Minimum Wage: Why Minimum Wage Should not be Increased
Introduction
The subject of minimum wages and their effect on unemployment levels is a controversial issue. A study that raised many questions for economist on weather increasing the minimum actually help the poor, which was the whole point in raining the minimum wage, was the study done in 1992 by David Card and Alan B.Kruege. The majority of Americans, however, favor increases in the minimum wage. They look at these increases as a way to help the poor, and see it as a beneficial thing to do. Politicians exploit these feelings by raising the minimum wage to gain popularity. However, these raises in the minimum wage often hurt the very people that need the help. With this in mind, we are going to explain the effects of raising the minimum wage and considers alternatives.
Definitions
Unemployed - a person is considered unemployed if he/she is above the age of 16, does not hold a job and has actively looked for employment in the last 4 weeks. If a person does not have a job and is not looking, he/she is not considered unemployed. Therefore, if a person needs a job, but has stopped looking because they are discouraged by the job market, they are not considered unemployed.
Long Term Unemployment - unemployed for more than 26 consecutive weeks.
Employed - a person who holds any job, full or part time is considered employed. Labor force - the sum of all employed and unemployed individuals.
Labor force - the sum of all employed and unemployed individuals.
Unemployment rate - the percentage of the total number of people in the labor force who are unemployed. It is calculated as: unemployement rate = unemployement/ (unemployment = employment).
Underemployment - the number of people who work during a recession but receive lower wages than they would during an expansion due to fewer number of hours worked, lower-paying jobs, or both.
Employment to population ratio - the number of workers relative to the entire population. The Bureau of Labor Statistics breaks this ratio down into groups of like individuals (ex., teenagers), so employment levels among various groups can be observed.
Raising the minmn wage: Rhetoric V. Reality by D. Mark Willsion
A. An unprecedented increase==
Increasing minimum wages results in the increases of commodity prices, the company will demand less labor as the price of production now goes up. The numbers of workers demanded for jobs as the result on increasing wages will let to the surplus of labor supply. Combination of both will lead to the larger numbers of workers demanded for fewer jobs available.
Between 1978 and 1982, $1.05 increasing in price cause the inflation to increase by 9.8 percent—far more than 2.5 % average rate over the past five year.
Who gets affected the most and why?
Raisin the minimum has its pro and cons, but in this case looking at the negative aspect, raising the minimum wage not only destroys jobs, hurt the poor, but it also keep people on welfare and encourage high school students to drop out of high school. Initially raising the minimum wage is assumed to help the working class.
B. Most poor would not benefit==
Economically analysis, initially raising the minimum wage is assumed to help the working class, but rather hurts the poor. For example, in 1997 nearly 60% of poor Americans over the age of 15 did not work and would not be helped by an increase. Only 10% of poor Americans over the age of 15 would benefit from the increase minimum wage to $6.15. Actually what ends of happening in most small business is a reduction in the amount of workers demanded – this cuts down on the hours worked by individuals, or through reduction in the number of employees.
C. Thwarting Welfare Reform==
Just as mention above, the effects of rising the minimum not only cuts hours worked, it also puts more people on Welfare. Raising the minimum wage not also would contradict Congress’s efforts to move unskilled workers from welfare to work. This is shown through the lower-wage unskilled jobs which are disappearing.
D. Keeping Teenagers Out of Work==
The increasing in minimum wages will give incentive to students to drop out of school and look for jobs. In 1990, Bereau of labor statistics have showed that before 1990, the miminum wages did not rise, the unemployment rates fell from 25- 14%. After 1990, the minimum wages rises, the umemployment rates rose from 14%- 22%.
Another study done by David Neumark shows that a higher minimum wage tends to decrease school enrollment by 4% after 1996, and increases the proportion of idle teenagers—for those who are neither in school or employed--. Even though teenagers believe that dropping out of school to find a job is a great idea, however they don’t hire them, because the increasing price in wages allows for only skilled workers to be hired.
Introduction to Cardad Kruger's study
Minimum Wages and Employment: a case Study of the Fast-Food Industry in New Jersey and Pennsylvania
Card and Krueger conducted telephone surveys of about 400 fast-food restaurants in February-March 1992 and then again in November-December 1992. From their statistical analysis of those survey data, Card and Krueger not only find no evidence that the rise in New Jersey’s minimum wag reduced employment at the fast-food restaurants in the state but also find that the in crease in the minimum wage increased employment.
Economists that oppose the raise of the minimun wage
5.1 Attack the raising minimum wages by David Neumark and William Wascher
Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania By David Neumark and William Wascher This review was done by David Card and Alan B.Krueger in 1994, in where they reported evidence that later brought up questions of the labor-market effects of minimum wage laws. Card and Krueger surveyed fast-food establishments in New Jersey and Pennsylvania in 1992 before and after the minimum wage in New Jersey rose from $4.25 to $5.05. By constructing a simple “difference-in-difference” this they intended to compare the changes in employment in these two states. Card and Krueger find “no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state...” Given the importance that this study has receive, both in support of proposals to increase minimum wage in the United States and elsewhere and also serves as evidence against the competitive labor market.
The Fundamental question that was brought up by Neumark and Wascher is not easily subjected to statistical analysis. Its whether Card and Krueger drew a qualitative conclusion from the New Jersey-Pennsylvania minimum wage experiment, or could have there been a difference in conclusion if they had their analysis based on payroll data, rather than on the telephone survey data. Besides finding no evidence that raising the minimum wage in New Jersey reduced employment, Card and Krueger also stated that “the increase in the minimum wage increased employment,” and that their findings “are difficult to explain with the standard competitive model.”
Will Increasing the Minimum Wage Help the Poor?By David Neumark and William Wascher
David Neumark an economist and a professor at the University of Irvine wrote an article in February of 1999 concerning the minimum wage. WilliamWascher another economist that wrote the article with David Neumark, both conducted a research study to be able to determine if increasing the minimum wage help the poor. In the article, Will Increasing the Minimum Wage Help the Poor, they stated that it was natural to assume that raising the minimum wage will help the poor families and that the main effect of minimum wage Is to raise the earnings of low-wage workers in low-income families. Lower employment occurs mainly because the increase in the cost of low-skilled labor, leads employers away from using low-skilled labor when they can be substitute for things such as machinery or more skilled workers. Recent studies, such as the one from the leading proponents David Card and Alan Krueger view that the prediction of the standard model are wrong, and argue that not only do minimum wages not reduce employment, they may even increase it.
5.2 Preston J. Miller raised questions about Card and Kruger’s investigation
a) Their liabilities on phone survey: Card and Kruger based on numbers of phone survey from fast food restaurant to predict that higher minimum wage increased employment. This survey did not give accurate statistically result about numbers of employment corresponding to the increasing wages, and led to failure in their examination. This was shown later by contradict results of many research organizations that immediately began to criticize their work. Other found contradict result: in 2000, David Neumark of Michigan State University and William Wascher, an economist on the staff of the Federal Reserve Board tried to “re-examining New Jersey- Pennsylvania minimum wage study” and found out that the New Jersey minimum wage increase had significantly had negative effects on employment (with an elasticity of -0.21 to -0.22).
In Table 4 above, the single payroll period data showed that there were 4% decrease in employment with an elasticity of -0.22. The averaging payroll data also showed an increase of 3.9% in unemployment with an elasticity of -0.21. Utilizing the data collected by EmPI, payroll records collected directly from restaurants would be more accurate than the results from phone surveys by Card and Kruger, Neumark and Wascher added additional data to re-evaluate the Card and Krueger results
They decisively concluded that “New Jersey’s minimum wage increase did not raise fast-food employment in that state.”
The histograms in the 2 figures were used to compare the variablity of KC’s data with that of payroll data. In figure 1, the upper left hand panel shows the distribution of initial FTE employment levels in Card and Kruger’s data for Pennsylvania and the lower left hand panel shows the same distribution in payroll date by Neumark and Wascher. Figure 2 displays similar histogram for New Jersey. They indicated both the FTE employment and employment changes data in N&W’s data are much more cluster. In contrast, the KC’s data, especially the data collected in Pennsylvania, showed many variabilitie.
b) Focus on very few industries: Card and Kruger only focus on Burger King Restaurants in New Jersey and Pennsylvania. Moreover, Labor market suggests this low wage market is characterized as competitive as opposed to monopoly system. Therefore, the influence of increasing prices relies mainly on others competitive businesses; it does not tell much whether increasing wages will bring positive effects on employment or not. An example for this is can Burger King set its wage for hamburger flippers much lower than those for Mc Donald’s flippers, local newspaper carries or grocery carry-out help without losing them? This argument makes support of increasing minimum wage become even weaker.
