Part -1: The employment effects of a minimum wage increase

One of the more hotly debated economic policy proposals in the past couple of years has been the proposal to raise the federal minimum wage. In his Feb. 2013 State of the Union, Obama proposed raising the federal minimum to $9.00/hour by 2015, and in March 2013, Congress went further with the Miller-Harkin Act (Fair Minimum Wage Act of 2013), which proposed raising it to $10.10/hour.

In Feb. 2014, the Congressional Budget Office produced a report assessing the likely impact of these proposals on employment and family income. The report, which was based largely on a synthesis of academic research, concluded that the employment effect of a $9 minimum wage could be anywhere from a small positive (i.e. a small increase in employment) to a moderate negative effect; and that the employment effect of a $10.10 minimum would likely be more negative than the effect of a $9 minimum.

Questions/guidelines:

First, based on what you have learned in the class, discuss and explain the possible reasons for (1) why the estimated employment effect of a U.S. federal minimum wage increase ranges from small and positive to moderately negative, and (2) why the employment effect is likely to be more negative at a higher value of the minimum wage. Your answer should draw on theoretical models of both competitive and imperfectly competitive (monopsonistic) labor markets. You should explain concepts verbally, but you may also sketch graphs to illustrate your points. In particular, you should address:

• What determines the size of the employment effect of a minimum wage increase in the model of perfect competition?
• What is meant by monopsony power and why might firms have it?
• Why might the minimum wage increase have a positive effect on employment if firms have significant monopsony power (as opposed to operating in very competitive labor markets)?
• In both competitive and monopsonistic markets, why and how does the employment effect depend on how high the minimum wage is set?

Part -2:

The return to investment in education

Regarding U.S. government policy toward higher education, the Obama administration has pursued several policies aimed at expanding investment in post-high school education.

• Early on, Obama proposed that every American should pursue at least one year of education beyond high-school and argued that the U.S. should aim to regain its status as the world's leader in the proportion of college graduates by 2020.

• He has increased government financing by expanding the Pell Grant program (which provides need-based grants to low-income undergraduates) and by expanding tax credits for college tuition (the American Opportunity Tax Credit).

• More recently, Obama has directed the Department of Education to develop a new college ratings system that would rate colleges based on their value. In response, some news organizations and websites such as Payscale.com have begun reporting "return on investment" measures that claim to measure the average return to graduating from a particular college or university, and have produced rankings based on these measures.

Question/guidelines:

Based on what you have learned in the class, (1) discuss/explain how one would evaluate the policies aimed at expanding investment in higher education, and (2) discuss some of the challenges involved in estimating the return to education and ranking colleges by their return on investment (ROI).