Poverty Lecture 10:Why are wages so low?

Today’s Readings•Schiller Ch. 5: The Working Poor •DeParle, Ch. 6: The Establishment Fails: Washington, 1992-1994•(Optional, Newman, “Working Lives,” eReserves, Ehrenreich, “Serving in Florida,” eReserves)

Today’s topics

• Why are wages so low?• Will raising minimum wages help the

poor?• Will raising the living wages help the

poor?

The working poor: why are wages so low?

• Wage determination in a perfect market– See handout, Graph 1 and Graph 2– Firms and workers are price takers– Perfect information– Perfect mobility

Will raising the minimum wage help the poor?

• Let’s take a look at the “basic facts”

Basic facts about the minimum wage (As seen by Opponents of increases)

• Who earns the minimum wage?– http://www.epionline.org/index_mw.cfm

View the Slide show!!!– only 2.8% of employees above the age of 30 – average family income of a minimum wage

employee is $44,331. – Single parent or single earner in a family

with kids account for only 15% of minimum wage earners.

Basic facts about the minimum wage(As seen by Proponents of increases)

• http://www.epinet.org/content.cfm/issueguides_minwage_minwagefacts Print the 3 pages of facts!!!!

• A minimum wage increase would raise the wages of millions of workers.– 14.9 million workers (11% of the workforce)

• Minimum wage increases benefit working families.– Approximately 3.9 million parents with children

under 18 would benefit.

Proponents View, cont.

• Minimum wage increases benefit disadvantaged workers.– 59% of beneficiaries are women – 14% of working women would benefit directly – African Americans represent 11% of the total

workforce, but are 16% of workers affected – Hispanics represent 14% of the total workforce,

but are 19% of workers affected

Proponents View, cont.

– 38% of the benefits would go to households in the bottom 20% receive only 5% of national income

– Among families with children and a low-wage worker

• on average, the minimum wage worker contributes (59%) of the family's earnings.

• 46% of minimum wage workers contribute 100% of their family's earnings.

– Southern and Mid-Western states would benefit most.

Proponents View, cont.

• A minimum wage increase would help reverse the trend of declining real wages for low-wage workers.

• The inflation-adjusted value of the minimum wage is 30% lower in 2006 than it was in 1979.

[The source for the next three slides is, Jared Bernstein and Isaac Shapiro, “BUYING POWER OF MINIMUM WAGE AT 51-YEAR LOW,” Economic Policy Institute, http://www.epinet.org/issuebriefs/224/ib224.pdf]

Proponents View, cont.

• A minimum wage increase is part of a broad strategy to end poverty.– Antipoverty effectiveness of the

combination of minimum wages and EITC falls when neither is indexed

• There is no evidence of job loss from the last minimum wage increase.

Where do economists stand on raising the minimum wage?

See:http://www.epi.org/minwage/epi_minimum_wage_2006.pdf

State minimum wages

• 29 states have minimum wage rates higher than the federal minimum

• 15 states set their minimum wage rate at the federal rate

• 1 states have minimum wage rates less • 5 states have no minimum wage laws than

the federal rate.• Source: http://www.dol.gov/esa/minwage/america.htm

Why do some states raise their minimum wages above the federal level?

• You tell me

Living wages• Basic facts

– See http://www.epinet.org/content.cfm/issueguides_livingwage_livingwagefacts

– The living wage level is usually the wage a full-time worker would need to earn to support a family above federal poverty line, ranging from 100% to 130% of the poverty measurement.

– 71 municipalities have enacted living wage laws to date

Living wage as a solution to poverty

• Should Notre Dame pursue living wages as a solution to poverty?– For the two different sides of the story, see– http://www.epionline.org/index_lw.cfm and– http://www.epinet.org/content.cfm/issueguides_livi

ngwage_livingwage

– To see what labor economists think about living wages, see

– http://www.epionline.org/study_detail.cfm?sid=13&group=lw

Review

• The remaining slides are a supplemental presentation about the traditional effects of increasing minimum wages on individual labor supply. Be sure to ask if you cannot explain predicted changes in hours worked for increases and decreases in wage rates, and also in nonwage income.

theory of labor force participation for groups Changes in average wage$

• How would an decrease in the minimum wage affect the LFPR of poor single mothers? An increase? Explain–1998 $6.31 per hour (2006$)–2006 $5.15 per hour–2007 $7.25 per hour

Source: Jared Bernstein and Isaac Shapiro, “BUYING POWER OF MINIMUM WAGE AT 51-YEAR LOW,” Economic Policy Institute, http://www.epinet.org/issuebriefs/224/ib224.pdf

Effects of Wage Changes on LFP and Hours Worked

• Substitution effect– %∆L/%∆w– If income is held constant, and increase in

the wage rate will increase the price of leisure and reduce the amount demanded thereby increasing work incentives.

– The substitution effect is positive: wages and hours move in the same direction

• %∆L/%∆w > 0

Wage increase with substitution effect dominating:The observed change

0 Work Hours(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours(maximum work hours)

A

C

Dobserved changeU2

U1

N1

N2

Y

Wage increase with substitution effect dominating:The income effect

0 Work Hours(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours(maximum work hours)

A

C

D

income effectU2

U1

N1

N3

Y

Wage increase with substitution effect dominating:The substitution effect

0 Work Hours(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours(maximum work hours)

A

C

D

substitution effectU2

U1

N3

N2

Y

Effects of Wage Changes on LFP:Substitution effect cause LF entry

0 Work Hours(maximum leisure hours)

Leisure hours (l)

Work hours (L)

Income (Y)

0 Leisure hours(maximum work hours)

U3

U2

U1

A

B

C

DE

Raising the wage from the slope of BE to the slope of BC increases hours from 0 to d:Substitution effect > income effect

d