Poverty Lecture 10:
Why are wage rates so low?
Today’s Readings
•Schiller Ch. 6: 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
• Who are the working poor?
• Why are wage rates so low?
• Will raising minimum wages help the
poor?
• Will raising the living wages help the
poor?
• Summary--why work doesn’t work
Who are the working poor?
(all data refer to 2006)
• 7.4 million Americans lived in 4.0 million poor
families where at least on adult spent 27
weeks in the labor force, working or looking
for work
• 70 % were White workers
• Black and Hispanic workers were
overrepresented (as usual)
• The working poor rate was higher for women
• Source: US Bureau of Labor Statistics,
http://www.bls.gov/cps/cpswp2006.pdf.
The working poor:
Why are wage rates 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)
• Most minimum wage workers aren’t poor”
– Who earns the minimum wage?
• http://www.bls.gov/cps/minwage2007.htm
• http://www.epionline.org/index_mw.cfm
– View the Slide show, Minimum wage Misconceptions!!!
• only 1.5% of employees above the age of 25
• average family income of a minimum wage
employee is over $43,000.
• Single parent or single earner in a family with
kids account for only 15% of minimum wage
earners.
Basic facts about the minimum wage
Opponents view, cont.
• Minimum wage increases cause job
losses
– Teenagers from well-to-do families crowd
out low-skill employees
– Black teenagers and young adults
experience four times more employment
loss than non-blacks.
Basic facts about the minimum wage
Opponents view, cont.
• The vast majority of minimum wage
workers move on to higher paying
jobs as they accumulate experience.
– Two-thirds of minimum wage workers
receive raises within 1-12 months of hiring
– Annual median real wage growth for
minimum wage employees is nearly 7%
Basic facts about the minimum wage
Opponents view, cont.
• Raising the minimum wage
decreases benefits and increases
taxes.
– Minimum wage workers lose government
benefits like EITC, FS, and health
insurance.
– The effective marginal tax rate sometimes
exceeds 100%
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!!!!
• The minimum wage increase to $7.25 (July
2009) will raise the wages of millions of
workers.
– 13.0 million workers (10% of the workforce)
• Minimum wage increases benefit the
children of working families.
– Approximately 6.4 children under 18 will benefit.
Proponents View, cont.
• Minimum wage increases benefit
disadvantaged workers.
– 59% of beneficiaries are women, the largest group
of beneficiaries
– 12% 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% that receive 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 (see next
slide)
Proponents View, cont.
• There is no evidence of job loss from
the last minimum wage increase.
– Study by David Card and Alan Krueger
most often cited
– How do these authors explain this
contradiction to economics theory?
Where do economists stand on
raising the minimum wage?
See: http://www.epi.org/minwage/epi_minimum_wage_2006.pdf
State minimum wages
• 24 states have minimum wage rates higher
than the federal minimum
• 14 states set their minimum wage rate at the
federal rate
• 7 states have minimum wage rates lower
than the federal rate.
• 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_livi
ngwage_livingwagefacts
– The living wage level is usually the wage a fulltime 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
Recap: Why Work Doesn’t Work
Earnings = hours X wage rate
• Too few hours
– Lack of commitment
– Physical and mental challenges
– Dependents needs
– Inadequate demand
– (Unfair) employer practices (Walmart)
• Discrimination on basis of race, gender, creed,
sexual orientation, physical appearance
Recap: Why Work Doesn’t Work
Earnings = hours X wage rate
• Wages rates are too low
– Market values contributions, not needs
• Slack demand
• Abundant supply
– Lack of soft skills (work readiness)
– Lack of hard skills (education, training)
– Unfair employer practices
• Declining strength of unions
– Absence of societal and hence governmental
commitment to adequate minimum wages
– (Unfair) employer practices
• Unequal pay for equal work
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
–2006
–2007
$6.31 per hour (2006$)
$5.15 per hour
$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
Y
U2
D
U
C
1
observed change
N
2
N1
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
Wage increase with substitution effect dominating:
The income effect
Y
income effect
U2
D
U
1
N3
C
N1
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
Wage increase with substitution effect dominating:
The substitution effect
Y
substitution effect
U2
D
U
1
N2
N3
C
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
Effects of Wage Changes on LFP:
Substitution effect cause LF entry
Income (Y)
U3
Raising the wage from the
slope of BE to the slope of
BC increases hours from 0
to d:
U2
C
U1
Substitution effect > income effect
D
E
B
A
0 Leisure hours
(maximum work hours)
d
0 Work Hours
(maximum leisure hours)
Leisure hours (l)
Work hours (L)