Minimum wage Flashcards
when was national minimum wage introduced
1999
initial aims of minimum wage
reduce poverty,
reduce pay differentials between men and women,
reduce exploitation of low paid workers,
improve incentives to actively look for paid employment
is national minimum wage ever adjusted
annual uprating based on recommendation from low pay commission
what is aim of national living wage
continue to increase to reach 60% of median earnings by 2020 subject to standard economic growth
features of national living wage
introduced april 2016,
higher minimum wage for workers aged 25+,
ambition to continue to increase to reach 60% of median earnings by 2020 subject to sustained economic growth
what is the real living wage
VOLUNTARY RATE set independently by living wage foundation according to basic cost of living in uk,
applies to all workers 18+,
different to national living wage
what is difference between national living wage and real living wage
NLW for workers 25+ with ambition to reach 60% median by 2020,
RLW voluntary set independently according to cost of living applies to all workers 18+
who does minimum wage legislation affect more out of men and women and why
affects women more due to many more women work part time (has a lot more of impact on part time, differences between men and women more for part time due to this)
what were they originally scared about a minimum wage
improve wages of some but pushing another set of workers out of work (creates winners and losers)
what does the standard model look like
y wage x employment labour supply upward sloping labour demand downward sloping equilibrium price W* equates supply and demand to get equilibrium emplyment E*
what happens to standard model when minimum wage increased
Wmin added in as horizontal line above the equilibrium point (like in A level),
employment goes down
what is substitution effect *
firms substitute away from higher-cost factor to other factors
what is the scale effect *
costs increase, product price increase, product demand decrease, factor demand decrease (in perfect market so increase in cost is passed on because zero profit)
do scale and substitution effect work in the same way
yes, cause employment to fall
explain substitution effect
price of unskilled labour up, adjust production technology to make overall cost cheaper so substitute away from unskilled labour to factors that are relatively cheaper
explain scale effect (income effect)
reducing overall level of production
how do you measure effect of minimum wage from diagram
measured by elasticity of labour demand wrt own wage
what four things does how much employment goes down due to minimum wage depend on (Hicks-Marshall laws of Derived Demand) *
how easy it is to substitute with other factors (eg capital),
elasticity of supply of other factors (eg capital),
low-wage-labour share in total costs,
elasticity of demand for the final product
explain degree of substitutability with other factors (how much employment changes due to minimum wage)
places like supermarkets replacing a lot of staff for machines
explain low-wage-labour share in total costs (how much employment changes due to minimum wage)
how much of the firms total costs is explained by low-wage-labour costs (some employ a lot some don’t)
explain elasticity of demand for the final product (how much employment changes due to minimum wage)
if firm increases price and consumers price responsive then there will be a big change in employment (elasticity of demand)
whats possible reasons for employment not changing by as much as theory suggests **
labour demand is inelastic,
there are offsetting adjustments in non-wage labour costs (EAT - cut paid lunch, tesco cut sunday pay),
uncovered sector absorbs displaced unskilled workers
example of offsetting adjustments in non-wage labour costs (possible reasons for employment not changing as much as theory suggests)
EAT - cut paid lunch,
Tesco - cut Sunday pay
explain labour demand is inelastic (possible reasons for employment not changing as much as theory suggests)
in short run labour demand going to much more inelastic than long run
explain offsetting adjustments in non-wage labour costs (possible reasons for employment not changing as much as theory suggests)
cutting paid lunch and sunday hours,
other non wage benefits like pension contributions insurance and training
what does ‘Uncovered sector’ absorbs displaced unskilled workers mean (possible reasons for employment not changing as much as theory suggests)
might have affected workers in one sector where firms employ unskilled workers its possible at aggregate economy level the workers who are displaced from one sector to be absorbed in other sectors (find work where minimum wage doesn’t apply)
what does the fact that worker’s will find work where minimum wage doesn’t apply mean (possible reasons for employment not changing as much as theory suggests)
in uk it applies in almost all where doesn’t apply `,
in some economies there are even larger sectors,
could be informal economy (black market)
what was significant about uber and deliveroo drivers until recently (possible reasons for employment not changing as much as theory suggests)
they were counted as self employed so could be paid at the minimum wage
what has an increase in minimum wage led to
increase in number of self employed workers due to people finding loopholes and changing the way they do business
assumptions of standard model **
workers are the same (unskilled) will be paid same wage,
firms can employ as many workers as they want at the market wage,
wage (=mc) = marginal revenue product (MRP) of labour,
employment contracts are complete
explain wage (=MC) = marginal revenue product (MRP) of labour (assumptions for standard model)
the marginal cost of getting another unit of labour is just the wage as all workers are paid the same and there is an infinite number of workers willing to work for the wage
explain employment contracts are complete (assumptions for standard model)
firms can monitor workers and wage doesn’t play a role in incentivising effort
alternative assumptions/ model *
imperfect competition (firms have market power they are wage setting W
what is the marginal product of labour
change in output that results from employing an additional unit of labour
features of imperfect competition model *
firms have market power they are wage setting (classic monopsony case single employer with no competitors)
what are some examples of labour market frictions
imperfect information about job opportunities,
switching costs,
preferences for particular jobs (proximity flexibility)
what does upward sloping labour supply curve mean
if a firm wants to employ more workers they have to offer more in order to overcome switching costs or preference costs
what does the labour diagram look like for a wage setting firm
look on first lecture notes ever for micro
why is MC to the left of labour supply for the wage setting firm
if employ 10 workers might have to offer £9 an hour and 11 workers £10 an hour so the marginal cost is greater than the wage offered to the 11th person (so to the left of the wage curve)
where is equilibrium for the wage setting firm
where MC = MRP
does a minimum wage affect the MC curve
yes, see back of first page of lectures
how does minimum wage affect labour diagram
back of first page lecture notes
up to a point a minimum wage _____ lead to lower employment
doesn’t (think about diagrams (on first page of lecture notes)
what explains the labour discipline model
employment contracts are incomplete, effort responds to wage increases
draw curves that represent labour discipline model
look at back of first page of lecture notes
why does increase in wage affect effort for the labour discipline model
wages up so cost of losing job greater so they will put more effort in
is firms having to pay more always a bad thing
no, firms reduce profit but some offset by increase in effort provided by the workers
who are the losers from minimum wage legislation
firms have reduced profits when they use a lot of low skilled workers,
increased prices passed on due to higher costs for firms
what does progressive mean
helps people from the poorer end of the income distribution
what does regressive mean
primarily benefits people in rich part of income distribution
why is it not as simple as wages increase due to minimum wage
other income needs to be taken into account not just labour,
possible increase in taxes paid (offset reduction of benefits received)
whats an issue with minimum wage
doesn’t take into account household measures, might be poor worker within wealthy household so not representative
what are some main reasons for minimum wage not being well-targeted on poor households *
many of the poorest don’t work,
many low paid individuals don’t live in poor households,
low paid low income households receive in work tax credits that are withdrawn if their incomes rise
when testing evidence what do you need to do
internal validity, ‘ronseal test’ does the study identify the causal effect of the MW on employment,
external validity, can we apply results of study to other settings
what does missing counterfactual mean
unobserved and unobservable (can’t see what it would have been like if not introduced)
how does card and kreuger basically work
exploit state differences in minimum wage legislation so look at differences between New Jersey who had an increase in minimum wage and Pennsylvania who had no change in minimum wage
why did they use fast food restaurants for card and kreuger
major employers of low-wage workers,
likely to comply with legislation,
homogenous (one burger king is like another
what did they collect for card and kreuger
410 restaurants,
information on wages and number of people employed in each restaurant
equation for DiD
(treatment group after - treatment before) - (control after - control before)
where can you test for common trends
in the pre-period
if something is statistically significant is that enough
no sometimes things are statistically significant but really small so doesn’t really justify
what did card and kreuger find
found nothing that gave support to the predictions of the standard model
has minimum wage decreased employment in the uk
minimum wage has largely been introduced without decreasing employment in the uk
part time ____ are most affected negatively in terms of employment due to minimum wage in the uk
female
talk about Mark Stewart (2004) uk minimum wage **
focused on introduction of minimum wage, showed that nmw increased wages but found no significant employment effects
for the uk studies who was the treatment and control group
treatment those paid < nmw before reform,
control those paid just above nmw (+10%) before
focus of interest for uk paper
what is the probability that treated workers stayed in employment after introduction/increase in nmw
what did they find about nmw for treatment and control for uk
over whole nmw period, wages grew faster among the treatment group than the control group
does the low pay commission take into account possible employment effects
yes they take into account possible negative effects on employment
what is employment retention
ability of an organisation to retain its employees
do low paid workers have a low or high employment retention
low
what are the Hicks-Marshall laws of derived demand *
degree of substitutability with other factors (capital),
elasticity of demand for the final product (capital),
low-wage-labour share in total costs,
elasticity of demand for the final product
what do you need to do
go over all different classes including min wage Hicks-marshall laws of derived demand
what is the monopsony model of labour markets (imperfect competition) *
classic monopsony case - single employer with no competitors,
there are labour market frictions,
workers cannot move costlessly, firms have some market power
what are the labour market frictions in the classic monopsony case with single employer no competitors
imperfect information about job opportunities,
switching costs,
preferences for particular jobs (proximity, flexibility),
workers cannot move costlessly firms have some market power
when is the classic monopsony case unrealistic
unrealistic for many of the markets where MW bites - fast food, care homes, hairdressers etc (check 46/71)
for labour discipline model what does the isocost line represent
isocost = constant cost per unit of effort
what is a potential response to minimum wage from labour discipline model
workers respond to increase in wages by increasing their effort, shift in labour demand curve as labour is now more productive
things to take into account for overall employment discussion
assumptions may be more or less relevant depending on sector, or depending on time-frame (short vs long),
longer term effects,
dynamic model that allows entry/exit of firms putty clay model
what is the key feature of the putty-clay model
that potential entrants are able to pick a capital-labour ratio that is well-suited to the minimum wage while incumbents are not
what is the putty clay model
dynamic model that allows for entry/exit of firms,
firms choose technology (capital/labour mix), costly to adjust,
in the short-run, little substitution (possible scale?),
in the longer term they are forced out by new entrants with a different (cheaper) technology
what is a putty-putty model
costs are not fixed in a company,
intro of min wage firms just replace workers with capital,
increase in relative cost of labour –> proportionate fall in demand
how does workers moving from the covered sector to the uncovered sector work when minimum wage introduced
intro of MW causes reduction of employment in covered sector,
displaced workers move from covered sector to uncovered sector
what does the workers moving from covered sector to uncovered sector when minimum wage depend on
assume that workers can move between sectors,
depends on extent to which uncovered sector can absorb displaced workers from covered sector,
size of two sectors, mobility of workers between sectors, elasticity of demand in uncovered sector
what does draca (2011) show
that profits in low-wage firms were negatively affected (compared to high-wage firms),
magnitude constant with full cost pass-through
what does wadsworth (2010) show
that prices in low-wage industries in the UK (hospitality, cleaning etc) rose by more than RPI,
who consumes goods and services produced by low-wage workers
what is a clay-clay model
firm’s production technologies are fixed even in the long run, increase in relative cost of labour –> no change in demand
what is Hicks-Marshall laws of derived demand related to factor of substitution
elasticity of factor substitution is a key factor in determining the employment response to MW,
how do firms adjust factor inputs in response to changes in relative factor prices
what is the uncovered sector
sectors where the minimum wage does not apply,
exempt sectors,
informal economy
