President Obama has proposed that the federal minimum wage be increased from $7.25 to $9 and be indexed to automatically increase with inflation in the future. The economic effects are straightforward: some low-skilled workers will be priced out of the market. In cases where employers cannot find substitutes for labor, the result will be either higher prices or reduced profit margins.
Christina Romer, Obama's chief economist in his first term, is not so sure that increasing the minimum wage is such a great idea. Although intended to help the working poor, some of the beneficiaries are teenagers in well-to-do families. She suggests that boosting the earned income tax credit would be a more effective approach.
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