In September 2014, there were a series of fast food workers’ strikes across the USA demanding an increase in the minimum wage to $15 an hour. Howard Schultz, Starbucks CEO, publicly stated that “the minimum wage issue is a double-edged sword,” because while it would mean higher wages for workers, it would also discourage businesses from hiring more workers (Huffington Post, 2013/3/21).
In class we have looked at three types of theories on unemployment –the Marxian theory, the Neoclassical theory and the Keynesian theory of unemployment.
Howard Schultz’s argument that raising the minimum wage to $15 an hour will discourage firms from employing workers is a neoclassical argument based on the substitution effect.
Write an open letter to Howard Schultz:
1) Explaining to him the economic theory of unemployment (neoclassical) which his argument is based on.
2) Explain to Mr. Shultz the underlying principle of distributive justice or fairness behind the neoclassical demand curve for labor. Do you agree that workers are paid the value of their contribution to output at the margin? Why or why not? (You may draw from Marx’s ideas on the exploitation of labor or you may use your own.)
3) Present the underlying principle of the labor-leisure trade-off behind the neoclassical supply curve for labor. What is Keynes’ critique of the labor-leisure trade-off?
4) Explain the income-effect of a wage increase or decrease on employment. On this basis, inform Mr. Schultz whether he is right or wrong.
5) Explain why unemployment happens according to Keynes (presenting the asset price theory) and tell him about the role of the government in a modern, monetary capitalist economy regarding job guarantee programs and ensuring minimum wages that allow workers to lead a decent life.