minimum wage

Examples of minimum wage in the following topics:

• Price Floors

  • By establishing a minimum price, a government seeks to promote the production of the good or service and ensure that the producers have sufficient resources to go about their work.
  • An example of a price floor is the federal minimum wage.
  • History of the federal minimum wage in real and nominal dollars.
  • The federal minimum wage is one example of a price floor.

• Ceteris Paribus

  • What would happen to the demand for labor by firms if a minimum wage was imposed at a level above the prevailing wage rate, ceteris paribus?
  • E is the equilibrium wage level when there is no binding minimum wage.
  • When a minimum wage is imposed, ceteris paribus, suppliers of labor are willing to provide more labor than firms (demand for labor) are willing to purchase at the binding minimum wage rate.
  • There is no shifting of either curve related to behavior influenced by the higher wage rate because ceteris paribus is holding labor-leisure trade-off (of workers) and substitution of labor (by firms) constant, along with other potential influencing variables.

• Arguments for and Against Government Price Controls

  • Generally price controls are used in combination with other forms of government economic intervention, such as wage controls and other regulatory elements.
  • One of the best known price floors in the minimum wage, which establishes a base line per hour wage that must be paid for work.
  • As a result, employers hire fewer employees than they would if they could pay workers lower than the minimum wage.

• Labor Standards

  • The Fair Labor Standards Act of 1938 sets national minimum wages and maximum hours individuals can be required to work.
  • In 1963, the act was amended to prohibit wage discrimination against women.
  • Congress adjusts the minimum wage periodically, although the issue often is politically contentious.
  • In 1999, it stood at $5.15 per hour, although the demand for workers was so great at the time that many employers -- even those who hired low-skilled workers -- were paying wages above the minimum.
  • Some individual states set higher wage floors.

• The New Work Force

  • Sizable wage increases were no longer considered a given; in fact, workers and their unions at some large, struggling firms felt they had to make wage concessions -- limited increases or even pay cuts -- in hopes of increasing their job security or even saving their employers.
  • Even as this gap widened, many employers fought increases in the federally imposed minimum wage.
  • While the minimum wage had increased almost annually in the 1970s, there were few increases during the 1980s and 1990s.
  • As a result, the minimum wage did not keep pace with the cost of living; from 1970 to late 1999, the minimum wage rose 255 percent (from $1.45 per hour to $5.15 per hour), while consumer prices rose 334 percent.
  • One survey in 1999 showed that 51 percent of employers used a pay-for-performance formula, usually to determine wage hikes on top of minimal basic wage increases, for at least some of their workers.

• How Taxes Impact Efficiency: Deadweight Losses

  • Causes of deadweight loss can include actions that prevent the market from achieving an equilibrium clearing condition (where supply and demand are equal) and include taxes or subsidies and binding price ceilings or floors (including minimum wages).

• Impact of Unions on Unemployment

  • If the labor market is competitive, unions will typically raise wages but increase unemployment.
  • This is illustrated in the graphic, in which a union successfully raises the wage rate above the equilibrium wage.
  • If we assume that the labor market is imperfect and that wages are naturally lower than the marginal revenue product of labor, unions may increase efficiency by raising wage rates closer to the efficient level.
  • In this case, wages will rise without a resulting rise in unemployment.
  • If a union is able to raise the minimum wage for their members above the equilibrium wage, then wages will be higher but fewer workers will be employed.

• Poverty and Inequality

  • Similarly, periods of strong economic growth, which bring more jobs and higher wages, have helped reduce poverty but have not eliminated it entirely.
  • The federal government defines a minimum amount of income necessary for basic maintenance of a family of four.
  • Increasing global competition threatened workers in many traditional manufacturing industries, and their wages stagnated.
  • In the late 1990s, there were some signs these patterns were reversing, as wage gains accelerated -- especially among poorer workers.

• Efficiency Wage Theory

  • Efficiency wage theory is the idea that firms may permanently hold to a real wage greater than the equilibrium wage.
  • The market-clearing wage is the wage at which supply equals demand; there is no excess supply of labor (unemployment) and no excess demand for labor (labor shortage).
  • This is called efficiency-wage theory.
  • There are several theories of why managers might pay efficiency wages:
  • Instead of market forces causing the wage rate to adjust to the point at which supply equals demand, the wage rate will be higher and supply will exceed demand.

• Sources and Determinants of Profit

  • In one year, the firm earns a total revenue of $50,000, while spending $15,000 on production (explicit costs) and having $10,000 in foregone wages, rent, and interest (opportunity costs).
  • If price were set equal to the minimum point of the average total cost (ATC) curve, the monopoly would earn zero economic profit.
  • If the price were set lower than the minimum of ATC, the firm would earn negative economic profit.
  • Graphically, this is seen at the intersection of the price level with the minimum point of the average total cost (ATC) curve.
  • If the price level were set above ATC's minimum point, there would be positive economic profit; if the price level were set below ATC's minimum, there would be negative economic profit.