South-Western College Publishing - Economics  
Voters Go to the Polls to Raise the Minimum Wage
Topic Labor Markets ; Income Distribution and Poverty
Key Words minimum wage, poverty, income inequality, unemployment, voters.
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Reference ID: A153271517

News Story Those who oppose raising the minimum wage in the U.S. argue that such raises increase the costs of employing workers, which reduces demand for low-wage workers, which in turn ultimately takes money out of these workers' pockets. If this argument rings true, then why are six states going to the polls in November to raise the minimum wage in their states, and then index it to inflation thereafter? Why do 21 other states set their minimum wages higher than the federal minimum wage level?

First, the notion that raising the minimum wage increases unemployment among lower-paid workers may not actually be true. While some studies show that minimum wage hikes decrease job opportunities for those who need jobs the most, the majority of studies suggest that the impact of higher wages on employment is at best positive, and at worst benign. These studies indicate that jobs aren't lost, and as a result of many workers' increased incomes, increased consumption may create more job opportunities as well. Other studies suggest that increased wages reduce turnover, improve morale, and raise productivity--people feel better about working for a better wage.

Second, people may no longer believe the stories of mass unemployment and higher prices that would accompany a wage increase. They have heard those stories when previous increases were suggested, but those dire consequences have yet to arise, so therefore the apocryphal stories must not have been true.

Third, many people may be increasingly concerned about low-income workers' ability to support themselves on current wages. The current minimum wage of $5.15, enacted in 1997, is at its lowest inflation-adjusted level since the 1950s. People can't live on those wages. And even if increasing the minimum causes some to lose their jobs, many more will see their incomes go up significantly. That benefit is worth the tradeoff.

Discussion Questions:
1. As the inflation-adjusted value of the minimum wage decreases over time, what happens to the overall level of income inequality in the US? Why? How is this inequality a problem?
2. If studies demonstrate that the impact on employment from raising the minimum wage is negligible, why do businesses object to it so much?
3. What happens to the real cost of hiring minimum wage workers when the minimum is not indexed for inflation? What would happen to a firm's labor costs if the minimum wage were inflation-indexed?
Multiple Choice/True False Questions:
1. A common argument against the minimum wage is that it creates a(n)------ in the labor market, creating unemployment
  1. Excess supply
  2. Excess demand
  3. Equilibrium
  4. Price differential
2. The minimum wage is an example of a

  1. Price ceiling
  2. Price floor
  3. Price cap
  4. Price equilibrium
3. True/False. According to the article summary, some studies indicate that income hikes increase demand for products made with minimum wage labor, which in turn increases demand for labor to create such products.

Source Leonhardt, David. "When Jobs Are Bountiful and Pay Isn't," New York Times, October 25, 2006.
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