South-Westerns' Economic News Summaries
If the Feds won’t increase the minimum wage, some states will
Subject states consider increasing the minimum wage above the Federal minimum guidelines.
Topic Supply and Demand; Government and the Economy
Key Words minimum wage, federal government, state government

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Reference ID: A140399917
News Story

The last time the government increased the minimum wage was in 1997, when it went from $4.25 an hour to $5.15 an hour. Subsequent attempts to increase the minimum wage have stalled in Congress. Some states are now taking the initiative and raising their state minima instead of waiting for Federal legislation.

About 2.7% of the total workforce earned the mandatory minimum or less in 2004 (not all job types are covered by the minimum wage—for example, restaurant workers follow a different wage schedule. Workers were generally young, single, and lacked a high school diploma. About 60% of these workers worked in bars or restaurants, where they had the opportunity to earn tips.

Given that the Federal government has not increased the minimum wage in nearly ten years, some states are pushing their own legislation to increase it. Currently, 17 states and the District of Columbia have their own state minima that are higher than $5.15 an hour. Currently Oregon’s minimum wage stands at $7.25 per hour, and is indexed annually for inflation; its supporters remind people that despite this wage level, Oregon had twice the rate of job growth of the rest of the U.S.economy.

Typical arguments against the minimum wage are that it constrains the market--if the minimum wage that must be paid is set too high (relative to what the market would offer), firms will be forced to higher fewer workers.

A proposal currently stands to amend the Ohio Constitution to set the minimum wage at $6.85 an hour, indexed to inflation. Supporters argue that it will help eliminate poverty; opponents argue that Ohio small businesses will be devastated. Voters in Nevada and Florida recently voted to extend the state minimum wage to $6.15 an hour, in both cases by a 2-1 margin. At the same time, the governor of California rejected a bill last summer to raise its state minimum wage from $6.75 an hour to $7.75 an hour. The governor argued that he was sympathetic to low-wage workers, but that the increase would cripple California businesses.

Questions
1.

Standard textbooks argue that a minimum wage is a price floor in the labor market. Using a graph of supply and demand, show the impact of the imposition of a minimum wage, indicating the presence of unemployment with the floor.

2. While the standard criticism of the minimum wage is the constraint imposed on the labor market, empirical studies provide no consensus on this argument. Many studies argue that unemployment may rise with increases in the minimum wage, but other investigations suggest that the opposite would be true. Why do you think that there is such a wide array of opinion and evidence regarding the minimum wage?
3. What underlying problem frustrates the effort to determine the impact of the minimum wage on employment? Explain carefully, using economic reasoning.
Source John M. Broder. “States take lead in push to raise minimum wages.” The New York Times. 2 January 2006. http://www.nytimes.com
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