Question

The following statement is false. Please explain why.

Approximately 1/3rd of production costs in the fast food industry go towards labor, and a significant share of fast food employees are paid the minimum wage. Suppose that payments to minimum wage employees constitute 15% of a small, competitive fast food company’s current costs, and that the minimum wage is expected to increase by 20%. The company’s production costs are expected to increase by at least 3%. (Note: 20 percent of 15 percent is 3 percent. Take the first and second sentences as given. You should address the third sentence.)

Answer 1

The minimum wage comes at a cost to society: it distorts decisions in the labor market and leads to deadweight loss. This is an equity-efficiency trade-offTrade-off that arises when policies that deliver a more equitable distribution of resources also generate deadweight loss.

That government impose minimum wages because they care about ensuring that the working poor earn a fair wage. Another way of saying this is that the minimum wage is an intervention by the government that is meant to change the distribution of society’s resources. If unskilled workers are going to earn more, then this means they are obtaining more of the total resources available in an economy. And if they are getting more, then somebody else must be getting less. We would like to have some way of thinking about the effects of the minimum wage on the distribution of income.

total wages paid in the labor market, sometime called the wage bill. By looking at the wage bill, we can find out if the additional wages earned by the working poor exceed the wages lost by those who find themselves unemployed.

Total wages are equal to the total hours worked multiplied by the hourly wage:

total wages = real minimum wage × hours worked.