Question

Let’s explore how a 20% increase in the federal minimum wage from $7.25 to $8.70 would affect workers and employers. Currently, about 8 million people (out of a total of 140 million workers) earn between $7.25 and $8.70. To predict how a 20% increase in the minimum wage would affect workers and employers, we need to know something about the elasticity of demand for low skill labor. Throughout the problem, assume workers average 25 hours per week.

Many economists have studied the relationship between higher minimum wages and the number of jobs available to minimum wage workers. Many (but not all) studies tend to indicate that some companies do reduce hiring when the minimum wage increases. Some firms may replace minimum wage workers with machines or with more highly skilled workers, while other companies might close down or relocate to another area.

Assume that the elasticity of demand for labor is -0.22. This estimate is on the high end of most published studies, and there is disagreement about this number. You’ll be looking at summaries of competing studies below.

a. Is demand for labor relatively elastic or inelastic? If the wage goes up 20%, will hiring fall by less than, more than or exactly 20%?

b. What will happen to the number of people working at the minimum wage as a result of the 20% increase in the minimum wage? First find the percentage change and then find the exact number of jobs lost and jobs that remain.

c. What will happen to the earnings of minimum wage workers taken as a group? Will earnings increase or decrease? Although we haven’t discussed total earnings before, you should be familiar with total revenue. Total earning would just be HOURS X WAGE X NUMBER OF WORKERS and we will assume hours do not change.

d. Who benefits from the higher minimum wage? Who is harmed? Are all workers helped by a higher minimum wage? I want sentences with numbers –preferably 4 sentences.

e. Many studies (starting with David Card & Alan Krueger) in the past 20 years provide estimates for the elasticity of demand for low skill labor around zero. Assume the demand for low skill labor is perfectly inelastic. Repeat numbers a-d, but this should be really easy.

Answer 1

a) The elasticity of demand is the percentage of change in the quantity demanded, due to a percentage change in the price of that commodity.

Ths elasticity of demand= (Percentage change in qiantity demanded/ percentage change in price.)

Here, as the elasticity of demand is -0.22, which is less than 1, it will be considered inelastic. Thus, for a 20%increase in the wage of labour, the percentage of fall in the quantity demanded of labour will be less.

b) The percentage change in the wage is 20%

The elasticity od dmand= -0.22

the percentage change in the quantity demanded= 20*(-0.22)= -4.4

Previously the quantity of labour (q0) demand is 8 million.

q1= 7.648

Thus, after the increase in the minimum wage, the quantity demanded of labour is 7.648.

Thus, the number of job loss= 0.352 million.

c) The total earnings of the workers is hours *wage *number of workers.

The hours of work= 25 hours per week.

Initial wage was $7.25, and the number of workers were 8 million.

Thus the initial total earnig was= 25*7.25* 8= 1450 millions

Now, when the wage increases to $8.70 and the number of workers decreases to 7.648. The total earnings becomes= 25*8.70*7.648= 1663.4 million.

Thus, the total earnings increases.

d) When the minimum wage is increased, the people who lose their jobs are the unskilled labours, while the jobs of the skilled labours remaind unaffected. Thus the unskilled labourd are harmed by the increase in the minimum wage.