Question

An article in the Wall Street Journal noted that a study by the U.S. Congressional Budget Office "estimated raising the minimum wage to \(\$ 10.10\) an hour would reduce U.S. employment by 500,000 but lift 900,000 Americans out of poverty." Why might raising the minimum wage reduce employment? How would it raise some people out of poverty? What effect might these estimates have on a normative analysis of the minimum wage?

Short answer

Raising the minimum wage might reduce employment because it increases the cost of labor for employers, possibly leading them to reduce their workforce to balance out the increased costs. On the other hand, it could lift people out of poverty by increasing their income levels, thus improving their standard of living. These estimates would have a significant impact on a normative analysis of the minimum wage, depending on the weightage given to either reducing poverty or maintaining employment levels.

Step-by-step solution

Understanding effect of raising minimum wage on employment

Raising the minimum wage increases the cost of labor for employers. If the new minimum wage is higher than the value an employer gets from an employee's work, the employer might decide to reduce the number of employees to balance out the increased cost, leading to a reduction in employment. This can be particularly true for small businesses or sectors where profit margins are thin.

Understanding effect of raising minimum wage on poverty

An increase in minimum wage raises the income levels of low-wage workers. This means they receive more money for their work which can potentially lift them out of poverty, provided they keep their jobs. More money allows them to afford better housing, food, education, and other essentials, improving their standard of living.

Understanding normative analysis

Normative analysis in economics involves value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. These judgements can be influenced by various factors, including these estimates. For example, if one values reducing poverty over potential job loss, they might see this policy as beneficial.

Considering the effect of these estimates on a normative analysis of the minimum wage

These estimates could significantly affect a normative analysis of the minimum wage. If a policy-maker or analyst places a higher value on lifting people out of poverty, they might see the policy as a success, despite the potential job loss. However, if they value employment status more, they might see the policy as costly. Therefore, the impact of these estimates on normative analysis depends on one's individual values and judgments.

Key concepts

Employment Impact

Increasing the minimum wage has potential effects on employment levels, especially among businesses. Employers face higher expenses as wages rise. Thus, they might choose to employ fewer workers. Think of it like a balancing act. If a business must pay more per worker, it may not afford to keep the same staff size.

• Small businesses, in particular, may struggle because their profit margins are thinner to begin with.
• Industries reliant on low-skilled labor, such as retail or hospitality, are more affected.
• Employment reduction might include cutting hours or laying off employees who bring less value than the higher wage.

This dynamic illustrates the trade-off between compensating workers fairly and maintaining current employment levels. To better understand, consider a scenario where a pizza parlor must decide between increasing pizza prices or cutting staff hours to manage higher wages. Each choice affects their business model and employment.

Poverty Reduction

Increasing the minimum wage doesn't just have business implications; it directly impacts the workers. This rise in wages can be a crucial step toward lifting people out of poverty. Suddenly, workers have more money to meet daily needs.

• Higher income means better access to essentials like food, shelter, and healthcare.
• Such economic changes can lead to improved quality of life and increased consumer spending.
• Families can invest in education or savings, which supports long-term financial security.

The key here is stability: more financial security means workers can better withstand emergencies. For example, with more savings or the ability to buy healthier food, they reduce their stress and improve their overall well-being.

Normative Economic Analysis

When we move from straightforward cause-and-effect to perspective-based analysis, we enter the realm of normative economic analysis. Here, people's values and beliefs play a significant role in assessing policies like minimum wage increases.

• It involves making judgments about what economic policies should achieve.
• Different individuals or groups may prioritize certain outcomes over others.
• This means potential trade-offs need to be considered, like choosing between reducing poverty and maintaining jobs.

For example, someone who believes that social welfare and poverty reduction are most important might support raising the minimum wage despite job losses. Conversely, an individual who values job preservation may view this policy as negative. Therefore, normative analysis often depends on what goal one considers most desirable and weighs decisions accordingly, reflecting diverse economic perspectives.