Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 12

Controversy over the Minimum Wage
The Fair Labor Standards Act of 1938 established a national minimum wage of $0:25 per hour. The Federal minimum wage was raised to $7:25 per hour in 2009 and has remained there since. In 2014 President Obama proposed raising the Federal minimum to $10:10 per hour and several states adopted much higher levels. For example, the Seattle- Tacoma area of Washington state adopted a $15 minimum. Increasing the minimum wage rates is always a contentious political issue, in part because some economists believe that such an increase may be counterproductive.
A Graphic Analysis
Figure 1 illustrates the possible effects of a minimum wage. Figure 1(a) shows the supply and demand curves for labor. Given these curves, an equilibrium wage rate, w1, is established in the market. At this wage, a typical firm hires I 1 (shown on the firm's isoquant map in Figure 1[b]). Suppose now that a minimum wage of w 2 is imposed by law. This new wage will cause the typical firm to reduce its demand for labor from I 1 to I 2. At the same time, more labor (L 3 ) will be supplied at the specified minimum wage than was supplied at the lower wage rate. The imposition of the minimum wage will result in an excess of the supply of labor over the demand for labor of L 3 - L 2.
Minimum Wages and Teenage Unemployment
There is some empirical evidence that changes in the minimum wage law have had serious effects in increasing teenage unemployment. Teenagers are the labor-market participants most likely to be affected by minimum wage laws, because their skills usually represent the lower end of the spectrum. Minority group members, for whom unemployment rates often exceed 30 percent, may be especially vulnerable.
Disputes over the Evidence
In an influential 1994 study, David Card and Alan Krueger challenged the belief that minimum wages reduce employment opportunities. 1 In this study, the authors compared employment levels at fast-food restaurants in New Jersey and Pennsylvania following increases in the New Jersey minimum wage. They concluded that there was no negative effect from the increase. That finding has not been universally accepted, however. An analysis of somewhat different data from similar fast-food franchises (Burger King,
As for many economic questions, the minimum wage is controversial because higher minimums represent a trade-off between two desirable goals: (1) The notion that everyone who works full time deserves to make a "living wage"; and (2) The belief that low wages are needed to encourage the hiring of low-skill workers. In such cases making an informed policy choice requires lots of information. You need to know how many people on minimum wage jobs rely on earnings from those jobs as their main source of family income, how earnings of those people would be affected by a higher minimum, and how many jobs might be lost because of the higher minimum. None of these questions is easy to answer definitively, so it not surprising that voters and policymakers are often ambiguous about which position to take on minimum wage legislation.