Should minimum wage be modified, maintained, or repealed?

• This exercise should come after a price controls chapter where minimum wage is discussed in a principles of microeconomics course.
• Students should know about the way a binding minimum wage affects market equilibrium using a demand-and-supply diagram. Specifically, students should know that a binding minimum wage creates a surplus of workers in the static supply-and-demand analysis.
• There is no class size limitations.
• This activity will take up to a class period, depending on the discussion length.

Overview

Prior to class, students should listen and read the following, which provide substantial information about minimum wage:
Podcasts:

• https://www.npr.org/sections/money/2016/04/06/473128291/episode-562-a-mall-divided. This NPR Planet Money episode discusses the curious case of a mall located in two cities with two different minimum wages in California: San José and Santa Clara
• https://www.npr.org/sections/money/2014/03/06/286861541/does-raising-the-minimum-wage-kill-jobs. This NPR Planet Money episode poses the question: Does the minimum wage kill jobs? This short episode discusses the famous studies on fast food restaurants in New Jersey and Pennsylvania done by David Card and colleagues and by David Neumark and colleagues, who found opposing conclusions.
• https://www.npr.org/templates/transcript/transcript.php?storyId=385468357. This NPR Planet Money discusses the origin of the minimum wage in the U.S.

Articles:

• https://www.economist.com/finance-and-economics/2017/07/08/economists-argue-about-minimum-wages. This article documents the controversy around minimum wage among economists.
• https://www.huffingtonpost.com/entry/the-2017-berkeley-and-university-of-washington-studies_us_596824fae4b06a2c8edb456e. This article discusses the findings from two independent studies about the increase in minimum wage to $15/hour in Seattle-Tacoma area, which finds opposing results.

Textbooks tend to oversimplify the issues around minimum wage. The static analysis with the demand-and-supply diagram tend to portray minimum wage laws as very distorting and negative.The purpose of the podcasts and the readings is to expose students to some of the intricacies and debates surrounding minimum wage policy. While there is a the lack of consensus about minimum wage among economists, this policy draws a lot of attention with several politicians proposing increases to the minimum wage. With more knowledge that complements the textbook, students are asked to consider different policy recommendations to modify, maintain, or abolish minimum wage that go beyond the material covered in your textbook. Students are asked to consider changes in costs of living. This activity will facilitate a better understanding about the arguments against and for minimum wage and about whether minimum wage may be modified, maintained, or abolished.

Expected Student Learning Outcomes

In this exercise, students will discuss arguments against and for minimum wage and whether it should be modified, maintained, or abolished.

Information Given to Students

Textbooks tend to oversimplify the issues around minimum wage. The static analysis with the demand-and-supply diagram tend to portray minimum wage laws as very distorting and negative. There is a sharp contrast between the unambiguous textbook analysis of minimum wage and the ambiguous empirical results. For example, the supply-and-demand model ignores any income effect by minimum wage earners or the possibility of monopsony power in sectors like fast food which employ many minimum wage workers. The purpose of the podcasts and the readings is to expose you to some of the intricacies and debates surrounding minimum wage policy. While there is a lack of consensus about minimum wage among economists, this policy draws a lot of attention with several politicians proposing increases to the minimum wage. With more knowledge that complements the textbook, you are now asked to consider different policy recommendations to modify, maintain, or remove minimum wage that go beyond the material covered in your textbook.

What is the best minimum wage policy?
A. Federal minimum wage should be revised and modified based on changes in national costs of living such that they continue to guarantee an acceptable living standard.
B. State and local minimum wages should be adjusted yearly based on state and local changes in costs of living such that they continue to guarantee an acceptable living standard.
C. Minimum wages should be abolished as they create unemployment.
D. Minimum wages should not be modified, as they fulfill their current purposes.

Minimum Wage Policies (Microsoft Word 2007 (.docx) 15kB Jul17 18)

Prefatory Remarks:

In the U.S., workers are paid at least the highest minimum wage set by federal, state, or local law. Minimum wage is a controversial topic among economists, politicians, and voters. This controversy has been documented by The Economists in an article titled Economists argue about minimum wages published on 7/8/2017 (https://www.economist.com/finance-and-economics/2017/07/08/economists-argue-about-minimum-wages). The standard introductory economics textbook provides a static analysis of minimum wage and its consequences, pointing to the decrease in employment due to the price control.

There is a sharp contrast between the unambiguous textbook analysis of minimum wage and the ambiguous empirical results. For example, the supply-and-demand model ignores any income effect by minimum wage earners or the possibility of monopsony power in sectors like fast food which employ many minimum wage workers.

Several economists have attempted to study the effects of minimum wage. For example, the increase in minimum wage to $15/hour in Seattle-Tacoma area was studied by two independent group of researchers that found opposing results (See https://www.huffingtonpost.com/entry/the-2017-berkeley-and-university-of-washington-studies_us_596824fae4b06a2c8edb456e for details). In this activity, you will be able to go beyond the textbook to better understand minimum wage policies.

During AE:

Teams should simultaneously reveal their choice. A student from each team can be randomly selected to answer the first question from the discussion questions. This activity can be assessed through the choice and subsequent reasoning. The reasoning should consider the purpose of minimum wage, and it should recognize that changes in costs of living should be reflected in minimum wage adjustments. Students should demonstrate that they can go beyond the static and simplistic analysis provided by introductory economic textbook to critically assess the existence and modification of minimum wage policies at different levels.

Discussion questions:

• What is the most important reason for your choice?
• How do you define an acceptable living standard?
• Do we need a minimum wage? Why?
• Who are the winners of a minimum wage? Who are the losers of a minimum wage?
• Does minimum wage create unemployment? If so, who is more likely directly affected by this the minimum wage?
• Why would different cities and states set different minimum wages?
• Is the minimum wage binding in all locations and/or industries? Explain.
• What are consequences of having adjacent cities or states with different minimum wages? What incentives does having different minimum wages have for workers? for firms?
• Why should minimum wage be revised?
• If students have taken macro, how could the CPI be used to modify minimum wage?
• What are alternative policies that attain similar goals as the minimum wage law? Are they more effective than the minimum wage?

Closing Remarks:
The effects of minimum wage are not clear-cut, and the topic remains controversial among economists.
Minimum wage is designed to provide a basic living standard for low-skill workers
Minimum wage should be revised based on changes in cost of living to continue serving its purpose.

At the end of the activity, students will be asked to identity their own answer, which does not have to be what they originally thought or what their team decided. Then, students are asked to justify their choice and to write a one-sentence statement summarizing what they learned through the TBL AE and class discussion. This material is collected from a sample of students and is assessed against a rubric [TBD] to determine if the learning outcome was met.

Prior to class, listen and read the following:
Podcasts:

• https://www.npr.org/sections/money/2016/04/06/473128291/episode-562-a-mall-divided. This NPR Planet Money episode discusses the curious case of a mall located in two cities with two different minimum wages in California: San José and Santa Clara
• https://www.npr.org/sections/money/2014/03/06/286861541/does-raising-the-minimum-wage-kill-jobs. This NPR Planet Money episode poses the question: Does the minimum wage kill jobs? This short episode discusses the famous studies on fast food restaurants in New Jersey and Pennsylvania done by David Card and colleagues and by David Neumark and colleagues, who found opposing conclusions.
• https://www.npr.org/templates/transcript/transcript.php?storyId=385468357. This NPR Planet Money discusses the origin of the minimum wage in the U.S.

Articles:

• https://www.economist.com/finance-and-economics/2017/07/08/economists-argue-about-minimum-wages. This article documents the controversy around minimum wage among economists.
• https://www.huffingtonpost.com/entry/the-2017-berkeley-and-university-of-washington-studies_us_596824fae4b06a2c8edb456e. This article discusses the findings from two independent studies about the increase in minimum wage to $15/hour in Seattle-Tacoma area, which finds opposing results.