Price Ceilings and Floors

1
Price Ceilings and Floors

• Effects on market equilibrium Assessing winners
  and losers

2
SURVEY

• Have you worked in a minimum wage job?
• If yes, what was the job?
• Do you support increasing the minimum wage by
  1.00?

3
Outline

• Historical Evolution of Minimum Wage
• Conventional Analysis
• How Do You Prove an Economic Theory?
• Empirical Evidence on the Minimum Wage
• Reconciling Results with Theory
• Assessing Costs Benefits
• Policy Alternatives

4
Historical Perspectives

• 1888-1916. Establishment of Governments Legal
  Authority to Regulate Labor Markets
• 1931-36. Minimum wage legislation passed by
  Connecticut, Illinois, New Hampshire, New Jersey,
  New York, Ohio, Utah and D.C.

• 1937. Fair Labor Standards Act established
  federal minimum wage of 0.25 1st year 0.30,
  the next 6 yrs. Narrow coverage. Numerous
  exemptions.
• 1949-1966. Increases in minimum wage in
  1949,55,61.

5
More Coverage Post 66

• 1966. The FLSA amended to cover agricultural
  workers and some public employees. Increased
  minimum wage to 1.40 an hour.
• 1972. Education Amendments established minimum
  wages for employees of public and private schools

• 1977. Minimum wage became 2.65 an hour effective
  1978 2.90 an hour in 1979, 3.10 an hour in
  1980 and 3.35 in 1981. Congress established the
  Federal Minimum Wage Study Commission.
• 1990. Minimum wage increased to 4.25

6
Current Law

• As of 9/1/97, minimum wage is 5.15.
• Some employees are not covered.
• Special exemptions available for student
  learners, full time students, persons with
  disabilities
• Penalties for violations can include criminal
  prosecution. Typical penalty is 1000 fine.

7
The Minimum Wage 1938-00
8
Who Earns the Minimum Wage?

• 57.9 Are Women
• 25.6 Are Teens
• 47.2 Work Full-Time
• 44.3 Work in Retail Trade
• 38.8 Are the Only Wage Earner
• 11.7 Are Teens in Families with Above Average
  Incomes
• 39.6 Are in Families in the Bottom Fifth of
  Income Distribution.

Source Mischel, L. et al, 1993, Who Wins With A
Higher Minimum Wage? EPI briefing paper. IWPR,
Women and the Minimum Wage, 1995
9
The Conventional Analysis
10
The Conventional Analysis

• Wage rate increases with binding constraint
• Increase in the quantity supplied of labor
• Decrease in the quantity demanded
• Fall in employment rate Increase in unemployment
  rate
• Increase in costs of production for affected
  industries
• Increase in prices paid by consumers
• More elastic demand for labor, the greater the
  fall in employment

11
Elasticity of Labor Demand
12
How Do We Prove This Theory?

• The Economists Laboratory
• Defining a control group
• Regression Analysis
• Time Series Data
• Other Factors affect employment and unemployment.
• Minimum Wage increases not independent of labor
  market conditions.
• Cross Sectional Data
• Case Studies of States/Industries

13
Empirical Evidence

• Time Series data
• Cross Sectional Studies
• Card and Krueger book
• Response to Card and Krueger
• Neumark and Wascher

14
Card and Krueger
15
Criticisms of Card and Krueger

• Their data is fatally flawed.
• They focus only on short term effects. Employers
  may be slow to adjust to higher minimum wage.
• Consumers may substitute between more expensive
  restaurant food and fast food. The increase in
  demand would offset the effects of higher minimum
  wage.

16
Employment Policy Institute
17
Neumark and Wascher
18
Card and Krueger Revisited
19
What Do We Know?

• Effects on teenage employment, if negative, are
  small
• Studies suggest the effect is smaller today than
  15-20 years ago.
• School enrollment decreases as minimum wage
  increases.

20
Why Isnt There a Bigger Effect?

• Minimum Wage not binding
• Neumark and Wascher, 1996
• Brown, 1996.
• Heterogeneity of teenagers
• Neumark and Wascher, 1996
• Monopsony Model
• Card and Krueger, 1995

21
Reconciling Results with Theory

• Data is wrong
• Minimum Wage not binding
• Labor Markets are not competitive
• Labor supply and demand not measured in quality
  units.

22
Policy Issues

• Why Is the Minimum Wage Popular with Politicians?
• Does the Minimum Wage Reduce Poverty?
• Alternatives to Increasing the Minimum Wage

23
The Minimum Wage and Poverty

• With no employment consequences, increase in
  minimum wage increases incomes of minimum wage
  workers.
• Not all minimum wage workers are poor.
• Estimated impact on poverty rate is small.