MINIMUM WAGE : Comprehensive Encyclopedia

The minimum wage is the minimum rate a worker can legally be paid (often per hour) as set by statute. Each country sets its own minimum wage laws and regulations, and while a majority of industrialized countries have minimum wage laws, many developing countries do not.

The first minimum wage law was enacted by the government of New Zealand in 1894. Minimum wage laws were first introduced nationally in the United States in 1938^[1], France in 1950^[2], and in the United Kingdom in 1999^[3]. In the European Union, 18 out of 25 member states currently have national minimum wages^[4]. Supporters say that minimum wages reduce exploitation, they can help ensure that everyone can afford to live and that they do not have negative effects on employment, or only very little. Opponents on the other hand contend that minimum wage causes inflation and unemployment, harms rather than helps the poorest workers, and slows economic growth.

The minimum wage law simply makes it a crime for an employer to employ a worker at a wage below the minimum. It does not provide any money to help fund the worker's wages.

Legislation in the Western industrialized world

The first moves to legislate wages did not set minimum wages, rather the laws created arbitration boards and councils to resolve labour conflicts before the recourse to strikes.

Australia

Canada

Under the Constitution of Canada the responsibility for enacting and enforcing labour laws rests with the ten provinces, the three territories also having been granted this power by virtue of federal legislation. This means that each province and territory has its own minimum wage. The lowest general minimum wage in force as of July 2006 is that of New Brunswick ($6.70/hour), the highest is that of Nunavut ($8.50/hour). Some provinces allow lower wages to be paid to liquor servers and other tip earners, and/or to inexperienced employees. British Columbia allows employers to pay as little as $6/hour to an inexperienced worker.

The federal government could theoretically set its own minimum wage rates for workers in federal jurisdiction industries (railways for example). As of 2006 however, the federal minimum wage is defined to be the general adult minimum wage rate of the province or territory where the work is performed. This means, for example, that a railway company could not legally pay a worker in British Columbia less than $8/hour regardless of the worker's experience.

France

Ireland

United Kingdom

Municipal regulation of wage levels began in some towns in 1524. Later, the Trade Boards Act of 1909 initially created four Trades Boards that set minimum wages which varied between industries for a number of sectors where 'sweating' was generally regarded as a problem and where collective bargaining was not well established. This system was extended considerably after the Second World War; in 1945 Trades Boards became Wage Councils, which set minimum wage standards in many sectors of the economy, including the service sector as well as manufacturing. Wage Councils were finally abolished in 1993, having fallen into decline due, in large part, to Trades Union opposition. A lower limit of pay, or 'pay floor' was regarded as threatening the voluntary system of collective bargaining favoured in the UK. Government had first made a serious attempt to abolish Wage Councils in 1986, having abandoned existing legislation that tried to widen the scope of voluntary agreements to include those firms that had not taken part in negotiations, such as the Fair Wages Resolutions. These required that government contractors pay fair wages and respect the rights of their employees to be members of trades unions.

A national minimum wage was introduced for the first time by Prime Minister Tony Blair's Labour government in April 1999, at the rate of £3.60 (US$5.78 at 1st April 1999 rate) per hour for those workers aged 22 and over. This rate was set after the Low Pay Commission, an independent body the Government appointed in July 1997 to advise it on low pay, recommended the rate. The LPC exists to this day to maintain the national minimum wages, and the board consists of nine members - three trade unionists, three employers, and three labour market relations experts. The Commission is widely regarded as a successful example of a 'social partnership'.

The current minimum wage in the UK for adults aged 22 or older is £5.05 or approximately $9, as compared with $5.15 in the US. For workers between the age of 18-21, or who are in the first six months of their job and receiving accredited training, the minimum wage is £4.25 per hour. The minimum hourly wage for all workers under the age of 18 (who are no longer of compulsory school age) is £3.

These values were tentatively scheduled to increase in October 2006, with those aged 22 or older receiving £5.35 hourly and 18-21-year olds receiving £4.45.

United States

The minimum wage was re-established in the United States in 1938 (pursuant to the Fair Labor Standards Act), once again at $.25 per hour ($3.22 in 2005 dollars.) It had its highest purchasing value ever in 1968, when it was $1.60/hour ($9.12 in 2005 dollars.) The current federal minimum wage is now $5.15 an hour.

Comparison of State and Federal Minimum Wage

During his presidency, Bill Clinton gave states the power to set their minimum wages above the federal level. As of 2004, 12 states had done so; and on November 2 of that year two additional states (Florida and Nevada) approved increases in statewide referendums. Community organizing efforts initiated by ACORN were responsible for the Florida and Nevada increases. Some government entities, such as counties and cities, observe minimum wages that are higher than the state as a whole. Another device to increase wages, living wage ordinances apply only to businesses that are under contract to the local government itself. Santa Fe's $9.50-per-hour minimum wage is the highest in the nation, and there are plans to increase this wage to $10.50 in 2008.

Many progressive politicians in the United States advocate linking the minimum wage to the Consumer Price Index, thereby producing small annual increases rather than the larger hikes that tend to be adopted when legislation to do so is passed.

Minimum wage jobs rarely include health insurance coverage (as noted here and here), although that is changing in some parts of the USA where the cost of living is high, such as California, and at some companies. For instance, Trader Joe's supermarkets give part-time employees health coverage (link).

Other countries

The current (2006) "monthly income for a full-time employee earning the national minimum wage" for twenty industrialised countries can be found here.

Debate over consequences of minimum wage laws

A minimum wage is usually different from the lowest wage determined by the forces of supply and demand in a free market, and therefore acts as a price floor, but it's not necessarily a living wage.

If the law is successfully enforced, and if they are high enough in real terms (or relative to the average wage), minimum wage laws are alleged to have various benefits and costs.

The costs and benefits arising from minimum wages are subject to considerable disagreement among economists, though the consensus among economics textbooks is that minimum wage laws should be avoided whenever possible as the costs exceed the benefits. A 2003 survey by Dan Fuller and Doris Geide-Stevenson reports that 46% of academic economists in the US agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers", 28% partly agreed, and 27% disagreed. The authors of this study also reweighted data from a 1990 sample to show that at that time 62% of academic economists agreed with the statement above, while 19.5% partly agreed and 17.5% disagreed.^[5]

According to a claim by the Mackinac Center for Public Policy^[6], a conservative think-tank, the passage of the first Federal mandated minimum wage in the United States in 1933 led to an estimated 500,000 blacks losing their jobs via replacement by higher skilled and more educated white laborers.

Costs and benefits

Supporters of the minimum wage claim it has these effects:

Helps some people pay their bills and live better. Regardless of the macro-economic effects, some very poor, very needy people will have their salaries raised with the introduction or heightening of the minimum wage.
Reduces exploitation (see wage slave).
Forces employers to pay at least the wage society thinks human labor is worth, rather than low-balling potential first time employees with salary offers below their true worth. Employers know that first time employees don't really know how much they're worth and have little bargaining power because if they try to negotiate for a higher wage, the employer can just find another person who doesn't know how much he's worth and give him the job instead.
Stimulates consumption, and thus economic growth, by putting more money in the hands of poor people who spend their entire paychecks.
Stimulates economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training.
Encourages some of those who would normally take low-wage jobs to stay in or return to school and thus accumulate human capital (with a caveat below).
Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees. This may increase productivity at the macro level and the individual level.
Discourages illegal immigration. A minimum wage increases the desirability of low-wage jobs, which allows those positions to be filled by legal citizens instead of illegal immigrants, thus discouraging illegal immigration. Note that it is also argued that a minimum wage encourages illegal immigration (see below).

Opponents of the minimum wage claim it has these effects:

Destroys those jobs that are naturally worth less than the minimum wage, thereby increasing unemployment and underemployment. Those who take this view believe it is worse to be unemployed than to be be employed for a poor wage. In most countries a higher percentage of people are unemployed than are employed but earning the minimum wage or a small amount above. They believe it is in such people's interests to take even the lowest-paid jobs.
Curbs economic growth by decreasing the supply of affordable labor.
Increases inflation by making low-skill jobs more expensive to employers.
Decreases opportunities for low-skilled workers to gain the training and responsibility they need to move up the wage ladder. This is an argument McDonald's makes about their jobs -- supposedly many successful people have worked their first jobs at McDonald's, and may have gained important skills.
Increases the cost of government social programs due to assistance programs aiding the laid-off workers.
Encourages teenagers with jobs to drop out of high school because a higher wage makes working more attractive.
Encourages more illegal immigrants from poorer places to enter the country because the pay differential between low-skill jobs in the two countries rises. This problem is particularly pronounced in the US, because the US-Mexico border is the longest developed/developing border in the world and is not well guarded.
Reduces the quality of jobs near the margin as well as the quantity - with less room to negotiate on salary, employers will necessarily cut other key areas such as job training.
Is less effective at reducing social exclusion than some other alternatives, for example training programs.
Is less effective than the Earned Income Tax Credit at targeting the truly needy, and is more damaging to businesses.

Some labor union contracts are based on the minimum wage; this produces a natural constituency to lobby for increases among union workers who typically earn far more than the minimum. Some public grants or taxes are also based on a multiple of the minimum wage, and this also can produce lobbying incentives in either direction. (For example, a worker may have an exemption if his earnings are below 2.5 times the minimum wage.)

Recent trends in the U.S.

Some idea of the empirical problems of this debate can be seen by looking at recent trends in the United States. The minimum wage fell about 29% in real terms between 1979 and 2003. Yet real wages have risen in the free market anyway, with real hourly earnings up by 7% since 1997. Some argue that a declining minimum wage might reduce youth unemployment (since these workers are likely to have fewer skills than older workers).^[7] Over all, there is no consensus between economists about the effects of minimum wages on youth employment, although empirical evidence suggests that this group is most vulnerable to too high minimum wages^[8].

Views of Card and Krueger

The more common debate is on changes to minimum wages. This unified view was challenged by empirical research done by David Card and Alan Krueger. In their 1997 book Myth and Measurement: The New Economics of the Minimum Wage (ISBN 0-691-04823-1), they argued the negative employment effects of minimum-wage laws to be minimal if not non-existent (at least for the United States). For example, they look at the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990-91 increases in the federal minimum wage. In each case, Card and Krueger present evidence ostensibly showing that increases in the minimum wage led to increases in pay, but no loss in jobs. That is, it appears that the demand for low-wage workers is inelastic. Also, these authors reexamine the existing literature on the minimum wage and argue that it, too, lacks support for the claim that a higher minimum wage cuts the availability of jobs.

Critics of this research, however, argue that their research was flawed^[9]. For example, Card and Krueger gathered their data by telephoning employers in Pennsylvania and New Jersey, asking them whether they intended to increase, decrease, or make no change in their employment. Subsequent attempts to verify the claims requested payroll cards from employers to verify employment, and ostensibly found that the minimum wage increases were followed by decreases in employment. On the other hand, data analysis by David Neumark and William Wascher, economists who are usually critical of minimum-wage increases, supported the Card/Krueger results.[2]

Agreement with Card and Krueger

Since the introduction of a national minimum wage in the UK in 1999, its effects on employment were subject to extensive research and observation by the Low Pay Commission. The bottom line there is, employment has not been reduced, productivity has increased in affected companies (especially service companies),^[10] and neither trade unions nor employer organisations contest the minimum wage, although especially the latter had done so heavily until 1999.

From the other side, some leading economists accept the Card/Krueger works and agree with their results [3].

Disagreement with Card and Krueger

According to the Joint Economic Committee of the United States Congress, Card and Krueger's work flies directly in the face of every piece of empirical research done on minimum wage laws within the United States within the past 50 years. ^[11] Minimum wage laws have been shown to cause large amounts of unemployment, especially among low-income, unskilled, black, and teenaged populations, as well as cause a host of other mal-effects, such as higher turnover, less training, and fewer fringe-benefits.

Theoretical arguments

The traditional economic view of minimum wage laws, views labor as a commodity and minimum wage laws as price setting. As with other attempts to set prices, minimum wage laws should cause more people to wish to provide the commodity, but fewer people wishing to purchase it, resulting in a surplus, or, in this case, unemployment.

Other views of minimum wage laws see labor not as a commodity but as a monopsonistic market, where the minimum wage laws will actually help to increase both wages and employment.^[12]. The problem with this view is that, although each individual is the only person that call sell his services, most employers don't care who does a job as long as the job gets done by somebody.

EITC vs. minimum wage

If they do exist, it is clear that some of the adverse effects can only occur when minimum wages are implemented and successfully enforced by government fiat: either these effects are a consequence of the cost of wage regulation or they do not exist. If, however, a floor on wages is implemented indirectly by providing wage subsidies, there would not be decreased employment. However, since this program is not a "free lunch", some other economic damage may be created instead, as with an externality. On the other hand, it is possible that there are already externalities contributing to unemployment, and that subsidies at the right level would merely be Pigovian solutions to these and would not actually cause any further harm after all. Research would need to be done to determine this.

When attempting to model complex systems of any sort, attributing a direct causal relationship with a single variable is difficult at best, especially with something that has as many factors as economics does.

While straightforward Pigovian subsidies would have funding problems, particularly when introducing them for the first time, there are other approaches. One was examined by Professor Kim Swales of the University of Strathclyde.^[13] This avoids funding problems by not having an actual subsidy but a virtual one — the funds flow is always from employers to the government, being netted off by the virtual subsidy before funds ever change hands. This may also be analysed by means of game theory (e.g "the prisoner's dilemma" or "the tragedy of the commons").

Alternatively, in the United States, many economists see the Earned Income Tax Credit (EITC, a wage subsidy) in the Federal income tax as providing the poverty-fighting benefits of the minimum wage without the non-budgetary costs, while being superior to most welfare state anti-poverty programs. One problem has been that many of the working poor (the target of this program) have a hard time with the tax forms needed to receive the EITC payment. There may also be long delays between when the money is needed and when the EITC payments are received. That is, a person might become eligible for the EITC in April but then get laid off for the rest of the year. But this person would not get help from the credit until nearly a year later (since Americans pay their taxes sometime between January and April). Further, like with the minimum wage, those people working at home taking care of children and other loved ones do not receive any benefits; only those doing paid labor are rewarded.

Finally, if these kinds of "complications" do not exist, it is possible that the benefit of the tax credit is received by the employer: assume that for low-skill workers the equilibrium market wage equals "X." Before the EITC is introduced, all of this wage is paid by their employers. After the EITC is instituted, the workers receive Y + Z, where Y is the new wage paid by employers and Z is the tax credit. If the labor market returns to the same equilibrium, then X = Y + Z. This means that the low-skill workers receive exactly the same amount as before the EITC was introduced and that the employer is paying less to the employees. This issue needs to be examined further, assuming that a model can be created that allows objectivity to control the experiment(s) rather than external factors.

References

^ Employment Standards Administration (12 February 2003). History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 1996. Fair Labor Standards Act (FLSA) on-line information. United States Department of Labor. Retrieved on 22 June 2006. Note: Date enacted was 24 October 1938
^ Staff (4 October 2005). SALAIRE GARANTI: MINIMUM WAGE (GUARANTEED). European Employment and Industrial Relations Glossaries. European Foundation for the Improvement of Living and Working Conditions. Retrieved on 22 June 2006.
^ Staff (17 June 2006). History of the National Minimum Wage. Employment Matters. United Kingdom Department of Trade and Industry. Retrieved on 22 June 2006. Note: Date enacted was 1 April 1999
^ Eurostat (2005): Minimum Wages 2005: Major Differences between EU Member States (PDF)
^ Fuller, Dan und Doris Geide-Stevenson (2003): Consensus Among Economists: Revisited, in: Journal of Economic Review, Vol. 34, No. 4, Seite 369-387 (PDF)
^ "Great Myths of the Great Depression (page 10)", Mackinac Center for Public Policy, April 22, 2006.
^ "Minimum Wages and Youth Employment in France and the United States", Cornell, May 1997.
^ Ghellab, Youcef (1998): Minimum Wages and Youth Unemployment, ILO Employment and Training Papers 26 (PDF)
^ "Myth and Measurement: The New Economics of the Minimum Wage", Cato, April 22, 2006.
^ Low Pay Commission (2005): National Minimum Wage - Low Pay Commission Report 2005 (PDF)
^ http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
^ Alan Manning (2003) Monopsony in motion: Imperfect Competition in Labor Markets (ISBN 0691113122)
^ See: Swales, Kim; D R Holden, G Beacon (November 1995). Employment friendly VAT (The Employment Effect of Subsidies). Report to the Directorate General Employment, Industrial Relations and Social Affairs, Commission of the European Communities. Fax From Nowhere (faxFN). Retrieved on 1 July 2006.

External links

Minimum Wage Issue Guide by the Economic Policy Institute
[4] by Policy Matters Ohio
EIROnline: Minimum wages in Europe
Low Pay Commission in the United Kingdom
UK Department of Trade and Industry - The National Minimum Wage
Raising the National Minimum Wage: Information, Opinion, Research
Average U.S. farm and non-farm wages compared to the minimum wage (1981 - 2004)
Impact of Proposed Minimum-Wage Increase on Low-income Families (PDF) by the Center for Economic and Policy Research
Center for Policy Alternatives – Minimum Wage Policy Model
Find It! By Topic: Wages: Minimum Wage U.S. Department of Labor
Wagenet - Australian Working Conditions
Measuring the Full Impact of Minimum and Living Wage Laws
Economist Paul Krugman on Minimum Wage Regulation
Economist Philip Lewis - Centre for Labour Market Research - on the relationship between unemployment and minimum wages

MINIMUM WAGE

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