Minimum wage

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A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. First enacted in Australia and New Zealand in the late 19th century,^[1] minimum wage laws are now in more than 90% of all countries.^[2]

The costs and benefits of minimum wage laws are not fully understood, and are debated. Many supporters assert that the minimum wage is a matter of social justice that helps reduce exploitation and ensures workers can afford basic necessities (cf. living wage). Supporters deny that the minimum wage adversely impacts employment, or argue that such an effect is modest and outweighed by the social benefit derived from higher wages. Detractors contend that a minimum wage increases unemployment among low-wage workers, harming rather than helping the poorest workers.^[3] Some also argue that it slows economic growth.^[4]

[edit] History of minimum wage laws

In 1896 in Victoria, Australia, an amendment to the Factories Act provided for the creation of a wages board.^[1] The wages board did not set a universal minimum wage; rather it set basic wages for 6 industries that were considered to pay low wages.^[5]. First enacted as a four year experiment, the wages board was renewed in 1900 and made permanent in 1904; by that time it covered 150 different industries.^[5] By 1902, other Australian states, such as New South Wales and Western Australia, had also formed wages boards.^[1]

Also in 1896, New Zealand enacted the first national minimum wage laws that, unlike the wages board of Victoria, were enforced by compulsory arbitration.^[1] MATT

In 1907 Ernest Aves was sent by the British Secretary of State for the Home Department to investigate the results of the minimum wage laws in Australia and New Zealand. In part as a result of his report, Winston Churchill, then president of the Board of Trade, introduced the Trade Boards Act on March 24, 1909. It became law in October of that year, and went into effect in January of 1910.^[1]

In the United States, statutory minimum wages were first introduced nationally in 1938,^[6] and in the United Kingdom in 1999.^[7] In the European Union, 18 out of 27 member states currently have national minimum wages.^[8] Many countries, such as Norway, Sweden, Finland, Denmark, Switzerland, Germany, Austria, Italy, and Cyprus have no minimum wage laws, but rely on employer groups and trade unions to set minimum earnings through collective bargaining.^[9] In addition to the federal minimum wage, nearly all states within the United States have their own minimum wage laws with the exception of South Carolina, Tennessee, Alabama, Mississippi and Louisiana.^[10]

[edit] List of minimum wage laws

Further information: List of minimum wage laws

[edit] Costs and benefits

The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please improve this article or discuss the issue on the talk page.

[edit] Benefits

Supporters of the minimum wage claim it has these effects:

Increases the average living standard.^[11]
Reduces worker exploitation.^[11]
Creates incentive to work. (Contrast with welfare transfer payments.)^[12]
Does not have budget consequence on government. "Neither taxes nor public sector borrowing requirements rise." (Contrast with negative income taxes such as the EITC.)^[12]
Minimum wage is administratively simple; workers only need to report violations of wages less than minimum, minimizing a need for a large enforcement agency.^[12]
Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.^[11]
Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.^[11]
Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.^[11]
Prevents in-work benefits (e.g. the Earned Income Tax Credit and the Working tax credit) from causing a reduction in gross wages which would otherwise occur if labour supply is not perfectly inelastic.^[11]^{[Confusing — Please clarify]}
Can increase the economic efficiency of the economy where labour markets exhibit a high degree of market power on the part of employers.^{[citation needed]} (See: Monopsony.)
Provides a "shock" which forces employers to use a high productivity strategy rather than a high labour turnover strategy, therefore improving the stock of human capital in an economy.^{[citation needed]}
Instigates technological employment and innovation. e.g. replacing workers in labor-intensive jobs with automation such as robots.^[13]
Stimulates economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training.^{[citation needed]}

[edit] Costs

Opponents of the minimum wage claim it has these effects:

Reduces demand for workers. This may manifest itself through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.^[14]
Hurts the least employable by making them unemployable, in effect pricing them out of the market.^[15]
Reduces profit margins of business owners employing minimum wage workers, thus encouraging a move to businesses that do not employ low skill workers.
Increases prices for customers of employers of minimum wage workers, which would pass through to the general price level.^[16]
Reduces economic growth by skewing factor-choice incentives away from the optimum choice.^[17]
"Will have only negative effects on the distribution of economic justice. Minimum-wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive, and poorest workers." (Cato)
Is a limit on the freedom of both employers and employees. Minimum wage laws make it illegal for employers to pay workers less than the minimum wage. This also prevents workers from being able to provide labor or services for less than the minimum. For example, during the apartheid era in South Africa, white trade unions lobbied for the introduction of minimum wage laws so as to exclude black workers from the labor market. By preventing black workers from selling their labor for less than white workers, the black workers were prevented from competing for jobs held by whites.^[18] Although it is the employer who is fined and/or imprisoned for violations, the workers also lose their freedom, albeit indirectly.
Decreases opportunities for low-skilled workers to gain the training and responsibility they need to move up the wage ladder.^{[citation needed]}
Increases the cost of government social programs due to assistance programs aiding the laid-off workers.^{[citation needed]}
Is less effective at reducing social exclusion than some other alternatives, for example training programs.^{[citation needed]}
Is less effective than the Earned Income Tax Credit at targeting the truly needy, and is more damaging to businesses.^{[citation needed]}
Decreases human capital by encouraging people to enter the job market instead of pursuing further education.^{[citation needed]}
Reduces the international competitiveness of a nation by raising the cost of factor inputs, and therefore output, relative to the level of other countries. It is argued that this is particularly problematic in developing economies.^{[citation needed]}

[edit] Economic analysis

[edit] Theoretical analysis

Economic theory analyses the effects of minimum wages within the context of labor markets (c.f. labor economics). In a labor market, workers supply their labor, which is sold for wages, and employers demand labor.

The traditional economic argument views the labor market as perfectly competitive. In perfectly competitive markets, the market price settles to the marginal value of the product. Therefore, under the perfect competition assumption, absent a minimum wage, workers are paid their marginal value. As is the case with all (binding) price floors above the equilibrium, minimum wage laws are predicted to result in more people being willing to offer their labor for hire, but fewer employers wishing to hire labor. The result is a surplus of labor, or, in this case, unemployment.

[edit] Supply of labor curve

The amount of labor that workers supply is generally considered to be positively related to the nominal wage; as wage increases, labor supplied increases. Economists graph this relationship with the wage on the vertical axis and the labor on the horizontal axis. The supply of labor curve then is upward sloping, and is depicted as a line moving up and to the right.

The upward sloping labor supply curve is based on the assumption that at low wages workers prefer to consume leisure and forego wages. As nominal wages increase, choosing leisure over labor becomes more expensive, and so workers supply more labor. Graphically, this is shown by movement along the labor supply curve, that is, the curve itself does not move.

Other variables, such as price, may cause the labor supply curve to shift, i.e. an increase in the price level may cause workers to supply less labor at all wages. This is depicted graphically by a shift of the entire curve to the left.

[edit] Demand for labor curve

The amount of labor demanded by firms is generally assumed to be negatively related to the nominal wage; as wages increase, firms demand less labor. As with the supply of labor curve, this relationship is often depicted on a graph with wages represented on the vertical axis, and labor on the horizontal axis. The demand for labor curve is downward sloping, and is depicted as a line moving down and to the right on a graph.

The downward sloping demand for labor curve is based on the assumption that firms are profit maximizers. That means they seek the level of production that maximizes the difference between revenue and costs. A firm's revenue is based on the price of its goods, and the number of goods it sells. Its cost, in terms of labor, is based on the wage. Typically, as more workers are added, each additional worker at some point becomes less productive. That's like saying there are too many cooks in the kitchen. Firms therefore only hire an additional worker, who may be less productive than the previous worker, if the wage is no greater than the productivity of that worker times the price. Since productivity decreases with additional workers, firms will only demand more labor at lower wages. Graphically, the effect of a change in is wage is depicted as movement along the demand for labor curve.

Other variables, such as price, may cause the labor demand curve to shift, i.e., an increase in the price level may cause firms to increase labor demanded at all wages, because it becomes more profitable to them. This is depicted graphically by a shift in the labor demand curve to the right.

[edit] Supply and demand for labor

Graph of Labor Market

Because both the demand for labor curve and the supply of labor curve can be graphed with wages on the vertical axis and labor on the horizontal axis, they can be graphed together. Doing so allows us to examine the possible effects of the minimum wage.

The point at which the demand for labor curve and the supply of labor curve intersect is the point of equilibrium. Only at that wage will the demand for labor and the supply of labor at the prevailing wage be equal to each other. If the wages are higher than the equilibrium point, then there will be an excess supply of labor, which is unemployment.

A minimum wage prevents firms from hiring workers below a certain wage. If that wage is above the equilibrium wage, then, according to this model, there will be an excess of labor supplied, resulting in increased unemployment. Additionally, firms will hire fewer workers than they otherwise would have, so there is also a reduction in employment.

[edit] Criticism of Standard Theory and Alternative Modeling

Gary Fields argues, however, that the standard "textbook model" for the minimum wage is "ambiguous," and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage… [and with] one sector with minimum-wage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on."^[19]

An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). Such a case is a type of market failure and results in workers being paid less than their marginal value. Under the monoposonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor.^[20] This view emphasizes the role of minimum wages as a market regulation policy akin to antitrust policies, as opposed to an illusory "free lunch" for low-wage workers. Detractors point out that no collusion between employers to keep wages low has ever been demonstrated, asserting that in most labor markets, demand meets supply, and it is only minimum wage laws and other market interference which cause the imbalance. However, it is important to note that collusion is not a pre-requisite for market power; segmented markets, information costs, imperfect mobility and the 'personal' element of labour markets all represent movements away from the idealised perfectly competitive labour market.

[edit] 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. For the median worker, real hourly earnings have increased since 1979, however for the lowest deciles, there have been significant falls in the real wage without much fall in the rate of unemployment. Some argue that a declining minimum wage might reduce youth unemployment (since these workers are likely to have fewer skills than older workers).^[21]

Comparison of the minimum wage to unemployment among teenagers in the U.S. In the data shown here, a higher minimum wage was correlated with higher unemployment among teenage workers relative to adult workers.

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 high minimum wages.^[22]

[edit] Scholarly articles

[edit] Views of Card and Krueger

The more common debate is on changes to minimum wages. This unified view was challenged by 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. They assume that the demand for low-wage workers is inelastic.

Critics of this research, however, argue that their research was flawed.^[23] 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, an assessment of data collected and analysed by David Neumark and William Wascher, economists who are usually critical of minimum-wage increases, did not initially contradict the Card/Krueger results,[4] but in a later edited version they found that the same general sample set did increase unemployment. The 18.8% wage hike resulted in "[statistically] insignificant—although almost always negative" employment effects.^[24]

Another possible explanation for why the current minimum wage laws may not affect unemployment in the United States is that the minimum wage is set close to the equilibrium point for low and unskilled workers. Thus absent the minimum wage law unskilled workers would be paid approximately the same amount. However, an increase above this equilibrium point could likely bring about increased unemployment for the low and unskilled workers.

[edit] 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 Low Pay Commission found that, rather than make employees redundant, employers have reduced their rate of hiring, reduced staff hours, increased prices, and have found ways to cause current workers to be more productive (especially service companies).^[25] Neither trade unions nor employer organisations contest the minimum wage, although especially the latter had done so heavily until 1999.

Many leading economists accept the Card/Krueger results.[5] ^[26]^[27]

[edit] Disagreement with Card and Krueger

The Joint Economic Committee (having at the time a Republican majority) of the United States Congress has been critical of Card and Krueger's work. They note that it conflicts with other studies done on minimum wage laws within the United States over the past 50 years. ^[28] According to the JEC, 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.

According to economists, Donald Deere (Texas A&M), Kevin Murphy (University of Chicago), and Finis Weltch (Texas A&M), the Card and Krueger study are contradicted by "common sense and past research." They conclude about the Card and Krueger research,

Each of the four studies examines a different piece of the minimum wage/employment relationship. Three of them consider a single state, and two of them look at only a handful of firms in one industry. From these isolated findings Card and Krueger paint a big picture wherein increased minimum wages do not decrease, and may increase, employment. Our view is that there is something wrong with this picture. Artificial increases in the price of unskilled laborers inevitably lead to their reduced employment; the conventional wisdom remains intact."^[29]

The importance of Card and Krueger's work does not necessarily lie in its empirical findings (which have been challenged by several studies more rigorous than Deere, Murphy and Weltch) but in its emphasis on the importance in recognising that theoretical economics is not incompatible with positive employment effects from the minimum wage.^{[citation needed]}

[edit] Equivalence to a tax and subsidy

As argued by former Council of Economic Advisors Chairman Gregory Mankiw, a minimum wage is equivalent to:

A wage subsidy for unskilled workers, paid for by
A tax on employers who hire unskilled workers. [6]

Part (1) of the policy provides some benefit to low wage workers while part (2) creates more unemployment among low wage workers. This is why the minimum wage is often criticized as a self contradictory policy. Others argue the small decrease in employment is offset by the increased benefit of the workers.

[edit] Debate over consequences of minimum wage laws

A simple classical economic analysis of supply and demand implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment. This is because a greater number of workers are willing to work at the higher wage while a smaller numbers of jobs will be available at the higher wage. Companies can be more selective in who they employ thus the least skilled and unexperienced will typically get excluded.

However, there are many other variables that can complicate the issue such as monopsony in the labour market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Whilst single employer market power seems unlikely to exist in most labour markets if understood in terms of the traditional 'company town' exposition, information and mobility imperfections, together with the 'personal' element of the labour transaction give some degree of wage-setting power to the majority of firms.

Comparison of the minimum wage to unemployment among low skill workers in the U.S. The two lowest points are for the years 1999 and 2000. Unemployment for all workers in those two years was the lowest since 1970. The data show a correlation in this data set between the level of the minimum wage and unemployment among lower-educated workers.

Comparison of the minimum wage to unemployment among college educated workers in the U.S. In this data set, there is essentially no correlation between the minimum wage and unemployment among higher-educated workers.

Economists disagree as to the measurable impact of minimum wages in the 'real world'. This disagreement usually takes the form of competing empirical tests of the elasticities of demand and supply in labor markets and the degree to which markets differ from the perfectly competitive efficient ideal.

A 2000 survey by Dan Fuller and Doris Geide-Stevenson reports that of a sample of 308 American Economic Association economists, 45.6% fully agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers", 27.9% agreed with provisos, and 26.5% disagreed. The authors of this study also reweighted data from a 1990 sample to show that at that time 62.4% of academic economists agreed with the statement above, while 19.5% agreed with provisos and 17.5% disagreed.^[30]

In the debate about minimum wage it is rarely mentioned by how much the quantity of labor demanded may fall if the minimum wage is raised. Research papers by the Employment Policies Institute^[31] and by the National Center for Policy Analysis^[32] claim that increases of 10% in the minimum wage may reduce demand hours worked at the minimum wage by around 1% or 2% depending on circumstances.

Comparison of the minimum wage to unemployment-population ratio among blacks relative to whites in the U.S. The data shown here indicate almost no correlation, or perhaps a weak positive correlation, between the level of the minimum wage and unemployment among black workers relative to white workers.

Some research suggests that the unemployment effects of small minimum wage increases are dominated by other factors. [7] In Florida, where voters approved an increase in 2004, a follow-up comprehensive study confirms a strong economy with increased employment above previous years in Florida and better than in the U.S. as a whole. : “The Florida Minimum Wage After One Year.” http://www.risep-fiu.org/reports/Florida_Minimum_Wage_Report.pdf

According to a claim by the Mackinac Center for Public Policy^[33], 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. Milton Friedman, 1976 Nobel Prize winner in Economics, called the minimum wage one of the most "anti-negro laws" for what he saw as its adverse affects on employers.^[34]

Today, the International Labour Organization (ILO)^[2] and the OECD^[35] do not consider that the minimum wage can be directly linked to unemployment in countries which have suffered job losses.

[edit] Policy alternatives to the minimum wage

The primary purpose of the minimum wage is to give higher income to low wage earners, but the minimum wage isn't the only policy that attempts to accomplish this goal. Several policy alternatives such as a negative income tax or earned income tax credit give benefits to low wage workers in a method that many economists believe is more economically efficient.[8]

Under a classical analysis of a minimum wage, some low wage earners are helped by the higher minimum wage, some low wage earners lose their jobs because of the higher minimum wage, and businesses employing low wage earners face higher labor costs. A benefit is delivered to some low wage workers at the expense of other low wage workers and businesses employing low wage workers.

On the other hand, a negative income tax or earned income tax credit benefits a broader population of low wage earners, and society as a whole bears the cost. This is more economically efficient because, a low tax rate on the broader economy causes less deadweight loss than a high tax rate on a small section of the economy. The ability of the earned income tax credit to deliver a larger monetary benefit to poor workers at a lower cost to society was recently documented in a report by the Congressional Budget Office.[9]

[edit] See also

[edit] References

^ ^a ^b ^c ^d ^e American Academy of Political and Social Science. "The Cost of Living." Philadelphia, 1913.
^ ^a ^b ILO 2006: Minimum wages policy (PDF)
^ http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
^ http://www.heritage.org/Research/Economy/wm676.cfm
^ ^a ^b Waltman, Jerold. "The Politics of the Minimum Wage." University of Illinois Press. 2000
^ Sanjiv Sachdev (2003). "Raising the rate: An evaluation of the uprating mechanism for the minimum wage". Employee Relations. Retrieved on 2007-02-12.
^ History of the National Minimum Wage. Employment Matters. United Kingdom Department of Trade and Industry (17 June 2006). Retrieved on 2006-06-22. Note: Date enacted was 1 April 1999
^ Eurostat (2006): Minimum Wages 2006 - Variations from 82 to 1503 euro gross per month(PDF)
^ Ehrenberg, Ronald G. Labor Markets and Integrating National Economies, Brookings Institution Press (1994), p. 41
^ http://www.dol.gov/esa/minwage/america.htm
^ ^a ^b ^c ^d ^e ^f http://www.epi.org/content.cfm/issueguides_minwage Real Value of the Minimum Wage
^ ^a ^b ^c Richard B. Freeman (1994). "Minimum Wages – Again!". International Journal of Manpower. Retrieved on 2007-02-12.
^ [1]
^ Tupy, Marian L. Minimum Interference, National Review Online, May 14, 2004
^ (Cato)
^ Aaronson, D. and E. French, 2006. Output Prices and the Minimum Wage. Employment Policies Institute.
^ Keiner, M. and R. Kudrle, 2000. Does Regulation Affect Economic Outcomes? The Case of Dentistry. Journal of Law and Economics.
^ Williams, Walter (1989): South Africa's War Against Capitalism, Praeger Publishers
^ Gary Fields (1994). "The Unemployment Effects of Minimum Wages". International Journal of Manpower. Retrieved on 2007-02-12.
^ Alan Manning (2003) Monopsony in motion: Imperfect Competition in Labor Markets (ISBN 0-691-11312-2)
^ "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.
^ Template:Cite "Neumark & Waschler, American Economic Review, Volume 90 No. 5."
^ Low Pay Commission (2005): National Minimum Wage - Low Pay Commission Report 2005 (PDF)
^ Krugman on the Minimum Wage[2]
^ Economic Policy Institute. "Hundreds of Leading Economists Say: Raise the Minimum Wage[3]
^ http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
^ http://www.cato.org/pubs/regulation/reg18n1c.html
^ Fuller, Dan und Doris Geide-Stevenson (2003): Consensus Among Economists: Revisited, in: Journal of Economic Review, Vol. 34, No. 4, Seite 369-387 (PDF)
^ "The Effect of Minimum Wage Increases on Retail and Small Business Employment", Employment Policies Institute, May 2006.
^ "Minimum Wage Teen-age Job Killer", NATIONAL CENTER FOR POLICY ANALYSIS, May 20, 1999.
^ "Great Myths of the Great Depression (page 10)", Mackinac Center for Public Policy, April 22, 2006.
^ http://video.google.com/videoplay?docid=6813529239937418232&q=label%3Afree+market Milton Friedman Exposes The "Unholy Coalition" of Minimum Wage Supporters
^ OECD (2006): OECD Employment Outlook 2006 (read-only PDF)

[edit] External links

Characteristics of Minimum Wage Workers: 2005 U.S. Department of Labor Bureau of Labor Statistics
Minimum Wage Issue Guide by the Economic Policy Institute
EIROnline: Minimum wages in Europe
Low Pay Commission in the United Kingdom
UK Department of Trade and Industry - The National Minimum Wage
U.S. Department of Labor statistics
The 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) Center for Economic and Policy Research (December 2005)
Center for Policy Alternatives – Minimum Wage Policy Model
Find It! By Topic: Wages: Minimum Wage U.S. Department of Labor
Wagenet - Australian Working Conditions
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 Research, Studies and Resources by The Heritage Foundation
Additional resources on the U.S. minimum wage and 2006 ballot initiatives at the Brennan Center for Justice at NYU School of Law

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