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Monday, January 22, 2007

Microeconomics quiz of the week II (delayed)

From last Friday's professorjournal.com:
"Economists of every political stripe agree that a higher minimum wage will cost some low-skill workers their jobs.... The House last week whooped through an increase in the minimum wage to $7.25, by a vote of 315-116.... The new, higher wage floor applied to all of these United States and its territories : save for the Pacific outpost of American Samoa." Why American Samoa? The territory is home to canning operations of the big fish and tuna industry. Starkist and Chicken of the Sea, which operate the facilities, are headquartered in California, with Starkist being located in Speaker Nancy Pelosi's home district.

The editorial reports that average hourly wage for American Samoan canneries in 2004 was about $3.60. In contrast, the average cannery wage in Thailand was 67 cents an hour and in the Philippines 66 cents. With the wage differentials between American Samoa and these Pacific countries, canning facilities have an incentive to move their operations from the American territory, thus leading to unemployment on the island.

1.) Use supply and demand analysis to evaluate the effect of an increased minimum wage.

2.) The editorial quotes economist Joseph Stiglitz, "A higher minimum wage does not seem a particularly useful way to help the poor." Interpret this statement. What is a better way to help the poor?

3.) Why are the canneries exempted from the minimum wage legislation?

Reviewed By: James Dearden, Lehigh University

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