Does Raising The Minimum Wage Help the Working Poor ?

You’re The Economist Series

What is Positive and Normative ?What is Positive and Normative ?

When Economists try to explain to the world, they are Scientists.

When Economists are trying to help improve it, they are policy advisers.

Scientists and Policy Advisers have different

goals. They use language in different ways.

Positive and Normative Analyses Positive and Normative Analyses

We discuss this with an example. Suppose two people are discussing minimum wage laws. Two statements that you might hear.

• Polly: Minimum wage laws cause unemployment.

• Norma: The Government should raise the minimum wage.

Positive and Normative AnalysesPositive and Normative Analyses

Polly and Norma differ in what they are trying to

do. Polly speaks like a Scientist. Makes a claim how

the world IS.

Norma speaks like a Policy Adviser. She is making a claim how she would like to CHANGE the world.

Positive Analyses Positive Analyses

Polly’s statement is a Positive statement. Positive Statements are descriptive.

Positive Statements make a claim about how the world is.

Positive statement make a analysis of facts.

Positive Analyses Positive Analyses Positive Statement can be confirmed or refuted by

examining evidence – like analyzing data on changes in minimum wages and changes in unemployment over a period of time. Thus, positive statements can be either True or False.

Positive Economics is descriptive economics, because in doing positive economics the aim is to describe as accurately as possible, what is.

Positive Analyses Positive Analyses Positive statement may be either simple or

complex, but they are always about matter of fact. The word positive means what is, it does

not mean something good or desirable. Positive statements are testable, i.e. it is possible

to prove such statements false by evidence gained by direct experience and observation.

Positive statements deal with cause effect relation that can be tested. for eg the statement’’ A high interest rate causes new housing loans to drop”

Normative Analyses Normative Analyses Norma’s statement is normative.(The

government should raise the minimum wage)

Normative statements are perspective.

They make a claim about how the world ought to be.

Normative economics is based on value judgments

Normative Analyses Normative Analyses Normative statement focuses on our beliefs, on

what should be and ought to be. In such statements we express our judgments about what is good and what is bad, what is desirable and what is undesirable, what is right what is wrong.

Positive and Normative AnalysesPositive and Normative AnalysesNormative statements are not testable. i.e. it is impossible to

prove such statements false by referring to factual evidence, gained through direct experience and evidence e.g. The statement. “Interest rate is too high” is a normative statement, as it has a value judgment.

2 persons can look at the same normative statement and come at a different normative conclusion about it. We agree or disagree based on our opinions.

Normative statements express a subjective opinion and involve our value judgments about how things should be. “The unemployment rate should be less then 1%”or “The economy should grow more than 5.5% per year”, are examples of normative statements.

Are Positive and Normative Statements related? Actually positive and Normative statements compliment each

other. We cannot do a good normative analysis unless we have done a good positive economic analysis.

Our values help us in establishing our goals. Positive analysis will help us to determine whether the actions we propose actually help us achieve the desired goals.

For e.g.. If we believe that teenagers should have a higher income. We further believe that , this goal can be achieved by increasing the minimum wage. We may support the demand for minimum wage. But will this work?

This is where positive analysis will come in to play. By doing a positive analysis of minimum wage we can answer the question will a increase in minimum wage result in increase in teenage income?

Thus we can conclude that in order to manage the economic problem better we must clearly identify and define our values, besides doing the positive analysis. We should be clear where or positive analysis ends, and our judgment begins.

Case StudyCase StudyIntroduction to the topic – Does raising the

minimum wage help the working poor ?

In 1938 Congress enacted legislation on “minimum-wage”. The legislation was intended to help the minimum wage worker earn a reasonable income for his livelihood. But the position today is s minimum wage worker in spite of working full time earns a deplorably low income and therefore the approach is whether the rise in minimum wage would help the working poor. However there are two varying thoughts on whether the raising of minimum wage would help the working poor ?

Positive StatementsPositive StatementsQ1 (a) Two positive and Two Normative Statements

from the Readings.

Two Positive StatementsPositive : A higher minimum wage for the

employed is enacted at the expense of jobs for unskilled workers.

Studies show that the minimum wage is a blunt weapon to redistribute wealth.

Normative StatementsNormative StatementsTwo Normative Statements

Normative : Raising minimum wage might help the working poor earn a living wage.

Normative : To help only the working poor, some economists argue that the government should target only those who need it.

Other minimum wage argumentsOther minimum wage argumentsHigher minimum wages reduce teenage

education levels and decrease workers long term earnings. It induces students to drop out of school thus reducing their long term employability – Positive Statement.

More people are attracted to work as wage earners. Enterprise will be low – Positive Statement.

Normative Statements Normative Statements Government should take initiatives towards

increasing investment so as to create more employment opportunities. – Normative Statement.

Government should devise policies aimed at helping the working poor – Normative Statement.

Government should lower taxation rates to increase disposable incomes in the hands of the people – Normative Statement

Positive and Normative AnalysesPositive and Normative AnalysesQ2 (a) Give positive & normative argument why

a business leader would oppose raising the minimum wage.

Positive Statement: There are some people whose labor is simply not worth the minimum

wage. Normative Statement: Increased labor cost

from a high minimum wage hike jeopardizes hundreds of thousands of unskilled jobs.

Positive and Normative AnalysesPositive and Normative AnalysesQ2(b) Give a positive and normative argument

why a labor leader would favor raising the minimum wage.

Positive Statement: If minimum wages are not assured, it would hurt those with the least resources and education the most because

employers would pay far less resulting in exploitation of labor.

Normative Statement: Opponents have exaggerated the dangers to the economy from a higher minimum wage.

Positive and Normative AnalysesPositive and Normative AnalysesQ3. Explain your position on this issue. Identify positive and

normative reasons for your decision. Are there alternative ways to aid the working poor?

Laws setting a minimum wage that employers can pay workers are a perennial source of debate. Advocates view the minimum wage is a way of helping the poor without any cost to the government (NS). Critics view it as hurting those it is intended to help. For workers with low level of skill and experience a high minimum wage forces the wage above the level that balances supply and demand (PS). It therefore raises the cost of labor to firms and reduces the quantity of labor that those firms demand. The result is higher unemployment among those workers affected by minimum wage. Although those workers who remain unemployed benefit from a higher wage, those who might have been employed at lower wage are worse off.

Positive and Normative AnalysesPositive and Normative Analyses The key to raising standards of living then,

especially for those at the bottom of the economic ladder, is (1) to prohibit governments from "helping the poor" by confiscating massive amounts of income and capital from the rich and middle class and (2) to prohibit government from "helping the poor" with economic regulations like the minimum wage.

Positive and Normative AnalysesPositive and Normative AnalysesIf poverty could be eradicated with minimum-wage laws, everyone in the world would be rich. All that legislators would have to do is raise the minimum wage to match what they make. Come to think of it, why haven't they?

Group IIBiju Naik E2009005Shyam Shet E2009045Parag Sharma E2009029Vinayak Bhomkar E2009055Simon Pinto E2009046