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Worksheet on the Minimum Wage (Tutor 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.
Q(a) to Q(b) is the level of unemployment
Now illustrate what would happen if the level of the minimum wage was raised. The dotted line should be raised to a higher level.
What has happened to unemployment? The level of unemployment increases
Why? Because as the minimum wage is increased the demand for labour falls (it is less profitable for the firm to employ as many people - the MRP becomes less than the wage at the existing level of employment). As the minimum wage rises the supply of labour also increases as people are attracted back into work (from benefits - reducing the poverty trap?)
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?
The level of unemployment resulting from the minimum wage will be much lower the more inelastic the supply and demand for labour are.
What would you expect the elasticity of demand to be for those jobs most likely to be affected by the minimum wage?
Inelastic? Many of the jobs will be necessary ones with few substitutes available for labour. Many may be manual and relatively unskilled jobs. This may make the demand relatively inelastic.
And the elasticity of supply?
Elastic? Because many of the jobs are less skilled ones there may be a large pool of labour available to take them on, and small increases in wages may attract people back to work. But...?
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:
N.B. You may need to register (free) for access to the archives. Check if your school or college already has registered.
What level is the minimum wage likely to be set at in the UK?
£3.60 recommended by the Low Pay Commission (check current figures though)
What is the view of industry of this level?
Too high. Jobs will be destroyed.
What is the view of the unions?
Too low. Insufficient to provide a decent working wage for their members.
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:
- Together with tax and benefit reform it can promote work incentives and form part of a strategy to make work pay
- It can help address the problem of in-work poverty
- By removing the worst cases of in work exploitation it can ensure greater decency and fairness in the work place
- It can prevent undercutting in the market place and so encourage firms to compete on the basis of quality and not just price
- It may help promote employee commitment, reduce staff turnover and encourage investment in training thereby providing a boost to productivity
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?
Federal government sets the National minimum.
What happens where minimum wages for individual states vary from the national one?
Where state law requires a higher minimum wage, that higher standard applies.
What is the current level of the minimum wage?
$5.15 as of Sept.'97 (but check current rate)
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:
Here are two key extracts from the arguments:
Higher minimum wages indeed make work more attractive and lead more individuals to compete for these jobs. But in the absence of an increased demand for minimum wage workers (an unlikely response to higher costs) there can be no overall increase in employment. The effect of higher labor supply, constant labor demand, and wages which are prohibited from falling is that employment
opportunities go to those with the best skills. We are left with a labor market that crowds out the least skilled workers -- in this case, the mothers attempting to leave welfare.
Not surprisingly, the decrease in work was matched with an increase in time spent receiving welfare benefits. The average length of time spent receiving welfare benefits (in any given spell of benefits receipt) was 14.5 months for the entire sample. But in states which raised their minimum wages, the average time spent on welfare was 19.5 months, compared to 13.5 months in states
that did not raise their wage floor. Increasing the minimum wage resulted in a 44 percent longer duration on welfare.
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:
- Equity - giving a fair wage
- Employment - the minimum wage increases employment
- Inflation has eroded the real value of the minimum wage
Summarise briefly his arguments against each of these:
- Minimum wage advocates set them up as moral judges telling others what fair. They know what is fair regardless of what agreements employers and employees reach on their own. Minimum wage advocates not only know what is equitable, but they will use your money and the power of the federal government to parade their idea compassion.
- To argue that increasing the minimum wage increases employment is to argue that there are a significant number of people who will return to employers a value equal to or greater than the new minimum wage. It is to argue further that these people are not found by employers until the minimum wage is increased.
- Fair enough. Let us make a trade. Agree to peg the minimum wage to the inflation adjusted minimum wage as of 1991. Now let us peg federal spending to the 1991 inflation-adjusted value. Any takers?
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
These tests should help to raise an interesting debate about the effectiveness of the minimum wage for alleviating child poverty. Encourage students to look carefully at the graph in the results of the simulation looking at 'gains by decile'. This shows quite clearly that the minimum wage will tend not to benefit the lower deciles the most. This is often because of the
raising of other pay to restore differentials whn the minimum wage is increased.
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.
- The Guardian (http://www.guardian.co.uk/)
- The Times (http://www.timesonline.co.uk/)
- The TUC (http://www.tuc.org.uk/) - try individual union sites for their views.
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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