The minimum wage paradox

A Social Benefits Calculator reveals that an increase in the minimum wage has a small impact on income for many poor people. (Winston Salem Journal, June 2021) Reductions in "social benefits such as food stamps (SNAP benefits) or child care or housing assistance" and increases in taxes reduce the impact of the increase in wages. Here is a money quote.

"Let’s use the calculator and create a hypothetical example: a full-time working parent earning the minimum wage, who is unmarried with two children in subsidized day care. ... after his or her wages more than double from $7.25 an hour to $15 an hour, earnings rise from $1,160 to $2,400, or a $1,240 change.

"... But after subtracting the decrease in benefits and higher taxes, that $1,240 increase erodes to just a $199 net improvement, or just a 16% change.

"... Through multiple scenarios using the CSEM calculator, I have found long ranges of income where work barely pays — what I call “disincentive deserts” in my published research. In some cases, individuals are actually worse off by accepting wage increases because of larger drop-offs in benefits, in what are called 'benefits cliffs.'”

The examples highlight the disincentives to earning more income that many poor people face and may explain why some poor people do not try to "pull themselves up by their bootstraps". Why work more when the tax man takes away much of the gain?

Minimum wage laws kick in

Minimum Wages Set to Increase in Many States in 2017
by: Eric Morath
Dec 31, 2016
Click here to view the full article on WSJ.com

TOPICS: Labor Economics

SUMMARY: About 4.4 million workers across the country are slated to receive a raise at the start of the year, a shift that may shed light on a debate about the effects of mandated pay increases at the bottom of the wage scale.

CLASSROOM APPLICATION: Students can use supply and demand to examine the benefit to workers of an increased minimum wage and the cost in terms of decreased job creation and increased unemployment. "Economists and policy makers are of two views on the costs and benefits of minimum-wage increases. While the policy puts more money in the pockets of low-wage workers, it also gives employers less incentive to add to their payrolls, leaving some workers behind. A 2014 study from the nonpartisan Congressional Budget Office found raising the federal minimum wage to $10.10 an hour would reduce job creation by 500,000 over two years. At the same time, the report estimated that the increase in the federal minimum wage would raise the pay of 16.5 million workers who kept their jobs."

QUESTIONS: 
1. (Introductory) What is the effect of raising the minimum wage on the willingness of firms to expand the sizes of their operations?

2. (Introductory) What is the effect of raising the minimum wage on the willingness of businesses to invest in automation that eliminates jobs?

3. (Advanced) What is the effect of raising the minimum wage on U.S. imports and on U.S. exports?

4. (Advanced) Describe the tradeoff involved in a state raising its minimum wage.

Reviewed By: James Dearden, Lehigh University

What happens when government removes price ceilings?

http://www.wsj.com/articles/venezuela-backs-away-from-price-controls-as-citizens-go-hungry-1476475368

Price and quantity traded both increase

Why is EpiPen expensive?

This opinion in the WSJ pinpoints well the reason that Mylan has been increasing the price of its EpiPen: :the steady Mylan rise is hard to read as anything other than inevitable when a billion-dollar market is cornered by one supplier."

The writer also questions the wisdom of Hillary Clinton's claim that "the EpiPen price hikes show the need for price controls" and her proposal to "require drug makers to 'prove that any [increases in price] are linked to additional patient benefits and better value.'” Should we require Nike to to prove that any increase in price are linked to additional benefits and better value when they sell running shoes?

This opinion is critical of increases in the minimum wage

Review & Outlook. Seattle's Minimum-Wage Education 
by: Editorial Staff
Aug 15, 2016
Click here to view the full article on WSJ.com

TOPICS: Labor Economics

SUMMARY: When a wage floor goes up, hours worked and employment go down.

CLASSROOM APPLICATION: The article informs students about the effect of an increase in the minimum wage on employment levels. The article also notes the difficulty economists have in disentangling the effect of changes in the demand and supply for labor and the effect of the minimum wage on employment levels.

QUESTIONS: 
1. (Advanced) What is the effect of an increase in the minimum wage on employment? How does the answer depend on the wage elasticities of demand for labor?

2. (Advanced) How would economists disentangle the effect of changes in the demand and supply for labor and the effect of the minimum wage on employment levels?

3. (Introductory) According to the editorial, what is the best route to higher wages?

Reviewed By: James Dearden, Lehigh University

Good summary of the effect of minimum wage

http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/

Here is a money quote: "... a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession.

A sad commentary on the effects of socialism and price controls

http://www.weeklystandard.com/long-lines-and-empty-shelves/article/2003561

Do Democrats really believe that increasing the minimum wage is going to boost employment in North Philly?

http://www.wsj.com/articles/the-fight-for-15-will-hit-north-philly-hard-1469574439 says that increasing the minimum wage will increase unemployment among and crime committed by entry level workers. The CBO study it cites states that the minimum wage may have contributed to the increase in joblessness and incarceration rates among 18034 year-old-males. The CBO study does a nice job showing how the demand for the lowest-skilled male workers has decreased. Simple economics tells me that the consequence of the reduction is demand is a reduction in the equilibrium wage and, if wages cannot fall because of legal restrictions, and a reduction in employment.

Is the minimum wage the best way to help poor people?

The Saturday Essay. A Guaranteed Income for Every American 
by: Charles Murray
Jun 04, 2016
Click here to view the full article on WSJ.com

TOPICS: Public Economics

SUMMARY: Replacing the welfare state with an annual grant is the best way to cope with a radically changing U.S. jobs market-and to revitalize America's civic culture.

CLASSROOM APPLICATION: Students can discuss whether a universal basic income should replace existing welfare programs. They could do so in the context of the wellbeing of households and economic incentives to work.

QUESTIONS: 
1. (Advanced) Is a household made better off by receiving the cash equivalent of the transfer payments it receives through welfare programs? Advanced students can analyze the question using the consumer choice model : budget constraints and an indifference map with two good, food and all other things. The welfare program would be food stamps.

2. (Advanced) Is a household made better off by receiving the cash equivalent of the transfer payments it receives through welfare programs? Advanced students can analyze the question using the consumer choice model : budget constraints and an indifference map with two good, food and all other things. The welfare program would be food stamps.

3. (Introductory) According to an anecdote in the Saturday Essay, what would be the effect of replacing existing transfer payments with a universal basic income on the rate of teen pregnancies?

Reviewed By: James Dearden, Lehigh University

What happens when price ceilings are below the equilibrium price?

http://www.theguardian.com/global-development-professionals-network/2015/apr/16/venezuela-economy-black-market-milk-and-toilet-paper

Friedman on the government's role to address poverty and the minimum wage

https://www.youtube.com/watch?v=Rls8H6MktrA

Is universal basic income a better solution to poverty than a myriad of welfare programs?

http://fivethirtyeight.com/features/universal-basic-income/

Universal basic income let's the individual decide how to spend rather than having a government bureaucrat decide.

It would eliminate all sorts of government programs purported to help poor people and the costs of administering them programs.

Is an increase in the minimum wage a good way to make the distribution of income more fair?

This article say no: http://qz.com/664196/wholl-pay-for-a-15-minimum-wage/

Evidence that a high minimum wage distorts the job markets

http://www.nationalreview.com/article/434003/minimum-wage-california-new-york-puerto-rico-future

What leading economists think about increasing the minimum wage.

http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

A review of a book critical of the ACA

http://www.realclearmarkets.com/articles/2016/02/16/book_review_sally_pipes_the_way_out_of_obamacare_102007.html

The article says that the attempt to use price controls to limit the increase in cost has failed.

The article is a good introduction to a discussion of whether markets or command and control is the best way to organize economic activity.

Optional material for L12b

1. This blog has examples of low rents paid for some apartments in NYC.
2. This paper reports vacancy rates for apartments in NYC.
3. This paper reports that the vacancy rates for apartments in NYC is lower than the national average.

Is Finland's approach to reducing poverty better than welfare or minimum wage?

http://managerialecon.blogspot.com/2015/12/why-is-finland-is-giving-every-adult.html

The debate over minimum wage

Studies and opinions about the minimum wage fall into three broad categories: the effects are hard to estimate, the effects are bad, and the effects are good.

The effects are hard to estimate

1. This is a history of minimum wage in the US.
2. The CBO estimates that the impact of raising the minimum wage to $10.10 on employment ranges from a slight decrease to a loss of 1 million jobs. The best estimate is implementation would reduce employment by 500,000 (and increase the unemployment rate by about 0.3%). It states, "Many more low-wage workers would see an increase in their earnings. ... The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO's estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates."
3. This article reports that President Obama issued an executive order raising the minimum wage for federal contract workers to $10.10. Would this increase tend to increase unemployment in the federal contract worker labor force? Who bears the extra expense of the higher wage? The article is a good introduction to the debate over the minimum wage and the difference in incentives facing government and private business.
4. The debate on minimum wage on Intelligence Squared. 
5. This story from Planet Money is a nice discussion of the disagreement in the estimates over the impact on unemployment of raising the minimum wage.

The effects are good.

1. This paper from the Center for Economic and Policy Research says that the minimum wage has no discernible impact on unemployment. 
2. In this video John Green argues in favor of minimum wage legislation.  A key point is that increasing the minimum wage by 10% reduces the number of people living in poverty by 2.5%. His statement that increasing the minimum wage is the “cheapest lunch available” for reducing poverty without increasing unemployment is probably incorrect; most economists agree that an earned income tax credit is a more effective way to reduce poverty.
3. This slideshow. It has 25 facts about the minimum wage.

The effects are bad.

1. This study says that minimum wage increases unemployment among 16-30 year-olds who did not finish high school. This group is likely to have low job skills.
2. This video is not a fan of minimum wage.
3. David Henderson on the minimum wage. He is not a fan.
4. Thomas Sowell on minimum wage. He is not a fan.
5. This paper reports that the gap between nationwide unemployment rates for whites and blacks began around 1940.
6. Fee does a nice job describing the decision employers face when deciding whether or not to employ someone and asks why not raise the minimum wage to $100 if raising it to $10 is good. 
7. A clip from John Stossel on the minimum wage. He is not a fan.
8. Read this article (1 p.). It reports that unemployment for young workers in New Zealand increased in 2008 following an increase in the minimum wage there.

Does morality warrant $15 as the minimum wage:

http://www.huffingtonpost.com/robert-reich/the-morality-of-a-15-mini_b_8332580.html?ncid=edlinkushpmg00000090

Are employees who pay less that $15 immoral?
Are voters who elect politicians who oppose increasing the minimum wage to $15 immoral?
Are politicians who vote against increases in the minimum wage immoral?

Who decides what is moral and on what basis?

Could someone disagree with Reich and mount a credible case that paying someone less than $15 is or may be, in fact, moral?