Increase in Minimum Wage: Perplexing Result? (Context Rich Problem)

Oskar Harmon, University of Connecticut
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

Students are asked to write a one page report analyzing the effect of an increase in the San Francisco city-wide minimum wage. The exercise is based on a current economic event. The student can be given a diagram representing the initial equilibrium. The completed diagram and explanation are presented in the one-page report.

Learning Goals

By the end of this exercise, students should be able to:

  1. Understand how to represent equilibrium, surplus and shortage at non-equilibrium prices.
  2. Understand that minimum wage works as a price floor above the equilibrium wage.
  3. Understand feedback effects between the labor market and the output market.

Context for Use

This exercise is appropriate for a principles of microeconomics class. It can be used in small class as a hands on exercise, or it can be used in any sized class as a homework assignment or an exam question. The exercise can be used in a computer lab setting, or in an online class as a homework assignment or an exam question. The activity takes about 20 minutes to complete. Students can work individually or in small groups. In a computer lab the student answers can be posted to a web page and the class can discuss and evaluate responses.

Description and Teaching Materials


You live in the city of San Francisco and your mother asked you about an article she just read that said an increase in the city's minimum wage would increase prices at city restaurants and not lead to a decrease in employment in the the city's restaurant industry. In the article the local labor leaders said that in the past increases in the minimum wage were not followed by layoffs. Back in the day she took an economics course in college and knows that you are now studying economics and she asks you to explain how this can happen. You sketch a diagram of the labor market in which you assume that the initial wage is $5, and the hike in the minimum wage is $2. You recognize that restaurants may be able to shift costs forward. You also sketch the market for restaurant dining in San Francisco. For simplicity you make the assumption that the demand for restaurant dining in San Francisco is perfectly inelastic. After sketching the forward shift of the full cost of the minimum wage hike you then show your mother the feedback effect in the labor market means no decrease in employment in the San Francisco restaurant industry.
Increase in the Minimum Wage: A Perplexing Result? (Microsoft Word 2007 (.docx) 299kB Mar27 12)


Teaching Notes and Tips

In the standard analysis an increase in the minimum wage results in a decrease in employment, and a labor surplus. In this example we get the unusual result of full shifting forward of the cost increase and no change in restaurant employment. If your students are new to context rich problems, you may need to help your students get comfortable with them.
To draw a diagram, students can use a hand drawn diagram, or a digital diagram. For the latter, students draw a diagram in Google Draw, or drag the initial diagram to their desktop, and edit the diagram using Goggle Draw or Sumopaint.com/app (both free online image editors).
Students will need to have learned about the following topics before this activity is completed:

  1. minimum wage and price floors
  2. tax shifting
  3. supply and demand in labor markets

Assessment

The response is evaluated for whether the student has shown some understanding for why the San Francisco restaurants are able to shift costs forward. The purpose of the assessment will determine whether or not you need a rubric.

References and Resources

  • The Wall Street Journal article that is background for this exercise is: (11/18/2009) New Minimum Wage Cuts Both Ways
  • A quick start to using sumo paint is: http://www.youtube.com/watch?v=6GRHD8balAE
  • An example of using this approach in Wikispaces: harmon.uconn.edu/Wikispaces.htm (link unavailable)
  • An example of a simple tool to create a grid for a graph: harmon.uconn.edu/GraphTool/index.html (link down)
  • An easy to use online drawing tool: Google Draw: http://www.google.com/google-d-s/drawings/