IB Docs (2) Team
Minimum wage
Introduction
This lesson focuses on the arguments for and against the imposition of a minimum wage on the economy. It is important for students to recognise that there is no definitive answer to this question but they need be aware of the arguments both in support of a minimum wage as well as the economic arguments against it.
Enquiry question
The impact of a price floor on the market for labour? Does a minimum wage create additional unemployment?
Teacher notes
Lesson time: 80 minutes
Lesson objectives:
Explain why governments impose price floors on wages.
Draw a minimum wage diagram and analyse the impacts of a price floor on the market for labour.
Calculate the possible effects of a minimum wage on the market for labour, including possible changes to employment levels and surplus labour levels (HL only).
Teacher notes:
1. Beginning activity, start with the opening question and video, which should take around 10 minutes. I generally start this particular class by asking my students to draw a supply and demand diagram for a labour and then place a minimum price on the diagram. Before moving onto the next activity take some time to discuss the validity of what Ben Shapiro argues. Is minimum wage a restraint of the free market?
2. Processes - technical vocabulary - The students learn the content reading the class handout and the first activity - allow 10 minutes for this.
3. Reinforcement processes - the handout includes 3 reinforcement activities, which will test a range of skills. The activities focus on the impact of a price floor on the labour market. Activity 4 is a HL activity and includes mathematical tasks while activities 2 and 3 are suitable for a whole class discussion. (30 minutes or 20 if the HL activity is not completed).
4. Application activity - activity 5 contains an example of a paper one type question, which you can either print off or project onto the whiteboard. Allocate 10 minutes for this activity.
5. Reflection activity - Finish the lesson with the two final discussion activities (20 minutes).
Beginning question
Is imposing a minimum wage a restraint of the free market and if so does this matter?
Key terms:
Minimum wage - a minimum price placed on the price of labour which workers are prohibited from earning below.
Real wage / classical unemployment - unemployment in the economy that occurs when labour market imperfections preserve a higher real wage rate than the equilibrium real wage rate.
The activities on this page are available as a PDF file at: 
Minimum wage
Activity 1
The diagram to the right illustrates the market for labour in a nation. At equilibrium wage (We) the demand for labour = supply of labour. The government decides to implement a minimum wage rate, above We.
(a) Illustrate this on a diagram, showing the excess supply of labour at the new wage rate.
(b) Does this mean that minimum wage creates unemployment?
Not necessarily, while some jobs may be lost, others maybe created by additional activity in the economy - a result of minimum wage workers spending their new higher salaries. Governments can also mitigate the negative effects of the wage by introducing it in gradual increments over a period of time.
Activity 2
Take a look at the following two videos and outline which opinion you find the most convincing and why?
And now for the alternative point of view?
Remember your opinion before examining the following table. Has this changed your opinion of the impact of the minimum wage on the economy?
Activity 3
The table below shows the minimum wage level and unemployment rate in selected US States
| US State | Minimum wage level per hour | Unemployment rate % of the labour force (2022) |
| Washington DC | $ 16.10 | 4.0 |
| California | $ 15 | 4.1 |
Massachusetts | $ 14.25 | 3.4 |
| New Jersey | $13 | 3.4 |
| South Dakota | $9.95 | 2.4 |
| West Virginia | $ 8.75 | 4.1 |
| Indiana | $ 7.25 | 3.0 |
| Kansas | $ 7.25 | 2.8 |
| Kentucky | $ 7.25 | 4.0 |
| Texas | $ 7.25 | 4.0 |
| Wyoming | $ 7.25 | 3.3 |
| Georgia | $ 7.25 | 3.0 |
1. Looking at the above table evaluate whether the imposition of a minimum wage contributes to unemployment or not? Outline arguments in support of the above statement and two counter arguments.1
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There would appear to be little evidence to suggest that the introduction of a minimum wage raises unemployment figures. If anything the figures perhaps suggest the opposite correlation, with some of the highest minimum wage levels operating in states with the lowest unemployment rates e.g. South Dakota. There is a plausible argument which states that while raising wage levels may price some workers out of a job this is compensated by the fact that increasing wages for low paid workers creates demand for goods and services and therefore additional demand for labour. We would normally expect low paid workers to have a high MPC - marginal propensity to consume.
2. What additional information would we require before answering the above question?
To answer this question fully the respondent would require information on per capita GDP / income levels from the above states. For instance it may be that the states with a high minimum wage level also have a high GDP per capita and this explains the relatively low unemployment rates. For instance Georgia may have a relatively low GDP per capita which explains the relatively high unemployment rate, despite the low minimum wage level. Perhaps with a higher minimum wage level unemployment in the state would be even higher?
Activity 4 (HL only)
| Price (wage in $) | Quantity demand (m) | Quantity supplied (m) |
| 6 | 24 | 12 |
| 8 | 22 | 16 |
| 10 | 20 | 20 |
| 12 | 18 | 24 |
| 14 | 16 | 28 |
Demand for labour = 19 million
Supply of labour = 22 million
Therefore the number of unemployed people will be 3 million people
Activity 5: Link to the assessment
Examples of a paper one question include:
Part (a)
Explain why a government might impose a price ceiling on the housing rental market but a minimum price for labour.
Command term: Explain
Meaning explain why a price ceiling is suitable for the housing market but a price floor suitable for the labour market.
Key term: price ceiling, price floor
Governments may introduce both forms of price control for the same reason, to legislate against exploitive behaviour and protect the most vulnerable, whether this be low income tenants or low income workers.
However, the disadvantages of both policies include shortages, the market not operating at the socially optimum level, an increase in products sold in parallel / unofficial markets and in the case of minimum wage, a possible increase in unemployment.
Part (b)
Using real life examples, evaluate the effectiveness of minimum wage legislation in reducing poverty levels in a country.
Command term: Evaluate
The command term requires to formulate an argument on the effectiveness of wage floors in reducing poverty.
Key term: price floor
Real life examples might include a comparison of US states which have different levels of minimum wage to compare poverty rates between them or a comparison of broadly similar nations (both with and without) minimum wage to compare poverty levels. However, such an example must also recognise that a minimum wage is only one factor in determining rates of poverty and differences in levels of poverty between nations can also be explained by other social and economic factors.
Arguments in support of this policy are that it can protect low income workers from exploitation by unscrupulous employers. This is particularly true of young and unskilled workers who are the most in need of protection.
Income inequality is reduced as the wage rise only applies to the lowest wage workers while leaving the salaries of other workers untouched.
Arguments against this policy include a recognition that a price floor may cause rises in unemployment as some employers will choose not to hire as many workers as before.
Other employers may simply pass on the additional costs of labour onto the consumer in the form of higher prices.
The conclusion should state that the group most likely to benefit from policy, as well as the most likely to face greater employment insecurity, are those groups that the government is trying to help - young workers and the unskilled.
Real life examples could include a nation they are familiar with which operates a minimum wage.
Activity 6: Misconceptions about minimum wage
After what you have learnt in this lesson, summarise the costs and benefit of the minimum wage in your country? Have your opinions changed as a result of this lesson. The final video aims to tackle what are sometimes perceived as the misconceptions regarding the subject.
7. Final activity: What is it like to live on the minimum wage in USA
So in conclusion does the minimum wage represent a living wage?
Hint:
Much of the answer to this question will depend on which state you live in. Different states have different levels of minimum wage as well as costs of living. Much will also depend on you personal circumstances. The lady in the video was a single mother of two. Living on the minimum wage as a 25 year old single lady / man would clearly be very different.
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