Minimum Wage

Read and consider the Minimum Wage case study presented in section 6.1.  Evaluate the arguments presented for and against the minimum wage.  States have the right to mandate a minimum wage that is higher than the federal minimum wage.  Consider your own home state, research its current demographics, cost of living, minimum wage laws, unemployment history, etc. and write an argument for your state representatives supporting or contesting an increase in the minimum wage.

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The Minimum Wage

An important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally adequate standard of living. In 2015, the minimum wage according to federal law was $7.25 per hour. (Some states mandate minimum wages above the federal level.) Many European nations have minimum-wage laws as well, sometimes significantly higher than in the United States. For example, even though the average income in France is almost 30 percent lower than it is in the United States, the French minimum wage is more than 30 percent higher.

To examine the effects of a minimum wage, we must consider the market for labor. Panel (a) of Figure 5 shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government doesn’t intervene, the wage normally adjusts to balance labor supply and labor demand.

Figure 5How the Minimum Wage Affects the Labor Market

Panel (a) shows a labor market in which the wage adjusts to balance labor supply and labor demand. Panel (b) shows the impact of a binding minimum wage. Because the minimum wage is a price floor, it causes a surplus: The quantity of labor supplied exceeds the quantity demanded. The result is unemployment.