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News Summaries
THE MINIMUM WAGE AND THE CHOICE BETWEEN WORK AND LEISURE
(05/97)
The real value of the minimum wage in 1995 dollars decreased
from $5.60 in 1956 to $4.25 in 1995. The recent nominal increases
in the minimum wage to $4.75 in 1996 and $5.15 in 1997 have reversed
this downward trend in the real value of the minimum wage. In
1996, the real value of the $4.75 minimum wage in 1995 dollars
was $4.61. When the $5.15 minimum wage becomes effective on September
1, 1997, the real value in 1995 dollars will be approximately
$4.86.
Since the economy is in the sixth year of an expansion, the demand
for all workers, including low-wage workers, has increased. The
unemployment rate has fallen to 4.9 percent, its lowest rate since
1973. Employers have raised wages as the minimum wage has risen;
low-wage workers making $5-$7 an hour have enjoyed gains in pay.
The higher wages are credited with increasing the labor force
by 2.7 million people, an increase twice the size of the growth
last year in the working-age population. Many of the new workers
were black women, older men, immigrants, teenagers, and Hispanic
Americans. This large increase in the supply of workers has kept
wages from increasing even faster than they have and has helped
to prevent inflation in spite of the low unemployment rate.
Despite the recent progress, low-wage earners still have a long
way to go to make up for losses in real wages since the 1970s.
Since that time, the real wages of low-wage workers have fallen
by almost twenty percent. In the last eighteen months, real wages
have regained only about 1.5% of that loss. Economists fear that
this modest gain could be lost if the current expansion ends.
Questions
1. Use indifference curve analysis to show the effect of the
increase in the minimum wage on the choice between work and leisure
in the last 18 months.
2. Has either the substitution or income effect been dominant
in the choice between work and leisure in the last 18 months?
3. Does the recent decrease in unemployment since the increase
in the minimum wage refute the argument that increases in the
minimum wage cause unemployment?
4. Why would a recession possibly cause the real value of wages
to decrease?
Keywords: minimum wage, indifference curves, consumer choice
theory, unemployment, labor force, real wages
Sources: Grossman, Jonathan. "Fair Labor Standards
Act of 1938: Maximum Struggle for a Minimum Wage." http://www.dol.gov:80/dol/esa/public/minwage/history.htm
Uchitelle, Louis. "Raises Arrive at Bottom Rung of Labor
Force." The New York Times. May 23, 1997, c1&c6.
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