The ten unavoidable problems with a living minimum wage discussed in this short book at http://www.amazon.com/dp/B00KYDDLP4
1. Millions More Unemployed Even If the Number of Jobs Remains Constant.
2. High-cost labor will be used at a too-high wage, reducing total output.
3. Mandatory Discrimination Against the Disadvantaged. Nobody will Hire Disadvantaged Labor.
4. In the long run, more people will choose to remain minimum wage workers, reducing output.
5. Job Lock and few minimum-wage job openings. People will be locked into bad minimum wage jobs.
6. Wasteful Rent Seeking Job Search Costs
7. Unethical Rent Seeking Costs such as the Casting Couch
8. Knocking the first step off the job ladder for people who need it the most.
9. Reduced Job Training for Everyone.
10. Very Inaccurate Redistribution. Some of the poor gain; some of the poor lose. Some of the rich gain.
Using non-technical language and a dialogue format, this short book explains the problems with a high "living" minimum wage and the misleading minimum wage arguments. Economics concepts are presented in a Socratic discussion with a labor activist at McDonald's. The book's appendix contains supporting peer-reviewed work.
The author has a Ph.D. in Economics from the University of Maryland at College Park and has taught economics in the United States, Europe and Asia.
21. Questions and Classroom Exercises.
1. Leading, mostly liberal, economists sign
a letter calling for an increase in the
minimum wage. They claim:
“..increases in the minimum wage have had
little or no negative effect on the
employment of minimum-wage workers..”
Can employment remain constant (no
effect or no change) while unemployment
increases? Hint: what happens when more
people want to work at a higher minimum
wage?
A six percent effect might be “little”
depending on what your definition of little
is, but if you are one of the 500,000 workers
losing a job, is the effect little?
2. Draw supply and demand curves (lines)
for unskilled labor in a small town with a
completely inelastic (straight up and down
line) demand for labor curve. Make the
quantity of labor demanded 200 workers at
every wage (the price of labor). Make the
equilibrium wage (the price of labor) $7 per
hour. Make the equilibrium quantity of
labor supplied 200 workers at a wage of $7.
Make the labor supply curve (line) upward
sloping.
3. Draw in a dotted horizontal line at the
wage of $10 per hour. If the government
sets the minimum legal price of labor (the
minimum wage) at $10 per hour, show that
the quantity of labor demanded (workers
hired) remains constant at 200 people.
22. 4. On the dotted line (should be horizontal
at wage = $10) you drew in question 3, at a
wage of $10 per hour when government
sets the minimum legal price of labor at $10
per hour, show that the quantity of labor
supplied is more than 200 workers. Make
this quantity of labor supplied at $10 be a
10% increase from 200 (at $7) to 220 (at
$10) workers. Your supply and demand
graph does not have to be exactly to scale.
5. If the quantity of labor demanded at $10
per hour is 200 workers and the quantity of
labor supplied is 220 workers, how many
people will be unemployed? (subtract)
6. Will employers hire the best, most
experienced workers first or the worst
“disadvantaged” workers first. Do you think
the five or ten most disadvantaged workers
in town will ever be hired?
7. With more unemployment, will it be
easier or harder to find a job?
8. Give examples of rent-seeking actions
people may undertake to find the now
hard-to-find $10 per hour jobs.
23. 9. Suppose it turns out that demand for
labor is not perfectly inelastic (a vertical
straight line), but the quantity of labor
demanded will fall 5% from 200 to 190
workers at a wage of $10. Draw a new
supply and demand graph. Make one point
on the demand for labor curve ($10, 190
workers) and another point ($7, 200
workers). Draw a line connecting the two
points, which is the demand curve for labor.
Your drawing does not have to be perfectly
to scale.
10. Again draw in a dotted horizontal line
wage of $10 per hour. If the government
sets the minimum legal price of labor at $10
per hour, show that the quantity of labor
demanded (workers hired) now falls to 190
people.
11. Again, make the quantity of labor
supplied at $10 per hour be 220 workers. If
the quantity of labor demanded is 190 and
the quantity of labor supplied is 220, how
many people will be unemployed?
(subtract)
Advanced – Extra Credit. The Long Run.
12. Because of the higher $10 per hour
wage, employers install labor-saving
machinery that replaces 20 workers. Redo
questions 9, 10. and 11 with the labor
demand curve shifted left 20 workers at
every wage. Show that at a minimum wage
of $10, only 170 workers will be hired. Show
that 50 workers will be unemployed.
24. 13. Because of the higher minimum wage,
5 workers in town decide not to go to
community college and stay in the
minimum-wage labor force their entire
lives. Redo question 12 shifting the labor
supply curve 5 workers to the right. Show
that 55 workers will be unemployed.
14. Sunk costs. (explained in most
elementary economics textbooks but not in
this book). Suppose McDonald’s “sunk” or
invested $500,000 into a restaurant
building. Will McDonald’s close the location
when McDonald’s can no longer cover it’s
total costs (fixed plus variable) or variable
costs? If McDonald’s had not yet built the
restaurant but was only thinking about
building a restaurant at that location, would
McDonald’s build the restaurant if it could
cover only its variable costs or total cost?
15. As a Keynesian stimulus, compare an
automatic stabilizer such as unemployment
insurance with the always-on minimum
wage.
