Policy responses to manage employment with a minimum wage

This activity can be used in an introductory economics course. Students should be familiar with the topics of labor supply/demand and unemployment before going over this exercise. Although the theory of price floors will not be explicitly applied in this exercise it would be beneficial if students are introduced to the concept of minimum wage in advance. It is best to be used right after teaching labor market but could also be used later on in the semester after covering macroeconomic topics such as unemployment, government spending and the aggregate equilibrium model.

Overview

In this exercise students investigate the impact of policies that can be introduced to offset possible job loss caused by the minimum wage. They will look at the costs associated with each policy response and determine whether one that affects the labor market in the short-run or the long-run is the best approach.

Expected Student Learning Outcomes

In this exercise students will illustrate the effects of different labor market policies on the labor supply and demand model. With the aim to increase employment levels they will compare different labor market policies and determine their costs and their short-run versus long-run effects.

Information Given to Students

Your city council has decided to support the state's decision to increase the local minimum wage above the national level. As an economics student you are asked to propose a plan to accompany this new wage change. It is often claimed that the increase in minimum wages will cause problems in the labor market so you are asked to draft a proposal that will be considered by the city council when the new minimum wage is enforced.
Which of the following policies should accompany the minimum wage in order to best compensate for possible job loss in the labor market. Consider the implications on economic activity of all choices and form a detailed response as to why you chose one of them.

A. Increase in public spending towards the education sector. The local government should invest in improving the quality of human capital.
B. Increase in public spending directed at vocational education and training to those who are unemployed.
C. The local government should participate in the labor market by increasing the number of public sector jobs.
D. Introduce tax cuts to businesses who hire recently unemployed personnel.

Student handout for 'Policy responses to minimum wage' application exercise (Microsoft Word 12kB Sep4 18)

This activity requires the application exercise to be printed out and handed to the teams along with four cards with the letters of each option to use for simultaneous reporting at the end of the activity.
Students should have 20-30 minutes to discuss in groups of 4-5 and allow for another 20-30 minutes for debriefing. If class size is small this activity could fit in an entire class period (60-90 minutes).

The four choices that are handed out to students could all be chosen as the correct one since all of them will eventually have a positive impact on employment levels. This is therefore not an exercise where a correct answer should be found. The important part is for the instructor to guide students into forming the right argument for each choice they make and to be able to justify their choice by comparing the pros and cons of all choices . Here are some points that the instructor could expect to hear from students or that they could use when they guide the conversation in the end;

Option A: This option will have a large cost and the impact in the labor market will be significant but the effects of this policy will not be realized in the short term but rather in the long term.

Option B: This option is more narrow targeted and will cost less than option A. It will be costly but probably not as much as option A (although this could also be open for discussion depending on the specific vocational education that is funded) . This option has the benefit of improving the skills of the unemployed and possibly tackling structural unemployment too. The effects of this policy will be visible in the labor market sooner than option A. This policy can also improve the employability of those unemployed and in time increase the supply of labor as more people will be willing to actively look for work with their new skills.

Option C: This option is harder to implement and has a wider target than option A or B. In the long term this would mean that the public sector is strengthened and that more jobs are available but its plausibility and the time frame that it will take to yield results is more questionable than any of the other options. Once it is implemented we would expect to see a shift in the demand for labor.

Option D: This option would decrease government revenue which is also a main disadvantage of this option. However, it will be very successful among businesses who aim to decrease costs and the effects of this policy will be realized relatively quickly. This policy could shift the demand curve for labor to the right due to lower costs for businesses.

Students should be able to justify their responses based on the short run and long run effects of each of these choices. After students present and explain their findings and the points mentioned above for each choice have been discussed, the following questions could be used to facilitate further discussion:

What are the main advantages of each policy response?

• Here the instructor can look for answers in the points I have made above.

What are the effects of increased public spending on the labor market graph? Will any of these choices shift the demand or the supply curve of labor?

• Depending on correct justification many answers could be possible. As a general guide the instructor could guide students to see that option A will improve human capital and thus make it more productive which can then also shift the demand curve for labor to the right. Option B is more likely to have an impact on the supply of labor as more skilled workers will enter the labor market and shift the supply curve to the right. Finally, when option C is implemented the total demand for labor in those specific jobs will increase shifting the demand curve to the right.

What are the costs associated with each option?

• The main costs are associated with government expenditure and decrease in government revenues (option D) . See above for details on that.

When looking for the best option should we be considering the long run or the short run effect of each action?

• This should generate discussion in class. The instructor could point out that short-term effects might only temporarily offset the possible negative impact of minimum wage but long-term options will have a more stable and permanent effect in employment levels. Of-course more opinions on this one could be voiced and be correct.

When the assigned time for the activity is over teams will simultaneously report their answers by showing the equivalent answer card. After they report their findings each team will have to explain their answer. It is advised that the reporter from each team should be randomly chosen on the spot so that all students during the activity equally participate and can justify their teams' choice in the end.
During the activity the teacher should circulate the classroom and try to clarify the activity for those who might be having issues applying the economic theory they have learned into choosing an answer.

Any introductory economics textbook that has a chapter on the labor market can be assigned as reading material to students with a special focus on the factors that affect the supply and demand of labor. Although the theory of price floors will not be explicitly applied in this exercise it would be beneficial if students are introduced to the concept of minimum wage in advance, so any chapter that discusses this topic could be assigned as reading material.