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Minimum wage

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The minimum wage is the minimum rate a worker can legally be paid (often per hour) as set by statute. It 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. Each country sets its own minimum wage laws and regulations, and many countries have no minimum wage.

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]. The purpose of introducing these laws was try and raise wages for workers and increase fairness. Supporters say that minimum wage reduces exploitation, and can help ensure that everyone can afford to live. However, opponents contend that minimum wage causes inflation or unemployment, and slows economic growth.

History

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 positive effect of:

On the other hand, minimum wages may have the negative effects of:

  • Curbing economic growth by increasing the cost of labor.
  • Decreasing incentive for some low-skilled workers to gain skills.
  • Cause higher unemployment rates among the low skilled and uneducated labor as the price of labor increases to favor the more skilled or machines.
  • Cause workers laid off because of higher labor costs to consume government assistance thus increasing the cost of government.

The effects of minimum wage laws, both positive and negative, may be increased by 'knock-on effects'. Where unions are not strong, wages for those earning slightly more than the minimum may be reduced, while those earning less than the minimum are forced to compete for work at pay levels above their experience, skill or education. Strong unions may be able to demand wage increases 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. 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." For example, after the passage of the first Federal mandated minimum wage in the United States in 1933, an estimated 500,000 blacks lost their jobs, replaced by higher skilled and more educated white laborers. |pg.10

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.[1],[2] 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.[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% 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).[4]

From the other side, some leading economists, including the Nobel prize winners, accept the Card/Krueger works and agree with they results [4].

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. 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 59% of the average hourly wage in manufacturing during the late 1960s to less than 41%.

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 market 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 (e.g., 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. Others 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 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.

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 [5]). 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...

United States

The first attempt at establishing a minimum wage in the United States came in 1933, when a $.25-per-hour standard was set as part of the National Recovery Act. However, in 1935 the United States Supreme Court declared the National Recovery Act unconstitutional, and the minimum wage was abolished.

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 ($8.85 in 2005 dollars.)

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. The vast majority of conservatives oppose this, but a few actually favor it, on the grounds that this would stop their opponents from, in their view, periodically exploiting the issue.

In 2005, John Edwards and the community organization ACORN organized a national tour to promote both city, state, and national increase of minimum wages.

On Tuesday, January 17th, 2006, Maryland became the 18th state in the nation to enact a law that will make Maryland's minimum wage higher than the federal. In a Baltimore Sun article related to the change, U.S. Represenative Steny H. Hoyer, a Maryland Democrat applauded Maryland lawmakers for overriding the veto on the increase and urged Congress to adopt legislation that would increase the federal minimum wage to $7.25. Massachusetts Senator Edward M. Kennedy, a ranking member of the Senate Committe on Health, Education, Labor and Pensions also commended Maryland for increasing its minimum wage, in a statement issued on January 17th, he stated that "Maryland is one of many states and communities across the country to recognize that no one who works for a living should have to live in poverty." Source.

See also: List of U.S. state minimum wages

United Kingdom

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Municipal regulation of wage levels began in some towns in 1524. Later, the Trade Boards Act of 1909 (introduced by Winston Churchill) initially created 4 Trades Boards that set minimum wages (which varied from trade to trade) 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 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 extent 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 (NMW) was introduced for the first time by Tony Blair's Labour government in April, 1999, at the rate of £3.60 per hour for those workers aged over 22. It took the recommendation of this rate from the Low Pay Commission, an independent body that the government had appointed in July, 1997. The LPC exists to this day to maintain the NMW, and consists of three members with a trades union background, three members with an employer background, and three academic labour market relations experts. The commission is widely regarded as a successfully example of '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. Despite a much higher minimum wage, the UK has lower unemployment than 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 workers aged under 18 is £3.00, provided that they are no longer of compulsory school age and are not apprentices.

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

See also: National Minimum Wage Act 1998

Australia

  • The current minimum wage in Australia is $12.75 AUD (~$9 U.S. Dollars) per hour [6].
  • In 2005, the Federal Government implemented significant changes to the nation's labour system. These changes do not explicitly lower the minimum wage (in nominal terms) but may slow its rate of increase. See also, Australian Industrial Relations Law Reform 2005

See also

References

  1. ^ "History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 1996". Department of Labor. March 31, 2006.
  2. ^ "MINIMUM WAGE (GUARANTEED)". European Foundation for the Improvement of Living and Working Conditions. March 31, 2006.
  3. ^ "National Minimum Wage". dti. March 31, 2006.
  4. ^ "Minimum Wages and Youth Employment in France and the United States" (PDF). Cornell. May 1997.

External links

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