What are the case against and the case for the minimum wage? What does the evidence indicate?
What will be an ideal response?
The primary argument against the minimum wage is that it will reduce employment of minimum-wage workers. When the minimum wage is imposed above the equilibrium wage in a market, then employers will reduce employment because the marginal revenue product from some minimum-wage workers will be less than the higher marginal resource cost of those workers because of the minimum wage. Although the minimum wage is often proposed as a “living wage” that is designed to get low-wage workers out of poverty, it does not work as a poverty program because it reduces the employment opportunities for low-skill workers.
The case for the minimum wage is based on productivity considerations. If the minimum wage is raised, then there may be a shock effect that encourages businesses to make more productive use of minimum-wage workers that increases their marginal revenue product. Workers who keep their jobs after the minimum-wage hike will also earn more income, which should increase their standard of living and possibly increase the health and motivation of workers. Furthermore, in a monopsonistic labor market, a minimum wage may raise wage rates without increasing unemployment.
The 1980 evidence indicated that a minimum-wage hike reduced employment somewhat especially among teenagers and young adults, with a 10% increase in the wage resulting in a drop in employment of about 1 to 3 percent depending on the group. More recent research suggests that the employment effect may be small, or close to zero. The unemployment effects, if there are any, fall disproportionately on workers in lower-wage occupations affected by the minimum-wage hike. Those low-skilled workers who remain employed, however, benefit from the increased income.
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Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by:
A. Marginal cost = average revenue B. Marginal revenue = average cost C. Average total cost = average revenue D. Marginal cost = marginal revenue
Which of the following explains why a $100 billion reduction in consumption spending might decrease equilibrium real GDP by more than $100 billion?
a. Say's law. b. The quantity theory of money. c. Flexible resource prices. d. The multiplier principle.
Because there is a trade-off between total output and equality of income distribution,
a. greater equality of distribution will generally result in higher levels of output. b. greater output is generally associated with more equal distribution. c. policies designed to increase output will only succeed if distribution is more equal. d. policies intended to expand output must necessarily fail. e. policies designed to equalize distribution may adversely affect the size of output.
Which of the following propositions would a proponent of supply-side economics be most likely to stress?
a. Because they expand government revenues, higher marginal tax rates will lead to a reduction in the budget deficit and to lower interest rates. b. Because they encourage investors to undertake low-productivity projects with substantial tax-avoidance benefits, higher marginal tax rates promote economic inefficiency. c. Because they do not consume resources directly, income redistribution payments will exert little impact on real aggregate supply. d. The primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.