03 Jun Question ASSIGNMENT THE REAL MINIMUM WAGE
Question
ASSIGNMENT THE REAL MINIMUM WAGE
NAME: ____________________________________________
Learn the facts. Then try on the stories like clothes. – John le Carre, Tinker Tailor Soldier Spy
The 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 whatever
wage is necessary to attract the number of employees they need. Conservatives also argue that it
doesnt actually benefit the working poor, because as a HYPERLINK
"http://en.wikipedia.org/wiki/Price_floor" price floor it creates unemployment. Liberals, on the
other hand, argue that the minimum wage rarely represents a deterrent to hiring because its usually
below the equilibrium wage. Liberals also argue that even if some workers lose jobs to the
minimum wage, others who still have jobs lose because the minimum wage hasnt kept up with
inflation.
That final claim (that the minimum wage hasnt kept up with inflation) can at least be tested against
the 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 minimum
wage provided for by Federal law at various dates (note that states can impose higher minimum
wages, and that workers receiving tip income and farm workers, among others, have often been
subject to lower minimum wages).
The Consumer Price Index (CPI) values are from the Federal Reserve Economic Data database of
the 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 FRED
database). Note that the CPI data does not begin until January 1, 1947, even though the minimum
wage 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 the
table by the Consumer Price Index values in the third column. Then multiply that result by 100, to
restore the decimal place to its correct location. A spreadsheet has been provided to make this even
easier.
A price index is a measure of the average level of prices over time. The index is set at 100 as of
some 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, when
the 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 has
lost? Explain your answer.
Draw a supply-demand diagram of the market for unskilled/semiskilled labor. Suppose the
nominal 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, an
effective 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 the
new equilibrium wage is $6.50. Would your answer to the first part of this question change as a
result of this new equilibrium price? Explain your answer.
Date
Jan. 1, 1947
Jan. 25, 1950
March 1, 1956
Sept. 3, 1961
Sept. 3, 1963
Feb. 1, 1967
Feb. 1, 1968
May 1, 1974
Jan. 1, 1975
Jan. 1, 1976
Jan. 1, 1978
Jan. 1, 1979
Jan. 1, 1980
Jan. 1, 1981
April 1, 1990
April 1, 1991
Oct. 1, 1996
Sept. 1, 1997
July 24, 2007
July 24, 2008
July 24, 2009
July 31, 2013
Nominal Minimum
CPI (1982-84 = 100),
Wage (not adjusted for closest date
inflation)
$0.40
21.48
$0.75
23.61
$1.00
26.89
$1.15
29.98
$1.25
30.72
$1.40
33.00
$1.60
34.20
$2.00
48.60
$2.10
52.30
$2.30
55.80
$2.65
62.70
$2.90
68.50
$3.10
78.00
$3.35
87.20
$3.80
128.90
$4.25
135.10
$4.75
158.20
$5.15
161.20
$5.85
207.667
$6.55
218.690
$7.25
215.442
$7.25
233.318
Real Minimum Wage
(adjusted for inflation)
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