Online Encyclopedia
Minimum wage
The minimum wage is the minimum rate a worker can legally be paid (usually per hour). Each country sets its own minimum wage laws and regulations, and many countries have no minimum wage.
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History
Minimum wage laws were first introduced in New Zealand. The chronology of moves to legislate minimum wages is as follows:
- New Zealand in 1894
- Australian state of Victoria in 1896
- United Kingdom in 1909
- United States, the state of Massachusetts in 1912
In the United States and other countries, minimum wage laws were a common demand of labor unions.
Consequences of minimum wage laws
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.
Hypothetical costs and benefits
Minimum wages may have the effect of:
- Reducing low-paid work, which may be viewed as unfair and exploitative.
- Reducing the dependency of the low-paid on welfare-state benefits, which may in turn reduce taxes or allow increases of other government outlays.
- Stimulating economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training.
- Encouraging many of those who would normally take low-wage jobs to stay in (or return to) school and thus to accumulate human capital.
On the other hand, minimum wages may have the effect of:
- Discouraging employment of low-wage earners, and generally increasing unemployment.
- Raising employment barriers for people with little or no work experience or formal education: if a worker's labor is not worth the minimum, he may not find employment at all.
- Curbing economic growth by increasing the cost of labor.
- Increasing the price of goods and services, since employers pass on employment costs in the form of higher prices. (Opponents of minimum wage often see a negative income tax, e.g., as a way to support the lower-waged jobs, with the money coming from those who pay taxes, not those who pay for the products including the unemployed)
- Decreasing incentive for some low-skilled workers to gain skills.
- Where implemented locally, making labor more expensive than in other areas, which may discourage inward investment and encourage local businesses to relocate their operations elsewhere.
The effects of minimum wage laws, both positive and negative, may be increased by 'knock-on effects', with increased wages for workers already earning above the minimum wage. For example, some labor union contracts are based on a fixed percentage or dollar amount above the minimum wage. Certain public grants or taxes are based on a multiple of the minimum wage. (For example, a worker may have an exemption if his earnings are below 2.5 minimum wages.)
Debate
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. This unified view has been disputed 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 found 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 Kreuger 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.[1] http://www.fee.org/vnews.php?nid=3896 ,[2] http://www.cato.org/pubs/journal/cj15n1-8.html For example, Card and Krueger gathered their data by telephoning employers in California and New Jersey, asking them whether they intended to increase, decrease, or 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.[3] http://www.epinet.org/briefingpapers/minimumw_bp_1996.pdf
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. This should have helped fight the problem of youth unemployment (since these workers are likely to have fewer skills than older workers). But young workers between the ages of 16 and 19 suffered from increased rates of unemployment (relative to those of workers 20 and older) than before this fall. Similarly, poverty rates in the United States ended their long-term decline after 1979. This suggests that critics of the minimum wage need to present a more complete theory of the origins of unemployment of young or poor people.
Theoretical arguments
As is usual in serious social science, any empirical conclusion is subject to doubt and is simply the basis for further questions and research. One key question is the possible theoretical explanation of the different results.
The traditional view that minimum wages have significant negative effects on employment typically assumes that labor markets for low-skill workers can be characterized as fitting the model of a perfectly competitive market, where the only role of wages is as a cost. On the other hand, if Card and Krueger's empirical research is valid, it may be explained by the efficiency wage hypothesis which states that higher wages may "pay for themselves" by increasing worker efficiency (i.e., labor productivity). Higher wages encourage a higher willingness of low-skill workers to stay with their current employers and to gain experience and skill, while the employers are more willing to train them. Alternatively, if monopsony exists, then an increase in the minimum wage can raise employment. Alan Manning's 2003 book, Monopsony in Motion: Imperfect Competition in Labor Markets (ISBN 0691113122) suggests that this kind of market is common if not ubiquitous in labor markets.
Even if Card and Krueger's results are accurate, there may be a "tipping point" above which their conclusions do not apply and the standard economic consensus does apply. The possible validity of their research may be the result of political forces: in the United States, business political pressure on legislatures and Congress may have kept the minimum wage so low that it has little negative employment effect. Further, the Federal minimum wage has moved away from the presumed tipping point, becoming less relevant. It has fallen from about 50 percent of the average hourly wage in manufacturing during the late 1960s to less than 40 percent.
Wage subsidies
If they 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 costs of regulation (the consensus) or they do not exist (Card, Krueger, and others). 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.
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 (See [4] http://www.faxfn.org/03_jobs.htm ). 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 in 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 examined further.
Worldwide minimum wages
The list below gives the official minimum wage rates. Some countries are more effective than others at enforcing these laws, so that the effective minimum wage may be lower than the official one.
- Australia: AUD 467.40 a week (ACTU).
- Austria: none by law; it is instead set by an industrial collective agreement.
- Brazil: R$ 260,00 (about US$ 100,00) per month; complemented sometimes with additional compulsory benefits.
- Canada: set by each province; it varies from $5.90 per hour in Alberta to $8.00 per hour in British Columbia.
- Chile: 120,000 Chilean pesos per month (about $350 2003 international dollars) for those aged 18–65; 90,327 Chilean pesos (about $260) for those younger than 18 and for those older than 65; and 78,050 Chilean pesos (about $225) for honorary payments.
- Belgium: 1,186.00 euros per month for private sector employees aged 21 or over (Eurostat 2004).
- Bulgaria: 61.00 euros per month (Eurostat 2004).
- Denmark: none by law; it is instead set by an industrial collective agreement.
- Finland: none by law; it is instead set by an industrial collective agreement.
- France: 7.61 euros per hour. 1,154.18 euros per month (35h/week, 151.67 hours per month.)
- Germany: none by law; it is instead set by an industrial collective agreement.
- Greece: 605.00 euros per month (Eurostat 2004).
- Hong Kong: none.
- Hungary: 209.00 euros per month (Eurostat 2004).
- Italy: none by law; it is instead set by an industrial collective agreement.
- Republic of Ireland: 7.00 euros per hour.
- Luxemburg: 1,403.00 euros per month (Eurostat 2004).
- Netherlands: 1,249.20 euros per month plus 8% holiday allowance, summing to 1,349.14 euros (the amount is less for those 22 years old or younger.)
- New Zealand: $NZ 9.00 per hour for people 18 years old or older, and $NZ 7.20 per hour for those aged 16 or 17.
- Portugal: 356.60 euros per month.
- Poland: 180.00 euros per month (Eurostat 2004.)
- Russia: 600 rubles per month (about $60 2003 intl. dollars.) (Note: A draft law was passed on December 15 2004 to raise the official minimum monthly wage to 720 rubles from January 1, 2005, to 800 rubles from September 1, 2005, and to 1,100 rubles from May 1, 2006.)
- Romania: 69.00 euros per month (Eurostat 2004.)
- Spain: 451.20 euros per month.
- Sweden: none by law; it is instead set by an industrial collective agreement.
- Switzerland: none by law; it is normally 3,000 CHF (~2,000 euros) set by collective agreements.
- Turkey: 245.00 euros per month (Eurostat 2004.)
- United Kingdom: £3.00 per hour for 16-to-17-year-olds who have finished compulsory education (except apprentices); £4.10 per hour for 18-to-21-year-olds; £4.85 per hour for 22-year-olds and above.
- United States: the federal minimum wage is $5.15 per hour, although workers under age 20 can be paid $4.25 an hour for their first 90 days. Some states also have minimum wage laws ranging from $2.00 in Oklahoma (for some jobs not covered by the federal rate), to $7.16 an hour in Washington. Some cities and counties have living wage ordinances of up to $15.00 an hour although the groups of workers it applies to are often limited. (29 USC Sec. 206) (OK Statutes 40-197.5) (Revised Code of Washington Sec. 49.46.020) [5] http://www.lni.wa.gov/WorkplaceRights/Wages/Minimum/default.asp
Minimum wage in the United States
During his presidency, Bill Clinton gave states the power to set minimum wages above the federal. 12 states have already done so, and the 2004 November ballot could increase that number. Floridians for All, a coalition consisting of ACORN, unions, and progressive business leaders, was successful in proposing a Florida minimum wage of $6.15 an hour, adjusted yearly by inflation. Florida voters passed this state constitutional amendment in the election of November 2nd, 2004.
See List of U.S. state minimum wages.
Minimum wage in the United Kingdom
Municipal regulation of wage levels began in some towns in 1524. Later, the Trade Boards Act of 1918 made a large number of trades subject to minimum wages (which varied from trade to trade). These rules were repealed during the Thatcher era. A national minimum wage was introduced for the first time by Tony Blair's Labour government.
See National Minimum Wage Act.
See also
- Maximum wage
- Social wage
- Living wage
- Wage slave
- Labor market
- Garcia v. San Antonio Metropolitan Transit Authority
External links
- The Economic Policy Institute http://www.epinet.org/content.cfm/issueguides_minwage_minwage
- Floridians for All http://www.floridiansforall.org
- AFL-CIO Guide to State Minimum Wages http://www.aflcio.org/yourjobeconomy/minimumwage/staterates.cfm
- UK Department of Trade and Industry http://www.dti.gov.uk/er/nmw/
Minimum Wage is also the name of a 42-second song by the alternative rock duo They Might Be Giants.