Traditional Economic Theory and Its Partisans have Long Maintained that Increasing the Minimum Wage

Reading Passage Question

Traditional economic theory and its partisans have long maintained that increasing the minimum wage would actually have a negative effect on low-wage employment in the United States. Their argument is straightforward: since most employees normally produce just enough to offset their own wages, a higher wage makes some workers’ wages higher than is justified by what they contribute to output. The result is a rise in unemployment due to the elimination of jobs whose productivity falls below the new, higher productivity standard forced by the wage increase. A new study by Princeton economists David Card and Alan Krueger on the aftereffects of recent state and federal minimum wage increases casts doubt upon the extent to which this theory is applicable.

Card and Krueger examined the conventional wage theory's prediction that a minimum wage rise should simply lop off the lower edge of jobs. Their findings, however, indicate that just the opposite occurs: instead of being fired, the lowest wage workers are "swept up" to the new minimum. The rise also causes a concomitant increase for workers who earn more than the minimum as employers try to maintain the structure of wage differentials among different groups and kinds of employees. In New Jersey, for example, an increase in the state minimum wage in 1992 was followed by an increase in minimum wage employment at the higher rate. The minimum wage employment in neighboring Pennsylvania, which did not enact a higher rate, lagged behind that of New Jersey. Rather than dismissing conventional wage theory completely, however, Card and Krueger interpret the data as an indication that the theory is merely incomplete. In areas of the country where demand for workers is high, employers often voluntarily exceed the legal minimum in order to recruit the workers they need, and under such circumstances, raising the minimum wage will have no negative effect on employment. Employers will pay a relatively premium wage In order to recruit all the workers they need and to stabilize the workforce at a higher level of output performance. This indicates that employers have some leeway in relating their employees’ wages to their productivity.

“Traditional economic theory and its partisans have long maintained that increasing the minimum wage”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. The author of the passage would most likely agree with which of the following assertions about the minimum wage in the United States?

1. Unemployment of low-wage workers will invariably rise when wages are artificially inflated.
2. Minimum wage patterns in New Jersey have no demonstrable relevance to unemployment figures in Pennsylvania.
3. Conventional economic theory makes no valid predictions about the connection between minimum wage increases and unemployment trends.
4. It is possible to find some correlation between worker productivity and wages earned.
5. Minimum wage increases will expand employment in all sectors of the economy by increasing employee productivity.

2. In the second paragraph, the author mentions the results of Card and Krueger's focus on New Jersey in order to

1. strengthen their contention that minimum wage levels in the Northeastern US are artificially low
2. provide evidence for their conclusion that the reality of minimum wage hikes may sometimes contradict the results expected by traditional theory
3. prove that Pennsylvania's low-wage employment suffered as a result of New Jersey's wage increase
4. undermine the argument put forth by the Princeton economists that an inflation of minimum wages will result in loss of low-wage employment
5. introduce an example of a beneficial minimum wage increase that can be used as a model for a new economic theory

3. It can be inferred from the passage that “traditional economic theory" (line 1)

1. is an accurate predictor of unemployment rates resulting from circumstances other than minimum wage increases
2. is under attack from many academic economists, who believe that minimum wages in the US should be raised
3. provides an explanation for New Jersey's low-wage employment jump that is consistent with its predictions
4. has been replaced with a more modern hypothesis that asserts that minimum wage hikes are necessary for a healthy economy
5. may still provide an accurate prediction of the results of a minimum wage hike under conditions of low worker demand

4. The passage suggests that immediately prior to the 1992 increase in the state minimum wage, some New Jersey employers were

1. paying their employees the same minimum rate that employers in Pennsylvania were paying
2. experiencing economic difficulties and laying off minimum wage employees whose output was insufficient
3. lobbying for an increase in the minimum wage as a means to hire more workers and increase productivity
4. in some cases paying more than the mandated minimum wage because demand for low-wage workers was high
5. eliminating the wage structure that had been created under the discredited theories of traditional economists

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