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Let's explore how a 20% increase in the federal minimum wage from $7.25 to $8.70 would affect workers and employers. Currently, about 8 million people (out of a total of 140 million workers) earn between $7.25 and $8.70. To predict how a 20% increase in the minimum wage would affect workers and employers, we need to know something about the elasticity of demand for low skill labor. Throughout the problem, assume workers average 25 hours per week. Many economists have studied the relationship between higher minimum wages and the number of jobs available to minimum wage workers. Many (but not all) studies tend to indicate that some companies do reduce hiring when the minimum wage increases. Some firms may replace minimum wage workers with machines or with more highly skilled workers, while other companies might close down or relocate to another area. Assume that the elasticity of demand for labor is -0.22. This estimate is on the high end of most published studies, and there is disagreement about this number. You'll be looking at summaries of competing studies below. a. Is demand for labor relatively elastic or inelastic? If the wage goes up 20%, will hiring fall by less than, more than or exactly 20%? b. What will happen to the number of people working at the minimum wage as a result of the 20% increase in the minimum wage? First find the percentage change and then find the exact number of jobs lost and jobs that remain. c. What will happen to the earnings of minimum wage workers taken as a group? Will earnings increase or decrease? Although we haven't discussed total earnings before, you should be familiar with total revenue. Total earning would just be HOURS X WAGE X NUMBER OF WORKERS and we will assume hours do not change. d. Who benefits from the higher minimum wage? Who is harmed? Are all workers helped by a higher minimum wage? I want sentences with numbers -preferably 4 sentences. e. Many studies (starting with David Card & Alan Krueger) in the past 20 years provide estimates for the elasticity of demand for low skill labor around zero. Assume the demand for low skill labor is perfectly inelastic. Repeat numbers a-d, but this should be really easy
