Reasonsforwagerigidity.PDFVIP

Reasons for wage rigidity Reasons for wage rigidity 1. Minimum wage laws 2. Labor unions 3. Efficiency wages CHAPTER 6 Unemployment CHAPTER 6 Unemployment slide 23 The minimum wage The minimum wage The minimum wage is well below the eq’m wage for most workers, so it cannot explain the majority of natural rate unemployment. However, the minimum wage may exceed the eq’m wage of unskilled workers, especially teenagers. If so, then we would expect that increases in the minimum wage would increase unemployment among these groups. CHAPTER 6 Unemployment CHAPTER 6 Unemployment slide 24 1 The minimum wage in the real world: The minimum wage in the real world: In Sept 1996, the minimum wage was raised from $4.25 to $4.75. Here’s what happened: Unemployment rates, before after 3rd Q 1996 1st Q 1997 Teenagers 16.6% 17.0% Single 8.5% 9.1% mothers All workers 5.3% 5.3% Other studies: A 10% increase in the minimum wage increases teenage unemployment by 1-3%. CHAPTER 6 Unemployment CHAPTER 6 Unemployment slide 25 Labor unions Labor unions Unions exercise monopoly power to secure higher wages for their members. When the union wage exceeds the eq’m wage, unemployment results. Employed union workers are insiders whose interest is to keep wages high. Unemployed non-union workers are outsiders and would prefer wages to be lower (so that labor demand would be high enough for them to get jobs). CHAPTER 6 Unemployment CHAPTER 6 Unemployment slid