South-Western College Publishing - Economics  
Raised Wages, Erased Jobs
Subject Minimum Wage, Market Interference
Topic Government and the Economy
Key Words Federal Reserve Board, Minimum Wage, Unemployment, Golden Parachutes
News Story

The Chairman of the Federal Reserve Board, Alan Greenspan, in testifying to Congress on the state of monetary policy, argued strongly against an increase in the minimum wage above the current $5.15 an hour. (President Clinton had advocated a further increase of $1 an hour.) Greenspan acknowledged that employers might be willing to pay more due to the 4.3 percent rate of unemployment. However, he feared that if the economy were to slow down, the least productive minimum-wage workers would be laid off. Teenagers would likely be affected the most.

Mr. Greenspan also spoke out against excessive executive pay. He stated that executives should be paid according to the value that they create for the shareholders. He was particularly scathing of lucrative golden parachutes given to ineffective executives.

(Updated April 1, 1999)

Questions
1. a) Draw a wage-employment diagram with labor supply and demand curves intersecting at a wage level of $8. Mark the minimum wage with a horizontal line.
  b) What is the effect of the current minimum wage on the wage rate and the employment level?
2. Amend your diagram to show the President's desired higher minimum wage of $6.15 an hour. What would be the implications for the wage rate and the level of employment?
3. a) If the economy slows, which curve will be affected and how? Explain.
  b) What would be the consequences for the wage rate and the employment level if the minimum wage were $6.15 an hour?
  c) How would they be different if the minimum wage were to remain at $5.15 an hour?
  d) Based on your analysis, do you agree with Mr. Greenspan that the minimum wage should not be raised? Why or why not?
Source Michael M. Phillips, "Greenspan Hits Both Extremes of Wages", The Wall Street Journal, February 25, 1999.

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