Economic Policy Problem

Aaron BeyeElliot Haas

Shawn HastingsJay Schrade

TOPIC: MINIMUM WAGE

ECONOMIC PROBLEM

Minimum wage raises the total cost for firms,

forcing them to reduce levels of employment,

which is a major factor in the current

unemployment problem.

PROPOSED SOLUTION

Do away with the minimum wage to boost the

employment of labor in the market. This will

decrease unemployment and reduce

outsourcing to foreign countries.

Economic Problem of Outsourcing

Minimum wage increases has caused firms to

move businesses to other countries through outsourcing.

This has lead to greater unemployment and

the destruction of low labor jobs in the U.S.

When did outsourcing start?Outsourcing occurred during the 1980’s.This started with the outsourcing of low labor

skilled jobs.Occurred because of Reagan's tax system and

how it decreased the size of government programs.

Is now still occurring but mostly with high skilled labor.

Where has the labor gone?The low skilled labor has gone to China and

Mexico.The high skilled labor is currently going to

India.With China now starting to become more

technologically advanced low skilled labor is starting to move to other Asian countries: such as Malaysia.

Why did outsourcing occur?Companies outsource because the U.S. has

higher labor costs than other countries.Here in the U.S. the minimum wage in $7.25

while in china workers work for $1 to $2.Also education levels are rising above the

U.S. in other countries, this is why high skilled labor is leaving.

Easy to move businesses because no language barrier.

How do we keep jobs here?Abolish the minimum wage so it can settle at

equilibrium.Because of increased shipping costs firms

will then stay in the U.S. even with a higher wage here in the U.S.

Studies show that the wage will settle around $5.

How do we bring the companies back?Companies will not return do to the high

overhead costs involved in moving production.

You have to give them incentives to move.We can do this through giving tax breaks to

companies here in the U.S..We can give grants or lower interest rates to

entrepreneurs.We can then subsidize the overhead costs

that firms take on by moving back to the U.S.

According to a 1978 article in American Economic Review…

90% of economists surveyed

agreed that having a minimum wage

INCREASES unemployment among low-

skilled workers!

If we were to RAISE minimum wage…

Firms look to find alternative solutions to human labor when wage rates are too high! (Bad for unemployment rate)

Minimum Wage is

INCREASED

Workers will not produce enough to pay for the firms cost of labor at a higher rate

Therefore…Firms seek out

other, more productive methods of doing the jobs. (ex. Robots, Electronics)

If we ELIMINATE minimum wage, or even just decrease it…

MINIMUM WAGE

Low Skilled U.S. Workers

are more appealing to

U.S. firms due to lower labor costs.

-UNEMPLOYMENT RATE will DECLINE

-More profits for firms

Not so obvious PROBLEM in the job market:- With the CURRENT minimum wage rate, Illegal

immigrants are taken advantage of by paying them below the minimum wage rate, “under the table”, for low skilled jobs. (Hiring, Firing, and Paying without record of transaction)

- One problem with this “under the table” business is that it leads to LESS TAXES PAID BY WORKERS, providing the government with an inadequate amount of tax dollars.

- Also, this leads to less jobs for low skilled U.S. Citizens who are aware of the minimum wage and desire that rate for a job.

THIS policy REDUCES the amount of “Under the Table” labor operations!

Companies will not be as tempted to illegally hire, fire, and pay illegal immigrants with no records of transaction.

These low skilled jobs will become more available for “low skilled” U.S. citizens, probably replacing some illegal immigrants that are in the workforce today.

BENEFITS:

Overall Effects on Low Skilled Workers

Firms will increase use of low skilled laborers More profit for firms, lower unemployment rate

Less “Under the Table” pay Government will receive more income taxes; firms are less likely to

take advantage of illegal non-English speaking immigrants when U.S. citizens are willing to work for the same rate

General welfare effects on workers ‘Classical’ thinking: Price floors = BAD!

Deadweight Loss:

Ctnd.No consensus in economic academiaMost leaning toward classical thought

Welfare Effects on PoorWhole theoretical idea was to help low-income

workersDid it work?Depends on whom you ask, but . . .Minimum wage increases the proportion of families

living at or below the poverty line (NSW 2005)Lowers welfare according to all common,

traditional welfare measures (GPW 2001)Including the Gini IndexGini = Gap between actual and “equal”

distribution of wealth divided by total wealth

ContinuedSome are better off

If they still have a jobSome lose their jobsSome have reduced working timeNet effect of above 3 is a welfare loss for

society (NSW 2004)

Some Good ThingsEmployers don’t reduce benefits when

minimum wage increases (S&K 2004)Health insurancePensions

Highly inelastic demand for labor can accommodate a minimum wage fairly wellEntirely dependent on the specific market

What Does it All Mean?Let the Market decide!Unionization is good (DFL 1996)Better that unions and firms clash than the

government impose a minimum wageMost markets are not uniformOften not even similar

Homogeneous standards for a heterogeneous economy will lead to inefficiency and welfare loss

ECONOMIC PROBLEMMinimum wage raises the total cost for firms,

forcing them to reduce levels of employment,

which is a major factor in the current

unemployment problem.PROPOSED SOLUTION

Do away with the minimum wage to

increase competitiveness with foreign

markets and boost the employment of labor

in the market.

WHY PROPOSAL SHOULD BE CARRIED OUT

Abolition of the minimum wage will bring jobs back to the United States

Minimum wage has adverse effects on low-skilled workers

The supposed benefits of the minimum wage are not so great

Bibliography Kanellos, Michael. "How clean tech will bring manufacturing jobs back to U.S.." CNET News. Nov. 1 2007.

News blog, Web. 9 Nov 2009. <http://news.cnet.com/8301-10784_3-9808686-7.html>. Engardio, Pete. "Can the U.S. bring jobs back from China?." BusinessWeek. June 19, 2008. Mcgraw-Hill,

Web. 9 Nov 2009. <http://www.businessweek.com/magazine/content/08_26/b4090038429655.htm>. McCormack, Richard. "Good luck competing against Chinese Labor Costs." Manufacturing and

Technology News. May 2, 2006. Publishers and Producers, Web. 9 Nov 2009. <http://www.manufacturingnews.com/news/06/0502/art1.html>.

Constitutional Rights Foundation. summer 2005. Web. 9 Nov 2009. <http://www.crf-usa.org/bill-of-rights-in-action/bria-21-3-c.html>.

Seader, David. "The United States' experience with outsourcing, privatization and public- private partnerships." The national council for Public-Private Partnerships, Web. 9 Nov 2009. <www.ncppp.org>.

LeVan, David. "Outsourcing Property Taxes to the United States." A Tax to Grind. Oct. 8 2009. Advantax group, Web. 9 Nov 2009. <http://www.advantax.com/ATaxToGrind/post/2009/10/08/Outsourcing-Property-Taxes-to-the-United-States.aspx>.

Brownfeld, Peter. "White House Under Fire for Outsourcing Proposal." Fox News. Feb 13,2004. Associated Press, Web. 9 Nov 2009. <http://www.foxnews.com/story/0,2933,111287,00.html>.

Williams, Walter E. “The Minimum Wage Vision”, August 9, 2006. Kearl, J. R., et al., “A Confusion of Economists?” American Economic Review 69 (1979): 28–37.

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