Lecture Introduction to economics: Social issues and economic thinking: Chapter 10 - Wendy A. Stock

Chapter 10 - The minimum wage. After completing this unit, you should be able to: Define the minimum wage, describe the history of the minimum wage, describe the difference between the real and nominal values of the minimum wage,…

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Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

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Z Pan

Chapter 10

The Minimum Wage

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Ø Define the minimum wage

Ø Describe the history of the

minimum wage

Ø Describe the difference

between the real and nominal

values of the minimum wage

Ø Assess the theoretical impacts

of the minimum wage on the

labor market

Ø Explain why minimum wage laws are controversial

Ø Describe research findings regarding impacts of the minimum wage

After studying this chapter, you should be

able to:

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Ø In 2006, Colorado passed a law that

automatically adjusts Colorado’s minimum wage

to keep pace with the prices of food, housing,

and other goods and services.

Ø In 2010, Colorado policymakers were bound by law to lower the minimum wage from $7.28 to

$7.24 per hour.

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Controversial minimum wage

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Ø The Minimum Wage is the lowest wage that employers can legally pay workers.

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The minimum wage

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Ø Fair Labor Standards Act (FLSA) in 1938

Ø The FLSA also includes provisions mandating

time and one-half overtime pay and restrictions on the use of child labor

Ø The Fair Minimum Wage Act of 2007

Ø The Nominal Value of the minimum wage is

expressed in current dollar values and is not

adjusted for inflation.

Ø The Real Value of the minimum wage is

expressed in constant dollar or inflation-adjusted values.

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History of Minimum Wages

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History of federal Minimum Wages

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Ø States also have their own minimum wage laws

Ø Thirteen states higher than the federal level

Ø Five states lower than the federal level

Ø Other states the same as the federal level

Ø When state and federal minimum wages are

different, workers are entitled to whichever minimum wage is higher

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State-level Minimum Wages

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Demand for labor

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Supply of Labor

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The Impact of a Minimum Wage in the

Labor Market

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Unemployment occurs when there is a surplus of

labor in the market

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unemployment

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Below-equilibrium Minimum Wage

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Impacts of MINIMUM WAGE: workers,

business & consumers

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Ø Minimum wages create winners and losers

Ø Proponents’ Arguments:

Ø It helps the poor by raising their income

Ø No direct expense for taxpayers

Ø Better employment incentives than welfare programs

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WHY ARE MINIMUM WAGES

CONTROVERSIAL?

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Ø Opponents’ Arguments:

Minimum wages benefit few poor workers at the expense of other poor workers, businesses, and consumers

Ø Minimum wages create more unemployment

Ø Discourage firms from investing in training for

workers

Ø Businesses tend to raise the prices of their

products, increasing costs for consumers

Ø Businesses tend to use substitute inputs like

machines or lower-cost workers in foreign countries instead of domestic workers

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WHY ARE MINIMUM WAGES

CONTROVERSIAL?

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Findings about Impacts of Minimum Wages on:

wage are associated with increased high

school dropout rates.

with slight increases rather than decreases in poverty.

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MINIMUM WAGE RESEARCH

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1) Why has the real value of the minimum

wage declined since 1968, even though the nominal value of the minimum wage has increased several times since then?

2) Are teenagers better off when a higher

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

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Key Concepts

• Minimum wage

• Nominal value of the minimum wage

• Real value of the minimum wage

• Unemployment

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