ECO ASSIGNMENT THE REAL MINIMUM WAGE

ASSIGNMENT THE REAL MINIMUM WAGENAME: ____________________________________________Learn the facts. Then try on the stories like clothes. – John le Carre, Tinker Tailor Soldier SpyThe Federal minimum wage has been a source of controversy since its introduction in 1938.Conservatives argue that it represents an infringement on employers freedom to pay whateverwage is necessary to attract the number of employees they need. Conservatives also argue that itdoesnt actually benefit the working poor, because as a HYPERLINK"http://en.wikipedia.org/wiki/Price_floor" price floor it creates unemployment. Liberals, on theother hand, argue that the minimum wage rarely represents a deterrent to hiring because its usuallybelow the equilibrium wage. Liberals also argue that even if some workers lose jobs to theminimum wage, others who still have jobs lose because the minimum wage hasnt kept up withinflation.That final claim (that the minimum wage hasnt kept up with inflation) can at least be tested againstthe facts. The table on page 2 shows the history of the minimum wage, based on the U.S.Department of Labors web site ( HYPERLINK "http://www.dol.gov/whd/minwage/chart.htm"http://www.dol.gov/whd/minwage/chart.htm). The table shows the highest nominal minimumwage provided for by Federal law at various dates (note that states can impose higher minimumwages, and that workers receiving tip income and farm workers, among others, have often beensubject to lower minimum wages).The Consumer Price Index (CPI) values are from the Federal Reserve Economic Data database ofthe St. Louis Federal Reserve Bank ( HYPERLINK"http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt"http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt) (the database is often called the FREDdatabase). Note that the CPI data does not begin until January 1, 1947, even though the minimumwage began on October 24, 1938.Your assignment is as follows:(1) Adjust the nominal minimum wage for CPI inflation, to convert it to a real, or inflationadjusted, wage. To do so, divide the nominal minimum wage amounts in the second column of thetable by the Consumer Price Index values in the third column. Then multiply that result by 100, torestore the decimal place to its correct location. A spreadsheet has been provided to make this eveneasier.A price index is a measure of the average level of prices over time. The index is set at 100 as ofsome date (for the CPI, its the average of all months in 1982, 1983, and 1984), for th(2) Next, answer the following questions:5 points: How much was the real minimum wage, adjusted for inflation, on January 1, 1947, whenthe CPI data begins?5 points: What was the highest value of the minimum wage, in real dollars? When did that occur?5 points: What is the nominal minimum wage right now? What is the real minimum wage now?20 points: Has the minimum wage kept up with inflation? Who has gained from this and who haslost? Explain your answer.Draw a supply-demand diagram of the market for unskilled/semiskilled labor. Suppose thenominal equilibrium wage in this market is $8.50 / hour.10 points: Is a minimum wage of $7.25 an effective price ceiling, a non-effective price ceiling, aneffective price floor, or a non-effective price floor? Explain your answer.10 points: Suppose that either the supply curve increases or the demand curve decreases, so that thenew equilibrium wage is $6.50. Would your answer to the first part of this question change as aresult of this new equilibrium price? Explain your answer.DateJan. 1, 1947Jan. 25, 1950March 1, 1956Sept. 3, 1961Sept. 3, 1963Feb. 1, 1967Feb. 1, 1968May 1, 1974Jan. 1, 1975Jan. 1, 1976Jan. 1, 1978Jan. 1, 1979Jan. 1, 1980Jan. 1, 1981April 1, 1990April 1, 1991Oct. 1, 1996Sept. 1, 1997July 24, 2007July 24, 2008July 24, 2009July 31, 2013Nominal MinimumCPI (1982-84 = 100),Wage (not adjusted for closest dateinflation)$0.4021.48$0.7523.61$1.0026.89$1.1529.98$1.2530.72$1.4033.00$1.6034.20$2.0048.60$2.1052.30$2.3055.80$2.6562.70$2.9068.50$3.1078.00$3.3587.20$3.80128.90$4.25135.10$4.75158.20$5.15161.20$5.85207.667$6.55218.690$7.25215.442$7.25233.318Real Minimum Wage(adjusted for inflation)* CPI is the All Urban Consumers All Items version. Closest date means the CPI date closest to the date of the change in theminimum wage.Part II. Fun with DoofusesBack on July 31, 2013, business analyst Neil Cavuto of Fox Business News had this comment aboutthe fact that fast-food restaurant workers were striking for a higher minimum wage:Only in America today can our politicians bemoan a livable wage, forgetting a lot of folkswould be grateful for any wage, any chance, any job, anytime. All I know is as soon as Iturned 16 and heard a fast food chain called Arthur Treacher’s was opening a store in my townof Danbury, Connecticut. I stood in a line for a positionany position. I got the job, and soonrocketed to relief manager, then weekend manager, then by 16 and a half, full-time storemanager! And it all started at two bucks an hour. And all the fish I could eat. (Source:HYPERLINK "http://www.motherjones.com/mojo/2013/07/neil-cavuto-doesnt-know-howminimum-wage-works" http://www.motherjones.com/mojo/2013/07/neil-cavuto-doesntknow-how-minimum-wage-works)Clearly, this is a heartfelt opinion by Mr. Cavuto. But lets see if he has his facts straight.According to the Fox News website, Mr. Cavuto was born on September 22, 1958. So if he got hisjob at Arthur Treachers at the age of 16, the date would have been about October 1, 1974.1) Yes or no: was Mr. Cavutos memory of how much he was paid per hour correct or not? (Checkthe table against the quote)2) If we adjust his hourly wage as of October 1974 for inflation, how much would it be in 2013dollars? To do this, solve the following equation:2013 wage = 1974 wage (2013 CPI as of Aug. 1, 2013 / CPI as of Oct. 1, 1974)To spare you the effort of looking it up on the FRED website, I can tell you that the CPI as ofOct. 1, 1974 was 51.000. The CPI as of Aug. 1, 2013 is in the table. So Mr. Cavutos $2.00 perhour in 1974 was equivalent to a wage of $_______________ in 2013.3) Mr. Cavuto also claimed that he got all the fish [he] could eat. If we include the value of thefish he ate as part of his wage, would his wage have been higher, lower, or the same as hisnominal wage? How would that affect his real wage? And how many fast-food employees areprovided with all the [fast food] they can eat by their employers in 2013?A final comment: Prof. Timothy Taylor is the managing editor of the Journal of EconomicPerspectives. He also writes an excellent blog called Conversable Economist that coverseconomic topics in language that most economics students can understand pretty easily. Heres apost on the minimum wage from February, 2013:HYPERLINK "http://conversableeconomist.blogspot.com/2013/02/minimum-wage-and-law-ofmany-margins.html" http://conversableeconomist.blogspot.com/2013/02/minimum-wage-and-lawof-many-margins.html