The Role of the Minimum Wage, A Mankiw Assignment


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Greg Mankiw poses an interesting question to his students, and the rest of us readers, on his blog.  Essentially, we are being asked to evaluate the policy change to increase the minimum wage after 2007.  And he shares the following data.  Between 2007 and 2010...

The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.

Read the assignment here

Antonio Fatás took a stab at the assignment.  Fatás, a former student of Mankiw, is now a professor of economics at INSEAD.  He points to a key characteristic of the period Mankiw isolates:

Not only we have seen an increase in the minimum wage but also a deep recession. It is possible that some wages have fallen and old employees have been replaced by new ones who are now paid a lower wage - right at the level of the minimum wage. This would also cause an increase in the number of workers paid the minimum wage. But, of course, there is a potential second effect of a recession going in the opposite direction: it can be that during recessions those who lose their jobs are workers that are being paid lower wages and, as a result, you might see the percentage then decreasing as opposed to increasing.

He plots out the variables in play:


As we can see this percentage has been decreasing since 1979. In that downward trend we also see three spikes: around 1991, around 1997 and 2008-10. The shape of this line, including the spikes correlate very well with the minimum wage (in green). It is measured in real terms (1996 dollars) and the scale is on the right hand side of my chart (the scale does not start at zero to see some meaningful variation). The real minimum wage has also been decreasing since 1979. A decrease that has been interrupted with increases in 1991, 1997 and 2007-09. These three increases coincide with the spikes in the blue line, the % of workers being paid the minimum wage. So the mechanical explanation is very visible in the chart, as you raise the minimum wage you see more workers being paid that rate.

Read Minimum Wage and Unemployment for the full answer.  Click here.

Posted 10-17-2011 7:30 AM by Graham Griffith
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