South-Western College Publishing - Economics  
Maximizing and Minimizing the Minimum Wage
Subject Price Floors
Topic Market Interference
Key Words Minimum Wage, Poverty, Tax Cut
News Story

The U.S. Senate has voted down a bill that would have raised the minimum wage by 50 cents in January 1999 and another 50 cents a year later. The proponent of the bill, Senator Kennedy, argued that a higher minimum wage would have helped the 12 million full-time workers who make only $10,700. The poverty level for a family of three is $13,600.

Most Republicans, and business lobbyists such as that of the National Restaurant Association, were opposed to the bill. They argued it was too much too soon: combined with the 1996 increase, it would have increased the minimum wage by 45 percent in less than five years. It would have been harder to hire unskilled and inexperienced workers.

Republicans criticized the plan as a way to get them on record as being against increasing the minimum wage, just before Congressional elections. However, they felt that the passage of a tax cut would mitigate the political fallout.

(Updated November 11, 1998)
Questions
1. a) Draw a diagram of the labor market for unskilled and inexperienced workers. Include a supply curve and a demand curve. Mark the equilibrium wage and level of employment.
  b) Now draw a line representing the minimum wage after the proposed hike. Assume that the minimum wage would have been above the equilibrium level. The Republicans were concerned that businesses would not have hired as many unskilled and inexperienced workers. Show this effect on your diagram.
   
2. Businesses were concerned at the consequences of a higher minimum wage for their costs.
  a) Why was the National Restaurant Association particularly anxious?
  b) Draw a price-quantity diagram of the market for restaurant meals. Show the demand and supply curves, and mark the equilibrium price and quantity of meals. Illustrate the effect of higher labor costs on the equilibrium price and quantity.
   
3. If the reduction of poverty is the goal, why might tax cuts be better than a higher minimum wage? Relate your answer in part to your diagram in Question 1.
Source Katherine Q. Seelye, "Senate Votes Down a Higher Minimum Wage, Citing Squeeze", The New York Times, September 23, 1998.

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