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Minimum wage

The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as opposed to wages that are determined by the forces of supply and demand in a free market. Each country sets its own minimum wage laws and regulations, and many countries have no minimum wage.



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.

  • In 1894, New Zealand established such arbitration boards with the Industrial Conciliation and Arbitration Act
  • In 1896, the state of Victoria, Australia established similar boards
  • In 1909, the Trade Boards Act was enacted in the United Kingdom, establishing four such boards
  • In 1912, the state of Massachusetts, United States, set minimum wages for women and children

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 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:

  • Limiting 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.
  • Curbing economic growth by lowering the supply 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.)


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. Indeed, a survey in the Winter 2005 issue of the Journal of Economic Perspectives reports that exactly two-thirds of academic economists at top universities agree with the statement, "a minimum wage increases unemployment among young and unskilled."

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 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],[2] 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]

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 percent since 1997 (the last time the minimum wage was increased). Some argue that a declining minimum wage might reduce youth unemployment (since these workers are likely to have fewer skills than older workers). In fact, unemployment rates for 16-19 year Americans is relatively stable (SOURCE Bureau of Labor Statistics: 16 percent in 1979, and 16 percent today).

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 is straightforward if one 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.

Some argue that minimum wage laws "lock-out" the poorest individuals from obtaining employment by legally forbidding them to compete for jobs by offering to work for lower wages. This argument of course does not apply to the black economy. The idea that a lack of a minimum wage naturally directs employment opportunities to the most needy is viewed by some as a moral justification for the elimination of minimum wage laws. On the other hand, the fact that the working poor often struggle to support themselves without government support (eg food stamps), under the assumption that the minimum wage is a net benefit to these people, is a moral argument in favour of it.

Some say that if developing countries had minimum wages, or minimum wages commensurate of those of developed countries, that jobs would not be exported to these poor individuals and their opportunity for economic advancement would be impeded. Other say that this overlooks the fact that movement of jobs applies above all to industries which require large quantities of unskilled or low-skilled labour, and that relative prices for such labour are very different.

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]). 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 be 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. Exchange rates as of March 1, 2005.

Australia AUD 467.40 (US$370) per week; most workers receive higher wages through enterprise agreements or individual contracts
Austria none by law; instead, nationwide collective bargaining agreements set minimum wages by job classification for each industry; the accepted unofficial annual minimum wage is 10,000 to 11,000 (US$13,260 to US$14,580)
Belgium 1,243 (US$1,650) a month for workers over 21 years of age; 18-year-olds must be paid at least 82 percent of the minimum, 19-year-olds 88 percent, and 20-year-olds 94 percent of the minimum.
Brazil R$300 (US$115) a month; annually adjusted by the Government
Bulgaria 150 leva (US$102) per month
Canada set by each province and territory; hourly wages vary from CAN$5.90 (US$4.7) to CAN$8.00 (US$6.4) to CAN$8.50 (US$6.8); Ontario and Alberta have a minimum wage rate for youths lower than their respective minimums for adult workers; see List of minimum wages in Canada
Chile 120,000 pesos (US$210) per month for those aged 18–65; 90,327 pesos (US$160) for those younger than 18 and for those older than 65; and 78,050 pesos (US$135) for honorary payments; subject to adjustment annually
China none
Denmark none by law, but national labor agreements effectively set a wage floor; the average net wage including pension benefits of adult workers in 2003 was 177 kroner (US$32) per hour
Finland 5,39 euros per hour or 926,40 euros per month, except where collective bargaining agreements have negotiated higher sector-specific minimum wages (anywhere from 1000 euros to over 2000 euros)
France 7.61 (US$10) per hour
Germany none by law (but in discussion); set by collective bargaining agreements
Greece 28 (US$37) daily and 616 (US$817) monthly; set by the GSEE and the Employers' Association through collective bargaining and routinely ratified by the Ministry of Labor
Hong Kong none
Hungary 53,000 HUF (US$290) per month; set by the IRC through agreement among its participants, representatives of the Government, employers, and employees
Israel Above age 18: 47.5% of the average income on April 1 of each year. In 2005: 3335.18 NIS (approx US$760). Under age 18, varies.
Italy none by law; instead set by a collective bargaining agreements on a sector-by-sector basis; when an employer and a union fail to reach an agreement, courts may determine fair wages on the basis of practice in comparable activities, although this rarely occurs in practice
Ireland 7 (US$9) per hour
Luxembourg varies according to the worker's age and number of dependents; for a single worker over the age of 18 is 1,403 (US$1,860) per month for unskilled workers, and 1,684 (US$2,230) per month for skilled workers
Netherlands 1,249.20 (US$1,660) per month plus 8% holiday allowance, summing to 1,349.14 (US$1,720) (the amount is less for those 22 years old or younger)
New Zealand NZ$8.50 (US$6) per hour for workers 18 years old or older, and NZ$6.8 (US$5) per hour for those aged 16 or 17
Portugal 374.70 (US$500) per month; covers full-time workers as well as rural workers and domestic employees ages 18 and over
Poland 824 PLN (US$280) per month
Russia 720 rubles (US$26) per month; to be raised to 800 rubles from September 1, 2005, and to 1,100 rubles from May 1, 2006
Romania 2.8 million lei (US$100) per month
Spain 490.80 (US$650) per month
Sweden none by law; set by collective bargaining contracts every year
Switzerland none by law; it is normally 3,000 CHF (US$2,450) set by collective agreements
Turkey 444 million lira (US$350) per month; reviewed every 6 months by the Minimum Wage Commission, a tripartite government-industry-union body
United Kingdom 3.00 (US$6) per hour for 16-to-17-year-olds who have finished compulsory education (except apprentices); 4.10 (US$8) per hour for 18-to-21-year-olds; 4.85 (US$9) per hour for 22-year-olds and above (5.05 from October 2005)
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 $7.35 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]

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.

Some cite the behavior of the U.S. Congress in defeating increases in the federal minimum wage of approximately $10,000 per year ($5.15 per hour for a 40 hour work week) for the last nine years (1996 to 2005) at the same time as repeatedly acting to increase their own wage by $28,500 to $162,000 over the last few years as an example of hypocrisy.

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

External links

Last updated: 10-13-2005 20:29:39
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