVisual-4: CostsP. 320 NVisual- 5: Teen employment P. 321 NVisual-6A: Opportunity cost P. 322 NVisual-6B: Opportunity cost P. 323 NVisual-7: Winners and losersP. 324 NVisual-7B: Winners and losersP. 325 NVisual-8: Price floor

lESSonS 2Copy and handout to students.

P. 328 2Lesson assessment

305 Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs

The minimum wage

Supply and demand analySiSModule-10Teacher

DEFInED

A minimum wage is the lowest hourly wage that employers can legally pay their employees. The minimum wage is a price floor. It

is a government mandated minimum price. There are good intentions behind the minimum wage. It is often believed that employees, especially low skilled employees who earn low wages, cannot earn enough to make a decent living. One reason for minimum wage laws is to help reduce poverty by increasing the wages of low skilled labor.

Most jobs (about 70%) are covered by the minimum wage. In 2007 the federal minimum wage increased to $5.85 per hour. The minimum wage is set to increase again in 2008 and 2009 on July 24, to $6.55 and $7.25 respectively. Some states have minimum wage laws that exceed the federal minimum and require pay greater than the federally mandated wage. In 2006, Montana passed a new minimum wage law increasing the state’s minimum wage to $6.15 per hour effective January 1, 2007. The Montana minimum wage is subject to annual adjustment reflecting the consumer price index.

By itself, the minimum wage does not ensure a higher standard of living. A full time job at $6.15 per hour brings an annual salary of $12,792. That is not a lot of money for even a modest life style. A relatively low housing payment of $650 per month would eat up over half of the wages earned. A modest food budget of $250 a month would use another 23 percent. This leaves an allowance of only $2,800 to cover yearly expenses for utilities, car payments, insurance, gasoline, income taxes, medical bills and child care.

Alleviating poverty is an important reason why many people are supportive of a minimum wage. Higher wages could help these individuals pay for their most basic needs. But at what cost?

There are costs of the minimum wage. Put yourself in the shoes of an employer. If additional minimum wage legislation passed, as Congress often proposes, how might employers act to deal with the higher cost of workers? Some employers may raise the price of the product being produced, although the price increase will mean fewer sales. Other employers may hire fewer employees instead using machines to do the work or giving the remaining employees more responsibilities. Costs could be cut by reducing the hours of operation. Offering fewer employee benefits, such as health insurance, paid vacation, and sick leave could help reduce costs. Some employers will become more selective in hiring, substituting older, more skilled employees for


The minimum wage


teenagers and inexperienced employees. If the costs are great enough some employers will simply go out of business.

Some employees will keep their jobs after a minimum wage increase; these employees win with the higher wages. But other employees will lose their jobs; these employees will be worse off. The costs of the minimum wage legislation are increased employer costs, increased unemployment (which also means inefficiency as these people could otherwise be productively working), and higher priced goods.

It is also important to consider who is most affected by the minimum wage. The largest fraction of minimum wage employees are teens. About one-third of teenage employees (ages 16-19) earn minimum wage or less. This is because most teens have little work experience and they have a low level of education. So an increase in the minimum wage means a decrease in teen employment. Research findings indicate that a 10 percent increase in the minimum wage is associated with a one to three percent decline in teen employment. That translated into over 90,000 jobs lost by teens when the minimum wage increased from $4.25 to $5.15 in 1996.

An increase in the minimum wage has another effect on teens. When wages rise, more teens are willing to work. Remember opportunity cost: The value of the best alternative given up when making a choice. When wages go up the opportunity cost of going to school also rises. As a result, some teens may choose to drop out of school to look for a job with the higher minimum wage. Others may decide to stay in school but work more, which may affect their school performance. Fewer teens in school now implies reduced economic growth in the future since the future work force is not as well-trained. Research findings indicate that a 10 percent increase in the minimum wage raises the proportion of teens who are not in school and not employed by 11.6 percent. It increases the proportion of teens who are not in school and are employed by 5.7 percent.

Is the minimum wage effective at reducing poverty? Some employees will keep their jobs and earn more which could potentially reduce poverty. Other employees who keep their job but have reduced hours of employment will have reduced earnings, hence the minimum wage may increase poverty. For employees who lose their jobs or are not hired because of higher wages, minimum wage may increase poverty. Research shows that the net effect of the minimum wage is an overall increase in poverty.


The minimum wage


Using the supply and demand analysis from earlier modules it can be seen that a minimum wage creates a surplus of labor. The graph below shows the minimum wage as a price floor. A price floor is a legally mandated minimum price. The price may not go below that floor. The floor is set above the equilibrium price. A price floor below the equilibrium would be ineffective; price would naturally move upward to the equilibrium. The minimum wage, if above the equilibrium price, entices more people to look for work. This quantity supplied can be found by following the horizontal line from the minimum price until its intersection with the supply curve. Employers, however, are not willing to hire as many employees at the higher wage. The quantity demanded is determined by the intersection with the demand and the minimum wage. The difference between the quantity supplied and quantity demanded is the surplus of labor or unemployment due to the minimum wage.


The minimum wage


ConCEPTS1. Minimum wage2. Price floor3. Opportunity cost4. Surplus (excess supply)

oBJECTIVES1. Understand why minimum wage laws are controversial.2. Realize that a minimum wage law has costs and benefits.3. Understand the impact of a price floor.

ConTEnT STAnDARDS

national ContEnt standards in EConoMiCs

1. (Standard 2) Effective decision making requires comparing the additional costs of alternatives with the additional benefits.

2. (Standard 4) People respond predictably to positive and negative incentives.

3. (Standard 13) Income for most people is determined by the market value of the productive resources they sell.

4. (Standard 15) Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.

5. (Standard 17) Costs of government policies sometimes exceed benefits.

6. (Standard 19) Unemployment imposes costs on individuals and nations.

Montana soCial studiEs ContEnt (standard 5)

1. (Benchmark 1) Identify and explain basic economic concepts.2. (Benchmark 2) Use basic economic concepts to explain current and

historical events.3. (Benchmark 3) Understand the social costs and benefits to society of

allocating goods and services through private and public sectors.


The minimum wage


TIME REQUIRED1-2 class periods

MATERIAlSOverhead projectorTransparency penVisuals for overhead projector: Copy to transparency.NVisual-1: Minimum WageNVisual-2: Costs and BenefitsNVisual-3: ExpensesNVisual-4: CostsNVisual- 5: Teen employment NVisual-6A and B: Opportunity cost NVisual-7A and B: Winners and losersNVisual-7B: Price floorLesson worksheets: Copy for each student.2Lesson assessment

PRoCEDURE1. Talk with students about the wages they are paid for work outside

the home. LQuestion: Ask them what the minimum wage is. The federal

minimum wage is $5.15 per hour. But will increase July 24, 2008 and again in 2009 to $6.55 and $7.25, respectively. The Montana minimum wage was raised to $6.15 per hour in 2007.

LQuestion: Ask students how many of them earn minimum wage?

LQuestion: Do some earn more or less than minimum wage? Display NVisual-1: Minimum wage. Talk with students about the different wages that can be paid under different situations. Some states, like Montana, have a minimum wage that is greater than the federal minimum wage in which case the higher rate must be paid.

2. LQuestion: Ask students why there is a minimum wage. Discuss the potential reasons for minimum wage legislation.


The minimum wage


Answer: Many support a minimum wage to reduce poverty or ensure a basic standard of living. Poverty will be discussed further in Module-15.

3. Discuss student opinions about the minimum wage. LQuestion: Ask students how many students are in support of the

minimum wage and why? LQuestion: Are any students opposed to the minimum wage?

Why? Display NVisual-2A: Benefits. Talk about the benefits of the minimum wage.

Answer: Possible answers are to reduce poverty and increase the standard of living.

Add students’ ideas to the visual. Now display NVisual-3: Expenses, and discuss whether the minimum wage alone is sufficient to ensure a higher standard of living.

4. Display NVisual-4: Costs and ask students about the potential costs of the minimum wage. Discuss the possible costs listed on the overhead and add any that students may bring up. Have students imagine they are an employer producing a product that requires labor, such as a restaurant or grocery store. Many grocery stores now have self check-out stands. This reduces the number of employees they need to hire. Ask students to think of some other labor saving tactics.

5. Have students focus on the impact of the minimum wage on teens alone. NVisual-5: Teen employment shows the impact on teenage hiring given an increase in the minimum wage. Many teens work for minimum wage and it is often that first minimum wage job that helps them gain experience, increasing productivity and helping to increase their wages.

LQuestion: Talk with students about some of the implications for teens who can’t get that first job.

6. NVisuals-6 A and B: Opportunity cost show how an increase in wage rates can affect the decisions of teenagers to work or attend school. Using NVisual-6A: Opportunity cost, discuss the idea of opportunity cost and the implications of a higher wage on school attendance and performance. NVisual-6B: Opportunity cost, provides some of the empirical evidence. A 10 percent increase in minimum wage results


The minimum wage


in a 1-3 percent decrease in teen employment. The higher wages also encourage some teens to drop out of school and seek employment. This is important considering the future of teenagers and American productivity. If fewer teens finish high school today, they will be less productive in the future. Decreased productivity will also mean a decline (or slower growth) in our standard of living. Talk with students about the opportunity cost of their education and employment.

LQuestion: How many students are employed in addition to attending school?

Survey the class to determine how high the wage would have to be for students to be willing to give up their other activities in order to go to work.

7. Display NVisual-7A: Winners and losers. Talk with the class about the costs and benefits, the winners and losers, from the minimum wage hike. Often minimum wage discussion focuses on the perceived benefits, but the costs are very real. Statistics have shown that the losers outweigh the winners. That is, there are more people who lose their jobs or are not hired as a result of the minimum wage than there are people who maintain their jobs and increase their earnings as a result of the minimum wage hike. NVisual-7B: Winners and losers shows this evidence.

8. Refer back to the supply and demand discussion of previous modules. In this example labor is being supplied in the market by individuals. Firms or employers are on the demand side wanting to hire that labor supply. The minimum wage sets a minimum price on labor often preventing the market from reaching equilibrium. (If the minimum wage is less than the equilibrium wage it is called ineffective and the higher market price will prevail.) Display NVisual 8: Price floor. A price floor is a minimum price that can be charged for a commodity. Minimum wage is a price floor on labor. To be effective, a price floor must be above the market equilibrium price. (Note: This is confusing to some students.) When the set price is above the equilibrium price, consumers (the hiring firms in the case of a minimum wage) don’t want to purchase as much as producers (those providing the labor services) are willing to supply. This will cause a surplus of labor in the market. That surplus is an increase in unemployment. These are people actively looking for work but unable to find it. With the lower


The minimum wage


market wage, some of these people would not be enticed to work. At the equilibrium wage (point E) people are willing to work about 70 hours and employers will demand the same number. At the higher minimum wage people want to work more hours, 120 (at point Qs where the $6.15 wage intersects supply). Employers are not willing to pay for as many hours at the higher wage, only 30 (at point Qd where the $6.15 wage intersects demand).

CloSURE

lEsson rEviEw

1. LQuestion: Who works for the minimum wage? Answer: Teenagers and others with little work experience and low

education levels make up the majority of minimum wage workers.

2. LQuestion: Does the minimum wage achieve its intended goals? Answer: The purpose of the minimum wage is to reduce poverty.

Unfortunately, the net effect is to increase poverty. While the standard of living of those that keep their jobs and the number of hours worked rises, many others will lose their jobs or not be hired because of the minimum wage, hence lowering their standard of living and increasing poverty.

3. LQuestion: What are some of the unintended consequences of the minimum wage?

Answer: The minimum wage may actually increase poverty, increase unemployment, and lower the long term standard of living.

ASSESSMEnT

MultiplE-ChoiCE quEstions

1. LQuestion: Which one of the following is a big loser when the

minimum wage is increased?a. Employers only


The minimum wage


b. All workersc. No workersd. Some teenage workers

2. LQuestion: One effect of the minimum wage is:a. higher unemployment among teenagersb. higher incomes for all workersc. an overall reduction in povertyd. more on-the-job training offered to workers

3. LQuestion: Who sets the level of the federal minimum wage?a. Employersb. Lawmakersc. Workersd. Varies across cities

4. LQuestion: Those who benefit when the minimum wage is increased include:a. Buyers of goods produced using minimum wage workersb. Workers who lose their jobsc. Employers d. Workers who keep their jobs

5. LQuestion: What happens when the government sets out to help low-income people by establishing a minimum wage?a. Increased unemployment may occurb. A shortage of labor may occur – not enough workers to fill

existing jobsc. In the long run more workers will leave the work forced. All poor people will definitely be helped by the minimum wage

answErs:

1. d2. a3. b4. d


The minimum wage


5. a

DISCUSSIon/ESSAy QUESTIonS1. LQuestion: Are teenagers better off when a higher minimum wage

enables some to get higher wages but causes others to lose their jobs?

Answer: Teenagers that maintain their jobs and the number of hours worked are better off, they earn more. Those that lose their jobs are worse off.

2. LQuestion: Why do you think that businesses would generally be opposed to increases in the minimum wage?

Answer: Businesses are opposed to the minimum wage because it increases their costs.

3. LQuestion: What types of students would be most likely to leave school as a result of a minimum wage increase?

Answer: Students who valued the potential wages to be earned more than the value of time spent at school would likely drop-out. Their opportunity cost (the alternative foregone if they choose to stay in school) is too high.

additional rEsourCEs:

Ehrenreich, Barbara (2001) Nickel and Dimed: On (Not) Getting By in America. New York, NY: Henry Holt and Company. http://www.henryholt.com/holt/nickelanddimed.htm

U.S. Department of Labor. http://www.dol.gov/esa/whd/flsa/U.S. Census Bureau. http://www.census.gov/hhes/www/poverty.htmlMiller, Roger, Benjamin, D. and D. North (2003) The Economics of Public

Issues, Thirteenth Edition. Boston, MA: Addison WesleyBrown, Charles (1988) “Minimum Wage Laws: Are They Overrated?”

Journal of Economic Perspectives 2(3):133-146.

Ov e r h e a dv i s u a l s

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minimum wage

N316

The minimum wage

Supply and demand analySiSModule-10Visual

Visual-1: minimum wage

Federal per hour

$5.85 beginning September 1, 1997

$6.55 beginning july 24, 2008

$7.25 beginning july 24, 2009

montana State per hour$6.15 beginning january 1, 2007

employeeS under 20 yearS oF age may be paid $4.25 per hour For the FirSt 90 conSecutive dayS oF employment.

certain StudentS, apprenticeS, and workerS with diSabilitieS may be paid leSS than the minimum wage.

where State law requireS a higher minimum wage, the higher Standard applieS.

note: certain occupationS and eStabliShmentS are exempt From the minimum wage and/or overtime pay proviSionS.

Source: www.dol.gov/dol/eSa/public/minwage/main.htm

N317

The minimum wage


Visual-2: CosT and BenefiTs

what are the beneFitS oF the minimum wage?

workerS able to buy more thingS pay billS and have an increaSed Standard oF living.

N318

The minimum wage


Visual-3: expenses

MiniMuM wage, will it reduce poverty?

MiniMuM wage is not enough to ensure a high standard of living.

*other expenSeS not included: utilitieS, tranSportation, inSurance, medical, child care.

houSing$650.00/month = $7800.00/yearincome tax15% oF earningS = $1919.00/yearFood$250.00/month = $3000.00/year

* total$12,719.00/year

minimum wage$6.15/hour x 40 hourS/week = $12,792..00/year

total$12,792.00/year

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The minimum wage


Visual-4: CosTs

■ increaSed coStS For employerS

■ unemployment

■ higher priceS For goodS

■ ineFFiciency-unemployment implieS that we produce below our potential (inSide the production poSSibilitieS Frontier)

N320

The minimum wage


Visual-5: Teen employmenT

teenagers are the group Most affected by MiniMuM wage changes.

approximately 32% oF teen workerS (ageS 16-19) earn minimum wage.

teens have low education levels and low experience levels.

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The minimum wage


Visual-6a: opporTuniTy CosT

Some teenS chooSe to drop out of School to Seek employment.

Some teenS chooSe to hold a job while in School, which affect School performance.

Frankie,what are

opportunitycosts

the value oF the best alternative

Foregone when we make a

choice.

N322

The minimum wage


Visual-6B: opporTuniTy CosT

what happenS when there iS a10% increaSe in the minimum wage?

5.7% increaSe oFteenS who arenot in Schooland are employed

SOURCE: NEUMARk, DAVID; WASCHER WILLIAM. DO MINIMUM WAgES FIgHT POVERTY? EcONOMIc INqUIry: 40 (3) 315-33

help!

i shouldhave

stayedin school

many leave School to take a job but may become unemployed. the reSult iS that the minimum wage iS aSSociated with a 1-3% decline in teen employment.

11.6% increaSe oF teenS who are not in School and not employed

N323

The minimum wage


are thoSe who keep

■ their jobS,

■ their current reSponSibility levelS, and

■ their hourS worked. theSe people will have higher earningS and a higher Standard oF living...

Visual-7a: winners and losers

thoSe who

■ were laid oFF

■ were not hired (who would have otherwiSe been),

■ have hourS cut, have more reSponSibilitieS (aS a reSult From a wage increaSe),

■ have Fewer beneFitS (inSurance, retirement, job training), and are prediSpoSed to Frequent headacheS!

■ buSineSSeS who loSe proFitS

■ conSumerS who pay higher priceS

and poSSibly be inclined to do the minimum wage hike two-Step

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The minimum wage


Visual-7B: winners and losers

minimum wageS increaSe the incomeS oF Some poor FamilieS. thiS may reduce poverty.

+ minimum wageS decreaSe employment among the poor. thiS may increaSeS poverty.

= net eFFect iS an increaSe in the number oF FamilieS that are poor and near-poor. minimum wageS increaSeS poverty.

hey frankie, how’S

the Soup

SOURCE: NEUMARk, DAVID; WASCHER WILLIAM. DO MINIMUM WAgES FIgHT POVERTY? EcONOMIc INqUIry: 40 (3) 315-33

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The minimum wage


■ when the Set price iS above the equilibrium price, conSumerS (potential employerS) do not want to purchaSe aS much aS producerS (potential employeeS) are willing to Supply.

■ there iS a SurpluS (oF labor) in the market.

Visual-8: priCe floor

■ a price Floor iS a minimum price that can be charged For a commodity.

■ minimum wage iS a price Floor on labor.

■ to be eFFective, a price Floor muSt be above the market equilibrium.


The minimum wage


NOTES

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Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs328 2

The minimum wage

Supply and demand analySiSModule-10lesson

MultiplE-ChoiCE quEstions

1. LQuestion: Which one of the following is a big loser when

the minimum wage is increased?a. Employers onlyb. All workersc. No workersd. Some teenage workers

2. LQuestion: What is one effect of the minimum wage?a. Higher unemployment among teenagersb. Higher incomes for all workersc. An overall reduction in povertyd. More on-the-job training offered to workers

3. LQuestion: Who sets the level of the federal minimum wage?a. Employersb. Lawmakersc. Workersd. Varies across cities

4. LQuestion: Those who benefit when the minimum wage is increased include:a. Buyers of goods produced using minimum

wage workersb. Workers who lose their jobsc. Employers d. Workers who keep their jobs

5. LQuest ion: What happens when the government sets out to help low-income people by establishing a minimum wage?a. Increased unemployment may occurb. A shortage of labor may occur – not

enough workers to fill existing jobsc. In the long run more workers will leave

the work forced All poor people will definitely be helped

by the minimum wage

lesson assessmenT

Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs 2329

The minimum wage

Supply and demand analySiSModule-10lesson

lesson assessmenT

disCussion/Essay quEstions

1. LQuestion: Are teenagers better off when a higher minimum wage enables some to get higher wages but causes others to lose their jobs?

2. LQuestion: Why do you think that businesses would generally be opposed to increases in the minimum wage?

3. LQuestion: What types of students would be most likely to leave school as a result of a minimum wage increase?


The minimum wage


NOTES

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Documents

Supply and demand analySiS - Montana Council on ...econedmontana.org/resources/elms/files/10_minimum_wage.pdflaw increasing the state’s minimum wage to $6.15 per hour effective January