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Date: Fri, 12 Nov 1999 10:57:00 -0800 (PST)
From: levine@haas.berkeley.edu
To: e201b-1@haas.berkeley.edu, e201b-2@haas.berkeley.edu
Subject: Effect of ECB interest rate jump + min. wage rise
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A classmate wrote...

>
> 1. From the F.T. 11/9/99 p. 29: Why will the ECB's interest rate increase
> make it "...harder for the [Italian] government to reduce its enormous 
public
> debt" ?


One element of net taxes is the transfer = interest payments on the public
debt.  Higher i raises interest payments and, thus, the goverment budget
deficit (G-T).

>
> 2. from the same article, why will the rate increase "...put pressure
> on Italian companies with high exposure to short-term loans" ?


Same logic: Short-term loans need to be refinanced regularly (unlike long-term
fixed-rate bonds).  If I have loans that need to be refinanced, their
refinanced rate will be roughly 1/2 point higher this month than last due to
the actions of the ECB.

Another classmate asked...

>The senate plans to raise the minimum wage by $1 an hour over the next 3
years. Based on what we learnt in class, a wage hike would tend to typically 
go
to teenagers and not
to primary bread-winners.

Lots of min. wage workers are teens, but roughly 40% are low-income heads of
households.

>Also, since a wage hike attracts more workers and
>creates excess labor supply,  businesses lay off workers rather than raise
>their pay - this creates more unemployment.

Turnover is high in low-wage jobs, so employment might fall, but not due to
many layoffs -- just lower hiring.  The point remains that employment still
declines.  Most estimates are that the employment declines are quite small, so
that low-wage workers on average come out ahead with the rise.

David I. Levine                 Associate professor
Haas School of Business    ph: 510/642-1697
University of California    fax: 510/643-1420
Berkeley CA  94720-1900                            email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/