The article in the WSJ reports on a drive to increase L.A.'s minimum wage.
SUMMARY: A drive to raise L.A.'s minimum wage to nearly twice the federal level would turn the city into a prime test for whether high pay requirements help lift workers out of poverty or increase joblessness and blunt growth. Related article: A mandated 40% increase in labor costs will put people out of work. But, hey, anything to help get out the vote.
CLASSROOM APPLICATION: Students can use wage and marginal revenue product of labor to examine the effect of an increase in a minimum wage on firm-specific employment decisions and labor market supply and demand to examine the effect of a minimum wage on employment levels in a labor market.
QUESTIONS:
1. (Introductory) What is the effect of an increase in a minimum wage on employment levels in the fast-food industry?
2. (Advanced) The related opinion piece states, "The other 24 employees are responsible for the remaining 75%, which comes to about $3,125 an employee. That is a generous estimate, as entry-level employees likely contribute less than their more experienced colleagues. If minimum-wage crew members working 25 hours a week received a 40% raise, they would earn an additional $3,705 a year. That is $580 more than what the employee contributes to the restaurant's profits." What important point is missing from this analysis? Hint: What is the effect of an increase in the wages paid by all competitors in a market on the equilibrium price of the market's product? Does this analysis imply that all fast-food outlets will lay off all employees, with the exception of the general manager? The opinion piece does continue with the following: "But here's what middle-class business owners, who live in the real world, will do when faced with a 40% increase in labor costs. They will cut jobs and rely more on technology.... The only other option is to raise prices."
3. (Advanced) Do customers of fast-food restaurants effectively pay for an increase in a minimum wage? If so, would the burden of a minimum wage increase fall primarily on lower-income households?
CLASSROOM APPLICATION: Students can use wage and marginal revenue product of labor to examine the effect of an increase in a minimum wage on firm-specific employment decisions and labor market supply and demand to examine the effect of a minimum wage on employment levels in a labor market.
QUESTIONS:
1. (Introductory) What is the effect of an increase in a minimum wage on employment levels in the fast-food industry?
2. (Advanced) The related opinion piece states, "The other 24 employees are responsible for the remaining 75%, which comes to about $3,125 an employee. That is a generous estimate, as entry-level employees likely contribute less than their more experienced colleagues. If minimum-wage crew members working 25 hours a week received a 40% raise, they would earn an additional $3,705 a year. That is $580 more than what the employee contributes to the restaurant's profits." What important point is missing from this analysis? Hint: What is the effect of an increase in the wages paid by all competitors in a market on the equilibrium price of the market's product? Does this analysis imply that all fast-food outlets will lay off all employees, with the exception of the general manager? The opinion piece does continue with the following: "But here's what middle-class business owners, who live in the real world, will do when faced with a 40% increase in labor costs. They will cut jobs and rely more on technology.... The only other option is to raise prices."
3. (Advanced) Do customers of fast-food restaurants effectively pay for an increase in a minimum wage? If so, would the burden of a minimum wage increase fall primarily on lower-income households?
Reviewed By: James Dearden, Lehigh University
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