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Worksheet on the Minimum Wage (Student Version)
This worksheet looks first at the theoretical arguments about the minimum wage, and then goes on to look at some sources on the Internet that may be helpful to students in examining the arguments and finding out more information.
Step 1 - A minimum minimum or a maximum minimum?
What level should a minimum wage be set at and what effect will it have? The diagram below shows a labour market with the wage determined by demand and supply. Draw on the diagram the effect of setting a minimum wage just above the equilibrium. Show clearly any unemployment.
Now illustrate what would happen if the level of the minimum wage was raised.
What has happened to unemployment? __________________________
Why?
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However, the amount of unemployment will depend on the elasticity of the demand and supply curves for labour. In the diagrams below, draw in the effect of a minimum wage:
What differences are evident from these two diagrams?
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What would you expect the elasticity of demand to be for those jobs most likely to be affected by the minimum wage?
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And the elasticity of supply?
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Step 2 - Where is the minimum?
Use one of the searchable newspaper archives on the Internet to find out the level at which the minimum wage is likely to be set in this country. Some links to them are given below:
What level is the minimum wage level in the UK? _________________________
What is the view of industry of this level?
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What is the view of the unions?
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Step 3 - Higher or lower?
As we have seen the view of the unions of the minimum wage and the view of industry differ. So who is right? Well as with most issues in economics and business there is no clear cut answer. The Department of Trade and Industry (http://www.dti.gov.uk/er/nmw/nmwguide.htm) is the government department responsible for the minimum
wage. You can find the government's case for a minimum wage here. There are some brief details, but also a very full paper in Adobe Acrobat format. It is a long document and may take some time to download, but the first few pages give a useful summary of the arguments. Write a brief summary of their case below:
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We can also look elsewhere to countries who have had minimum wages for longer for much of the analysis of the impact a minimum wage may have. We will use the US as an example.
Go to the US Department of Labor (http://www.dol.gov/esa/whd/flsa/) to find out the following:
Who sets the minimum wage in the US? _________________________________________
What happens where minimum wages for individual states vary from the national one?
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What is the current level of the minimum wage? _______________________
One argument that is used against the minimum wage is that it will keep people on welfare longer. Go to an analysis of this argument to reduce the minimum wage (http://www.epionline.org/study_detail.cfm?sid=4) and write a brief summary of it below:
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For some further arguments against min wage (http://mywebpages.comcast.net/fmonaldo/articles/minimumw.htm) follow this link. What are the three main arguments the author says are used for the minimum wage:
1.
2.
3.
Summarise briefly his arguments against each of these:
1.
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2.
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3.
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Step 4 - Will a minimum wage help reduce child poverty?
One argument for the minimum wage is that it will help reduce child poverty. To test if this is the case try a series of experiments on the child poverty simulation on Biz/ed.
Try progressively increasing the minimum wage in the simulation and note down the effects. Write below a summary of your findings:
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Now use the child poverty simulation to try other methods to reduce child poverty. Write below a summary of how effective the minimum wage was compared with other methods
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Step 5 - Further analysis
You should now have an idea about the debate which surrounds the minimum wage. Use once again the searchable newspaper archives and some further sources below to get more information on the minimum wage. Combine this with the arguments and analysis you have already found to choose what level you believe the minimum wage should be set at. Write a full justification for the choice of
this level.
What level have you chosen? £ __________ per hour
Why? N.B. Try to refer in your answer to the elasticity of supply and demand, the relationship to the level of benefits, the effect on work effort, the effect on employee recruitment and training, the impact on inflation and differentials, equity and the effect on firm's costs.
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