Minimum Wages and Economic Justice: A Classroom Exercise

Abstract

This paper presents a classroom exercise for an introductory economics course that allows students to discover the economic and social impacts of working for minimum wages. Students are asked to estimate a budget necessary for both a desirable and sustainable standard of living for those earning a minimum wage income. By engaging in active learning on topics such as economic justice, normative economic policy, living wages, and non-material needs, the exercise is an effective vehicle for integrating social economics into a principles course; and offers an opportunity to augment traditional economic pedagogy. Extensions, variations, and a suggested assessment tool for the exercise are also provided.

Keywords:

• Minimum wage
• economic justice
• economic pedagogy
• social economics

Acknowledgement

The authors would like to thank two anonymous referees for exceptionally helpful comments and suggestions.

Notes

 1 For 2011, the total number of individuals working for an hourly wage totaled 73.9 million. Of these, 1.7 million earned exactly the minimum wage, with another 2.2 million earning less than the minimum wage. Thus the share of hourly workers earning wages at or below the federal minimum is 5.2% (US Department of Labor, Bureau of Labor Statistics, 2011). Of those living below the poverty level and 16 years or older—the working poor—41.4% worked full time in 2010 (US Census Bureau, 2011: 15).

 2 In 1983, Secretary of Agriculture John R. Block volunteered his family to feed themselves for one week on a food stamp budget allotted for a family of four with no income to demonstrate that the program was capable of meeting the nutritional and dietary needs of a family living in poverty (New York Times, 1983). The irony of this experiment seems to be lost in that it failed to demonstrate that this diet was sustainable, and thus served as an official rationalization for deep social and economic injustices.

 3 Instructors may use the US Department of Labor, Bureau of Labor Statistics’ (2010) Consumer Price Index weights as a reference point. There are seven main categories with the following budget shares: housing (41.7%), food and beverage (14.8%), transportation (17.3%), medical care (6.6%), education and communication (6.4%), apparel (3.6%), recreation (6.3%), and personal care and supplies (3.3%).

 4 Of course a budget might exceed the $15,080 parameter. If so, it should be noted but the expenditures should not be revisited.

 5 This section, although certainly not exhaustive, highlights some of these main topics. Indeed, this section only presents some topics for discussion that would be appropriate for a principles course. In an undergraduate labor economics course, for example, the causes of the employment and spillover effects of a change in minimum wage laws could be introduced (Card and Kruger, 1994, 1997), in addition to efficiency wage theory, and the validity of the neoclassical model of the labor market. See Kruger (2001) for additional topics.

 6 Pollin (2003) estimated that the added costs to a firm of a living wage ordinance ranged between 0.9% and 3.9% for firms in Los Angeles, New Orleans, and Santa Monica. To create a range of feasible price increases, one could assume that prices rise by an equivalent amount of the above cost increases.

 7 Firms could absorb the costs through productivity increases, lower turnover and absenteeism, and, of course, pass them on to consumers in the form of higher prices.

 8 The basic budget income threshold is similar to our definition of a sustainable standard of living, although more broad: it is “the income which families… need for a safe and decent, yet basic, living standard,” (Wicks-Lim and Thompson, 2010: 11) and ranges from one to three times the official poverty threshold. These figures, however, do not include entertainment expenses, which would raise the threshold.

 9 Official poverty thresholds and self-sufficiency standards have little in common. Although this could provide fodder for discussion in courses that specifically focus on poverty, it should be mentioned that letting the discussion move in this direction will consume a large amount of time if the concept of poverty is to be discussed in a fair and understandable way. However, a brief discussion of the poverty threshold developed by Orshansky (1965) is useful. Observing that the average family in the mid-1960s spent one-third of its income on food, Orshansky concluded that this could be used to determine whether a family was living in poverty by determining how much income was needed to buy the food necessary for a healthy diet, and then multiply this number by three. This estimate failed to account for housing, medical care, transportation, etc. costs. Since this forms the foundation of estimating the poverty threshold, it is easy to illustrate to students that the current poverty line is much too low. If the average family spent one-third of its budget on food, today's average family spends closer to one-seventh on food, meaning that our current poverty line is less than half what it should be if Orshansky's original methodology is used.

10 In an advanced class, or a class with more time than can be devoted to this exercise, it might be appropriate to question Maslow's theoretical underpinnings. For Maslow it would seem that those with more income are always happier or more satisfied than those with less income. Recent research casts doubt on Maslow's findings by critically examining the process of preference formation, positional externalities, relative comparisons, institutional structures, and class arrangements (see Frank, 1999, 2005; Veblen, 1934). Indeed, contrary to neoclassical assumptions, utility functions may be interdependent, and people in different income groups attach different statuses to particular goods, thus potentially altering the hierarchy of needs.