Minimum Wage: Why Minimum Wage Should not be Increased
Introduction (by Erika)
The subject of minimum wages and their effect on unemployment levels is a controversial issue. A study that raised many questions for economists on whether increasing the minimum actually helps those that are underprivileged or hurts them. According to a study done in 1992 by Davis Card and Alan B. Krueger, minimum wage is raised to help the lower class. The majority of Americans 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 are intended to be helped. With this in mind, we are going to explain the effects of raising the minimum wage and why it should not be raised.
Definitions (by Erika)
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.
Unemployment rate - the percentage of the total number of people in the labor force who are unemployed. It is calculated as: unemployment rate = unemployment/ (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.
Purpose of Minimum Wage (by Erika)
The purpose of the minimum wage is to provide a base pay rate for employees. The base pay rate is considered to be a fair pay for the work that the employee agrees to. While many employees choose to pay their employees more than the minimum wage, the purpose of the minimum wage is to protect all employees from any alterations in the economy. The minimum wage was first developed in the U.S. in 1933. While minimum wages had been established in other countries, the U.S. found itself in dire straights in terms of economic vitality in 1933. The country needed to find a way to help employees afford food and housing, even when their work was hard to find. The purpose of the minimum wage was to ensure that all employees were able to afford the basic necessities in the bad Great Depression economy
Raising the minimum wage: Rhetoric V. Reality by D. Mark Willsion (by Anh Nguyen)
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 lead 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 eliminated unskilled workers, but it also keeps 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 mentioned above, the effects of raising the minimum wage not only cut hours worked, it also puts more people on welfare. Raising the minimum wage not also would contradict Congress’ 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
Increases in minimum wages will give incentive to students to drop out of school and look for jobs. In 1990, The Bureau of labor statistics showed that before 1990, the minimum wages did not raise and the unemployment rates fell from 25- 14%. Whereas after 1990, the minimum wages rose and the unemployment rates rose from 14%- 22%. This data shows a correlation in minimum wages and unemployment rates.
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 (those who are neither in school or employed). This number of workers refers to those who dropped out of school and could not find employment. While teenagers believe that dropping out of school to find a job is a great idea, they are not hired because the increase in wages allows for a demand in higher skilled workers.
E. Raising minimum wages hurt small business
Since small business only earns a small amount of profits, it will be harder for them to afford paying high minimum wages for their employees. Therefore, any small businesses that cannot come up with high minimum wage for their employees eventually have to close their company. Here, Willson gave an example of New York state when dealing with the raise of minimum wage. For instance, a small increase of $1.60 per hour would cost a bake shop with ten clerks and bakers over $30,000 per year. Due to the higher payrolls for the workers causes the company to increase their compensation insurance, unemployment insurance, Social Security taxes, Medicare taxes and even liability insurance in some cases. This is money that most small employers simply do not have. So, either they will have to lay off workers, increase prices, or both. Neither of these solutions brought a solution for increasing the price. Willsion's argument raised a very thoughtful question to ponder on: since these small businesses have created about two-thirds of the net new jobs in the United States since 1970, increasing the minimum wage will make the economy turn downward for long time.
Introduction to Card and Kruger's study
Minimum Wages and Employment: a case Study of the Fast-Food Industry in New Jersey and Pennsylvania (by Erika)
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 minimum wage
Attack the raising minimum wages by David Neumark and William Wascher (by Erika)
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” test 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, William Wascher, and Mark Schweitzeir (by Erika)
David Neumark an economist and a professor at the University of Irvine wrote an article in February of 1999 concerning the minimum wage. William Wascher and Mark Schweitzeir is two another economists that wrote the article with David Neumark, all 3 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. David Neumark, Mark Schweitzer, and William Wascher suggest that the latter effect outweighs the former, and therefore the net effect of minimum wages is an increase in the proportion of poor families.
Preston J. Miller raised questions about Card and Kruger’s investigation (by Anh Nguyen)
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 economists who 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 also added additional data to prove that Card and Kruger's data is not very accurate. The histograms in the 2 figures were used to compare the variability of Card and Kruger’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 data by Neumark and Wascher. Figure 2 displays similar histogram for New Jersey. They indicated both the FTE employment and employment changes data in Neumark and Wascher’s data are much more cluster. In contrast, the Card and Kruger’s data, especially the data collected in Pennsylvania, showed many variability.
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 monopolist system. Miller questions Card and Kruger's study: "Can Burger King set its wage for hamburger flippers much lower than those for McDonald’s flippers, local newspaper carriers or grocery carry-out help without losing them?" 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.
c) Even if we accepts the monophony theory, increasing wage does not tell us whether or how much to raise the minimum wage. The failure judgment by Government in making decisions about how much to increase or when to increase can lead to further tight labor market.
Walter J. Wessels: Reexamination of Card and Krueger’s (State) Study of Minimum Wage (by Azucena Alvarado)
Card and Krueger’s difference-in-difference study of the 1990-1991 federal minimum wage hikes compared states by the proportion of workers directly affected by the minimum wage; Walter J. Wessels applied their model to the 1996-1997 federal minimum wages. Wessels found that increases in the minimum wage significantly lowered teenage employment rater more in highly affected states. Using Card and Krueger’s interpretation, this implies the minimum wage did reduce teenage employment.
To reexamine the relationship between the fraction of affected workers and changes in employment, Wessels uses the same data sources as Card and Krueger. Wage-related data such as the fraction of affected workers are taken from the outgoing rotation files of the Consumer Population Survey. Employment and population data (for example, the teenage employment-population ratio) are from the Current Population Survey. Following Card and Krueger, all labor force data have been compiled using the final weight in the Current Population Survey and regressions at the state level are weighted by the state's teenage population.
While Wessels uses the same data sources, he redefines the variables. For the dependent variable, Wessels uses the log of the ratio of the teenage employment-to-population ratio in 1992 over its value in 1989 - the more common practice in the labor literature rather than Card and Krueger's percentage change. (Results for both log and percentage changes were similar in size and significance.)
For the 1990-1991 minimum wage hike, which raised the minimum wage from $3.35 to $4.25, Wessels use the same periods as Card and Krueger as the "before and after" periods: 1989 and 1992. For the 1996-1997 minimum wage hike, which raised the federal minimum wage from $4.25 to $5.15, the "before and after" periods (October 1995-September 1996 and October 1997-September 1998) were chosen as they are closer to the dates of the increases. Closer dates are necessary because the effects of the minimum wage hikes were overcome by the business expansion of the late 1990s.
Table 1 shows the results from the regression of the fraction affected (using Card and Krueger's definition) on the employment of teenagers. While the states with more affected workers gained jobs for the 1990-1991 hikes, they lost jobs for the 1996-1997 hikes. Following the logic of Card and Krueger, this suggests that the 1996-1997 minimum wage hike did lower employment.
Table 2 shows the results of controlling for the effects of the business cycle. Card and Krueger, for the 1990-1991 minimum wage hikes, find that controlling for the business cycle make the coefficient of the state's fraction affected insignificant. My results are similar. On the other hand, controlling for the business cycle for the 1996-1997 hikes had no sizable or significant effect on the state's fraction affected--it was still significantly negative. The 1990-1991 findings confirm Card and Krueger's findings. Teenagers in more affected states did not lose more jobs. On the other hand, the 1996-1997 findings show teenagers in more affected states did lose more jobs.
Table 3 shows that for the 1990-1991 minimum wage hike, states with higher fractions of affected workers had relatively smaller employment losses, confirming Card and Krueger's findings. However, for the 1996-1997 minimum wage hike, states with higher fractions of affected workers had relatively greater employment losses. This result was significant at the 7 percent level.
SUMMARY (By Azucena Alvarado)
Card and Krueger's (1995) difference-in-difference study of the 1990-1991 federal minimum wage hikes compared states by the proportion of workers directly affected by the minimum wage and they found that employment losses were not higher in states with more affected workers. Card and Krueger interpreted these results as showing that the minimum wage did not decrease employment. However, when their model is applied to the 1996-1997 federal minimum wage hike, it is fount that employment losses were higher in states with more affected workers. Using their interpretation, results imply that the minimum wage did reduce employment. Furthermore, when it is examined why the minimum wage had little effect for the 1990-1991 hikes but had a negative effect on employment for the 1996-1997 hikes, results suggest that the teenage labor market may have been tighter in 1996-1997 so that the negative effects of the minimum wage hike were more discernible.
CITATION
Anh Nguyen's work citations:
Wilson, Mark. "Raising the Minimum Wage: Rhetoric V. Reality." Executive Memorandum #590, 23 April. 1999. October 4. 2007. <http://www.heritage.org/Research/Labor/EM590.cfm>.
Miller, Preston J. "The new economics of a minimum wage hike." Fedgazette. October 1995. October 15. 2007. <http://minneapolisfed.org/pubs/fedgaz/95-10/edi9510a.cfm?js=0>
Fox, Liana. "Minimum wage trends." Understanding past and contemporary research." 25 October 2006. October 22. 2007.
<http://www.epi.org/content.cfm/bp178>
Neumark, David; Wascher, William. "The American Economic Review," Vol. 90, No. 5. (Dec., 2000), pp. 1362-1396. <http://www.jstor.org/view/00028282/di020242/02p00162/10?searchUrl=http%3a//www.jstor.org/search/AdvancedResults%3fhp%3d25%26si%3d1%26q0%3deffect%2bof%2bnew%2bjersey%2527s%2bminimum%2bwage%26f0%3d%26c0%3dAND%26wc%3don%26sd%3d%26ed%3d%26la%3d%26ic%3d00028282%7c15325059%7c10497498%26ic%3d00028282%7c15325059%7c10497498%26node.Economics%3d1%26node.Business%3d1&citationAction=save&charset=u&frame=noframe&dpi=3&userID=400939f0@dickinson.edu/01c0a8486500507d3ba¤tResult=00028282%2bdi020242%2b02p00162%2b0%2cFFF7FFFF0F&config=jstor&citationPath=00028282-di020242-02p00162&PAGE=10>
Alesse, Mark and Guilbault, Matthew. "A Minimum Wage Increase Will Hurt Small Business and the Working Poor." 16 February, 2004. October 22. 2007 <http://www.gothamgazette.com/article/20040216/202/871>
Erika Nunez's work citations:
Neumark, David; Wascher, William. "The American Economic Review," Vol. 90, No. 5. (Dec., 2000), pp. 1362-1396. <http://www.jstor.org/view/00028282/di020242/02p00162/10?searchUrl=http%3a//www.jstor.org/search/AdvancedResults%3fhp%3d25%26si%3d1%26q0%3deffect%2bof%2bnew%2bjersey%2527s%2bminimum%2bwage%26f0%3d%26c0%3dAND%26wc%3don%26sd%3d%26ed%3d%26la%3d%26ic%3d00028282%7c15325059%7c10497498%26ic%3d00028282%7c15325059%7c10497498%26node.Economics%3d1%26node.Business%3d1&citationAction=save&charset=u&frame=noframe&dpi=3&userID=400939f0@dickinson.edu/01c0a8486500507d3ba¤tResult=00028282%2bdi020242%2b02p00162%2b0%2cFFF7FFFF0F&config=jstor&citationPath=00028282-di020242-02p00162&PAGE=10>
David Neumark & Mark Schweitzer & William Wascher, 1999. "Will increasing the minimum wage help the poor?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb 1. http://www.clevelandfed.org/Research/com99/0201.pdf
"Policy Debate: Does an increase in the minimum wage result in a higher unemployment rate?." 14 Nov 2007 <http://www.swlearning.com/economics/policy_debates/increase_minimum.html>.
