By John Kessler for presentation at Indiana University Purdue University Fort Wayne on April 3, 2008
Two Sides of the Debate
The current debate over the minimum wage in Congress is a classic one. Ultimately the debate is over efficiency and equity. Do we want efficiency in the market or do we want equitable outcomes from the market? This debate gives us an opportunity to notice that economics is not “a set of established and universally accepted principles that govern how the economy works” [3, p. 244]. Perhaps many educators believe the debate concerning the minimum wage has been long settled.
The traditional view of the minimum wage debate, as portrayed in the majority of introductory economics texts, is that of the neoclassical supply and demand model . This view was put forward in an article by George Stigler in 1946 written in response to a similar historical situation to what we face today . In 1946, legislators argued that the minimum wage set in 1938 had been eroded by inflation and that a raise in the minimum wage was in order. This same argument, that the real value of the federal minimum wage is less than it has been since 1955, is heard today in Congress .
In the neoclassical model, equilibrium in the labor market is found at the intersection of supply and demand (see Figure 1).
In a perfectly competitive market the wage of labor and the amount of labor hired is found at the point where the supply of labor is equal to the demand for labor. Stigler argued correctly, according to this model, that if a minimum wage is set at a point higher than the equilibrium wage it would act as a price floor effectively creating a surplus of labor and therefore unemployment (see Figure 2) .
This is the model that is used to argue against the minimum wage. Raising the minimum wage according to this model would have potentially many negative effects:
This list is by no means exhaustive but is meant to give a general sense of the arguments against raising the minimum wage.
Other arguments that have been proposed against the minimum wage are that the Earned Income Credit is better at targeting the truly needy  and that increasing the minimum wage will increase the school dropout rate of teenagers . According to Stigler the issue should be settled . Using this model there are no good reasons for raising the minimum wage. There are many negative effects of a minimum wage set above the equilibrium wage and if the minimum wage is set below the equilibrium wage it is not binding on the market so why waste our time arguing over it.
Why is it then that 664 economists, including at least 5 Nobel laureates, would sign a petition calling for the minimum wage to be raised ? The argument that inflation has eroded the real value of the minimum wage is true and the desire to help those in poverty is a strong one. However, there is more to the story. The neoclassical model presented above is just that, a model of reality. It is an attempt to take the complex world of reality and simplify it into a model that can be used to predict and explain. The model of perfect competition assumes some specific parameters. Two of these assumptions are that in a perfectly competitive market there is perfect information and no or little transaction costs. However, in reality perfect information does not exist and transaction costs are not zero in a labor market.
Economists understand that there is a difference between theory and empirical research. Theoretical models should be tested by empirical research to see if they work. If they do not work then new theoretical models will be developed in light of the new evidence. Economics is after all a science with hypotheses that are proposed and tested. The question then is, does the classical model of perfect competition predict and explain the effect of raising the minimum wage?
David Card and Alan Krueger set out to answer this question in their 1994 study of the fast-food industry in New Jersey and Pennsylvania . This study has become the basis for the arguments in favor of raising the minimum wage. Card and Krueger compared the fast-food industry in New Jersey before and after it raised the minimum wage with the same industry in eastern Pennsylvania which did not raise the minimum wage. They picked the fast-food industry because it is known for high turnover and it employs many people at low wages. In direct contradiction to the neoclassical model, Card and Krueger found no decrease in employment in the fast-food industry after New Jersey raised the minimum wage. In fact, Pennsylvania saw unemployment increase in the fast-food industry when they did not raise their minimum wage at the same time that New Jersey saw an increase in employment when they raised their minimum wage. The 1994 study by Card and Krueger has been attacked by many for their research methods, but they have answered these attacks in their 2000 article where they reanalyzed the data and arrived at the same conclusions .
In light of this new evidence the neoclassical theory has to be reevaluated. What could explain this apparent contradiction in outcomes? One reason could be that the minimum wage was not binding. If the economy is growing and the equilibrium wage is above the minimum wage then it would have no effect. This does not seem to be the case in this study. At the time the minimum wage was raised, New Jersey’s economy was in a recession. The neoclassical model would predict that there would be a large increase in unemployment in this industry in this case, but this did not happen.
There are two possible answers to this contradiction. First is the efficiency wage theory. This theory argues that if wages are increased then worker productivity will increase as well. The increased productivity of workers would be enough to counter the higher cost of labor [9, p. 255]. The other possible answer is that the monopsony model is a better model of the labor market than the perfectly competitive model .
Joseph Stiglitz has argued that the neoclassical model does not deal with market failures in the labor market. There is not the assumed perfect information in the market which the classical model requires. Instead, imperfect information abounds in the labor market [10, pp. 10-11]. This undermines the two assumptions of the neoclassical model which requires that there be perfect information and no or little transaction costs in a perfectly competitive market. Imperfect information increases the transaction costs of searching for a new job. Stigler recognized this as a constraint on labor mobility because of the cost of moving to a new job [4, pp. 363-364]. Without the ability to transfer from one employer to another quickly and with minimal costs the labor market is not a perfectly competitive one. These constraints lead to asymmetries in the bargaining power of labor and management and management may be left with monopsonistic power in the negotiation of wages.
A monopsony is when there is only one buyer and many sellers. It is similar in effect to a monopoly which is only one seller and many buyers. Like a monopoly, a monopsony is a profit maximizer. The profit maximizing point is where marginal cost is equal to marginal revenue, or, in the labor market, marginal revenue product. Unlike in a perfectly competitive market place, a monopsony is not a price taker. In a competitive market the supply of labor would be the same as the marginal cost of labor. In a monopsony market however, the marginal cost of labor is above the supply of labor because the monopsony dictates the wages. For each worker it hires the wage increases for all workers. The monopsony will continue to hire workers until the point where MC=MRP. The wage will be w and the number of people hired will be L. This is a lower wage and less employment than would be seen in a competitive market (w’ and L’ respectively) (see Figure 3).
In Figure 3 the triangle created above the supply curve, below the MRP curve and to the right of L and to the left of L’ shows the deadweight loss created by the monopsony. The rectangle created above w, below w’, to the right of the x axis and to the left of L shows the gain to the employer at the expense of the employees.
In this kind of market if there is a minimum wage instituted there will actually be an increase in wages and employment at the same time. The marginal cost of labor becomes the minimum wage at w” and the intersection of marginal cost and marginal revenue product (point A) increases employment to L” (see Figure 4). In these terms the minimum wage actually helps to fight the exploitation of the workers by the employer.
In light of this new model of the labor market and the evidence that increasing the minimum wage may not have the harmful effects predicted by the neoclassical model, what should be done with the way the current proposal to increase the minimum wage is taught? A report by the Joint Economic Committee in 1995 points out that the Card and Krueger study flies in the face of fifty years of research on the minimum wage . Yet, over 600 economists think that the new research is significant. This points out that “reasonable people can, and do, disagree about the significance of recent findings indicating that moderate minimum wage increases have negligible effect on employment” [3, p. 243]. It is possible that the Card and Krueger study was only true of the specific industry in the specific states that they studied and the results can not be generalized to the nation as a whole. If so, do we want to just throw out the past fifty years of research that show contradictory results?
Teaching the Debate
he insights to be gained by using the minimum wage as an illustration in class are many. The debate leads to an intriguing learning opportunity for students. William Becker argues that “textbook discussions of markets are too often hypothetical and do not involve current events and observable phenomena. Textbook-style competitive markets may work for agricultural commodities, at least in an idealized world, but they do not work for many items of interest to students” [12, p. 111]. The minimum wage is a current issue that will interest students and provide an opportunity to discuss the “too often hypothetical” models presented in textbooks. Alan Krueger has also proposed ways in which the new research on the minimum wage can be used to teach about economics and how economics is done . In this paper comments will be directed at those who are currently using the minimum wage as a topic of discussion and illustration in their class; those who are not should read the Krueger article and decide for themselves if it is appropriate for use in their class.
If a high school teacher is using the minimum wage to illustrate a model of the economy, it is most likely to illustrate the neoclassical model as explained by Stigler. Teachers around the country have state standards which they must address. Many of these standards are based on the National Voluntary Content Standards of the National Council on Economic Education . In the national standards the monopsony model is not mentioned. The closest they come is stating that the economics course should discuss the role of the government when the market does not allocate resources effectively when the market is not competitive [13, p. 37]. They do specifically advocate for the teaching of monopoly markets and the effects of binding ceilings and floors in competitive markets [13, p. 20]. It is probably a safe assumption that what is being taught in the economics classroom is similar to what is presented by the NCEE standards.
Another option is that the teacher may be teaching an Advanced Placement course in economics. According to The College Board economics course description the AP Microeconomics test has questions on perfect competition, monopoly, oligopoly, and monopolistic competition that constitute 25-35% of the test [14, p. 8]. The AP Macroeconomics test has questions on demand, supply and market equilibrium as a subcategory of basic economic concept questions that are only 8-12% of the test [14, p. 24]. This means that an AP economics teacher is more than likely not discussing the monopsony model and if they are using the minimum wage as an illustration it is probably to illustrate the neoclassical model of a price floor. In the course description the competitive market model is emphasized but it does state that “the effect of deviations from perfect competition, such as minimum wages, unions, monopsonies, and product market monopolies, can also be considered” [14, p. 7]. It is questionable whether these concepts will actually be considered because teachers are faced with limited time to cover a considerable amount of content. With, at most, 25-35% of the test covering other models, there is probably little time to cover these “deviations from perfect competition” that are not actually going to be part of the test. So even though The College Board acknowledges these alternative models, they are not testing students on their knowledge of this new research and therefore not offering teachers an incentive to cover them.
Public school K-12 educators, in response to the mounting pressure to address the standards presented to them, are more likely to limit their instruction to only what is asked of them by these standards. The extent of the standards requires teachers to cover a large volume of information in a relatively short period of time. In order to accomplish this daunting task teachers end up going an “inch deep and a mile wide” with their coverage of the curriculum. This does a disservice to the students. Teachers are more likely to present only one model and one interpretation of the minimum wage, if they present it at all, because of the limitations put on them by the standards. By presenting only one side of the debate we end up with more indoctrination and less education of our students.
The potential for indoctrination is greatest in the public schools which are feeling the most pressure to address these standards. The ability of public schooling to lead to indoctrination is a fact recognized by Karl Marx in The Communist Manifesto where he argues in favor of “free education for all children in public schools” [15, p. 53]. This was also recognized in the 1982 Levittown, New York case of Pico v. Board of Education, where “the Board of Education argued that ‘a principal function of all elementary and secondary education is indoctrination…to transmit the basic values of the community…in secondary school a prescriptive, inculcative or indoctrinative process applies’” [16, pp. 46-47]. When children are younger this may very well be the case. Public schooling has long been recognized as necessary for teaching the “values of the community” and because of this requires teachers to take into account “the values and cultural assumptions of the children’s families” [16, pp. 45-46]. However, as students get older this image of the role of the teacher changes to mean “that students should be exposed to a variety of ideas and values and that wherever possible the classroom should be a marketplace of ideas” [16, p. 46].
Public school students do not have a choice to be in class or not because truancy laws mandate attendance and if they are only getting one perspective then there is the potential for indoctrination. Absent some sort of voucher system, most public school students also have no choice over what school they attend. College students on the other hand can choose which classes to enroll in and what schools to attend. If college students feel they are being indoctrinated they can choose to leave and go somewhere else. Some college students may choose a specific school because of the particular viewpoint that it represents, whether because they want to reinforce beliefs they already hold or because they want to learn different perspectives. The choices available to the college student are not open to the public school student and therefore it is even more important for public school teachers to be cognizant of the potential for indoctrination.
Recognition of this potential should encourage those teachers who are using the minimum wage as an example in their class to present a balanced perspective. If a teacher is purposely not presenting both sides of the minimum wage debate then they are acting unethically. However, there may be reasons why the teacher is not doing this on purpose. They may just be responding to the standards that are given to them which do not require them to teach the monopsony model. In this case they should not be using the minimum wage as an illustration of a binding price floor in their class because they will leave their students with one perspective and with little understanding of the complexity of the debate.
On the other hand, teachers may not be aware of the new research presenting a different interpretation of the minimum wage. This is no excuse. The National Board of Professional Teaching Standards recognizes the need for teachers to “critically examine their practice…and adapt their teaching to new findings, ideas and theories” [2, p. 4] and to “stay abreast of current research and when appropriate, incorporate new findings into their practice” [2, p. 17]. In context, these statements are in regard to pedagogical research. However, just as teachers should stay current in pedagogical research, they should also stay current with research in the subject areas that they teach. The American Federation of Teachers has expressed that teachers “need to know deeply the subject they teach” [17, p. 48] and “need to keep current with the latest knowledge in their subject areas” [17. p. 49]. In this case indoctrination may occur due to teacher ignorance which is unacceptable. Teachers need to be well versed in their subject area because “you can’t teach what you don’t know well” [17, p. 48]. This underscores the need for teachers to have “ongoing, meaningful professional development” [17, p. 49] and illustrates why university teacher preparation programs should “require rigorous preparation in pedagogy and the academic disciplines [17, p. 9].
In the end, “values of responsibility and care to the well-being of students are primary” to the teaching profession [18, p. 208]. The teaching profession offers the potential of inflicting harm on students if teachers are not properly prepared and do not exercise care in how they present curriculum . It is likely that blatant indoctrination is rare. Few teachers when presenting the minimum wage would make an outright normative statement that the outcome presented in the classic model is “good” and therefore should be the basis of our public policy. However, do we imply that this model is the appropriate interpretation of reality simply by leaving out alternative models? If so, this leaves our students with a misunderstanding about the different sides of the minimum wage debate. Ethical educators must take into consideration the possibility of this subtle indoctrination and for the well being of their students should do what they can to prevent it.