Minimum wage

Minimum wage is the minimum amount of compensation an employee must receive for performing labor. Minimum wages are typically established by contract or legislation by the government. As such, it is illegal to pay an employee less than the minimum wage.

Employers may pay employees by some other method than hourly, such as by piecework or commission. But, in any case, the dollar amount that eligible employees earn, divided by the hours that they worked, must equal at least the current minimum wage per hour.

EXAMPLE: The current minimum wage in the U.S. for eligible employees under Federal law is $5.85 per hour, effective July 24, 2007. And it is function of age. Minimum wage for the first 90 consecutive days of employment for eligible employees who are under 20 years of age is $4.25 per hour. It increases to $5.85 per hour after the first 90 consecutive days of employment or when eligible employees turn 20 years old, whichever occurs first.

Minimum wage theoretical overview

The International Labour Office in Geneva, Switzerland reports that some 90% of countries around the world have legislation supporting a minimum wage. The minimum wage in countries that rank within the lowest 20% of the pay scale is less than $2 per day, or about $57 per month. The minimum wage in the countries that represent the highest 20% of the pay scale is about $40 per day, or about $1,185 per month.

Five excerpt, from very different – in time and space – academics, and writers that researched this topic should be very useful to read right now:

“…The estimation in which different qualities of labour are held comes soon to be adjusted in the market with suffi cient precision for all practical purposes, and depends much on the comparative skill of the labourer and the intensity of the labour performed. The scale, when once formed, is liable to little variation. If a day’s labour of a working jeweller be more valuable than a day’s labour of a common labourer, it has long ago been adjusted and placed in its proper position in the scale of value….” ( Ricardo, 1973.)

“....The higher the minimum wage, the greater will be the number of covered workers who are discharged.....” ( Stigler, 1946.)

“…...In a background paper for Canadian Policy Research Networks’ vulnerable workers series, we asked the author, Olalekan Edagbami, to disregard the outliers ( studies that find extreme results, at either end of the spectrum ) and focus on what the preponderance of research says about minimum-wage increases. His conclusion:

"...There is evidence of a significant negative impact on teenage employment, a smaller negative impact on young adults and little or no evidence of a negative impact on employment for workers aged 25 or older….”( Saunders, 2007.)

“….Minimum wages often hurt those they are designed to help. What good does it do unskilled youth to know that an employer must pay them $ 3.35 per hour if that fact is what keeps them getting jobs?....” ( Samuelson and Nordhaus, 1985.)

“…..The whole point of a minimum wage is that the market wage for some workers — the wage that would just balance the supply of and demand for unskilled, transient, or young workers in highly unstable service industries — is deemed to be too low. If, accordingly, it is fixed by law above the market level, it must be at a point where the supply exceeds the demand. Economists have a technical term for that gap. It’s called ‘unemployment’….... The point is not that those struggling to get by on very low wages should be left to their own devices. The point is that wages, properly considered, are neither the instrument nor the objective of a just society. When we say their wages are “too low,” we mean in terms of what society believes is decent. But that’s not what wages are for. The point of a wage, like any other price, is to ensure every seller finds a willing buyer and vice versa, without giving rise to shortages or surpluses — not to attempt to reflect broader social notions of what is appropriate. That's especially true when employers can always sidestep any attempt to impose a “just” wage simply by hiring fewer workers…....”( Coyne, 2007.)

The Economic Effects of Minimum-Wage Laws

Simply stated, if the government coercively raises the price of some good (such as labor) above its market value, the demand for that good will fall, and some of the supply will become "disemployed."

Unfortunately, in the case of minimum wages, the disemployed goods are human beings. The worker who is not quite worth the newly imposed price loses out. Typically, the losers include young workers who have too little experience to be worth the new minimum and marginal workers who, for whatever reason, cannot produce very much. First and foremost, minimum-wage legislation hurts the least employable by making them unemployable, in effect pricing them out of the market.

An individual will not be hired at $5.05 an hour if an employer feels that he is unlikely to produce at least that much value for the firm. This is common business sense. Thus, individuals whom employers perceive to be incapable of producing value at the arbitrarily set minimum rate are not hired at all, and people who could have been employed at market wages are put on the street ( Kibbe, 1988.)

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 forgo 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.

• The Iron Law of Wages: Malthus

According to the Malthusian theory of population, the size of population will grow very rapidly whenever wages rise above the subsistence level ( i.e. the minimal level needed to support a person’s life ). In this theory, the labour supply curve should be horizontal at the subsistence wage level, which is sometimes called the Iron Law of Wages. In the below graph, the "subsistence wage level" could be depicted by a horizontal straigh edge that would be set anywhere below the equilibrium point on the Y ( i.e. wage )-axis.

Malthus’ gloomy doctrine exerted a powerful impact upon social reformers of the 19th century, for this view predicted that any improvement in the living standards of the working classes would be eaten up by population increase.

"....Looking at the statistics of Europe and North America, we see that the people do not inevitably reproduce so rapidly --- if at all --- but the effect of globalization might eventually simulated such a tendency and, perhaps there is a germ of truth in Malthus’ views for the poorest countries today..." ( Samuelson and Nordhaus, 1992. )

• The Reserve Army of the Unemployed: Marx

Karl Marx devised quite a different version of the iron law of wages. He put great emphasis upon the “reserve army of unemployed.” In effect, employers led their workers to the factory windowd and pointed to the unemployed workers outside, eager to work for less.

"....This, Marx is interpreted to have thought, would depress wages to the subsistence level. Again, in a competitive labour market, the reserve army can depress wages only to equilibrium level. Only if labour supply became so abundant and demand were in equilibrium at minimum-subsistence level, the wage would be at a minimum level, as in many underdeveloped countries...." ( ibid., 1992.)

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.

Supply and demand for labor

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.

Who Benefits from Minimum-Wage Legislation?

Labor unions and their members are the most obvious beneficiaries of government-imposed minimum wages. As the established elite of the workforce, union members are on the receiving end of the minimum wage's redistribution process. To fully understand how unions gain from minimum-wage legislation, one must consider the essential nature of unions.

The success of a union depends on its ability to maintain higher-than-market wages and provide secure jobs for its members. If it cannot offer the benefit of higher wages, a union will quickly lose its members. Higher wages can be obtained only by excluding some workers from the relevant labor markets. As F. A. Hayek has pointed out:

"....Unions have not achieved their present magnitude and power by merely achieving the right of association. They have become what they are largely in consequence of the grant, by legislation and jurisdiction, of unique privileges which no other associations or individuals enjoy......" ( Hayek, 1969 )

Teenagers to be supported by the“Minimum wage legislation”

American example

The miniumu wage legislation has, historically, been targeting teenage labour force under the assumption that increase of employment in this demographic sector with skill formation ( i.e., educational attainment and on-the-job training ) would benefit the economy.

Economic theory, however, suggests that teens bear most of the disemployment effects resulting from a minimum wage hike, compared with any other demographic group (e.g., adult males), since minimum wages directly affect a high proportion of employed teens.

Thus, a great deal of the research examines the economic impact an increase in the minimum wage would have on teenagers.

In the U.S. in 1981, the congressionally-mandated Minimum Wage Study Commission concluded that a 10 percent increase in the minimum wage reduced teenage employment by 1 percent to 3 percent. This estimate is confirmed in more recent studies by David Neumark of Michigan State and William Wascher of the Federal Reserve Board, and Kevin Murphy of the University of Chicago, and Donald Deere and Finis Welch of Texas A&M.

This suggests that between 130 thousand and 400 thousand jobs will be lost if the Clinton plan is approved by Congress ( Bartlett, 1996 .)

The Clinton Administration has challenged the widespread view among economists, that an increase in the minimum wage will reduce jobs, by referring to the recent work of economists David Card and Alan Krueger, both of Princeton. Their studies of fast food restaurant employment after New Jersey and California increased their state minimum wages found no evidence of job loss.

However, there appeared to be serious flaws in the data that cast even more serious doubt upon the validity of the Card-Krueger conclusions.

In a paper published by the National Bureau of Economic Research, Neumark and Wascher reexamined their data, which originally came from telephone surveys. Using actual payroll records from a sample of the same New Jersey and Pennsylvania restaurants, Neumark and Washer concluded that employment had not risen after an increase in the minimum wage, as Card and Krueger had claimed, but in fact had fallen.

A review of the Card study of California by Professor Lowell Taylor of Carnegie Mellon University found that the state minimum wage increase had a major negative effect in low-wage counties and for retail establishments generally.

Thus Nobel Prize winning economist Gary Becker of the University of Chicago concluded that:

"…...the Card-Krueger studies are flawed and cannot justify going against the accumulated evidence from many past and present studies that find sizeable negative effects of higher minimums on employment…...."( ibid., 1996 ).

But even if the minimum wage had no effect on overall employment, there are still strong arguments against raising it.

First, it is important to understand that the impact of the minimum wage is not uniform. For 98.2 percent of wage and salary workers, there is no impact at all, because they either already earn more than the minimum or are not covered by it.

However, for workers in low-wage industries, those without skills, members of minority groups, and those living in areas of the country where wages tend to be lower, the impact can be severe. This is why, historically, economists have always found that the primary impact of the minimum wage has been on black teenagers.

In 1948, when the minimum wage covered a much smaller portion of the labor force, the unemployment rate for black males age 16 and 17 was just 9.4 percent, while the comparable unemployment rate for whites was 10.2 percent. In 1995, unemployment among black teenage males was 37.1 percent, while the unemployment rate for white teenage males was 15.6 percent. The unemployment rate for black teenage males has tended to rise and fall with changes in the real minimum wage.

But current unemployment is just a part of the long-term price that teenagers of all races pay for the minimum wage. A number of studies have shown that increases in the minimum wage lead employers to cut back on work hours and training.

When combined with the loss of job opportunities, this means that many youths, especially minority youth, are prevented from reaching the first rung on the ladder of success, with consequences that can last a lifetime. Even liberals now recognize that this may be the worst effect that the minimum wage has. For example, in 1992 former Senator George McGovern wrote in the Los Angeles Times:

“…..Unfortunately, many entry-level jobs are being phased out as employment costs grow faster than productivity. In that situation, employers are pressured to replace marginal employees with self-service or automation or to eliminate the service altogether. When these jobs disappear, where will young people and those with minimal skills get a start in learning the "invisible curriculum" we all learn on the job? The inexperienced applicant cannot learn about work without a job….”( ibid., 1996.)

Debate over consequences

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.

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.

Economically speaking, the theory of supply and demand suggests that the imposition of an artificial value on wages that is higher than the value that would be dictated in a free-market system creates an inefficient market and leads to unemployment. The inefficiency occurs when there are a greater number of workers that want the higher paying jobs than there are employers willing to pay the higher wages. Critics disagree.

What is generally agreed upon by all parties is that the number of individuals relying on the minimum wage in the United States is less than 5%. However, this statistic is largely ignored in favor of citations regarding the number of people that live in poverty. Keep in mind that earning more than minimum wage does not necessary mean that one is not living in poverty. According to estimates from the CIA World Fact Book, some 13% of the U.S. population lives in poverty. That's 37 million people.

OECD experience

In the research article of Grant Belchamber ( 2004 ) there is a table “Minimum wages and employment/population ratios – Selected countries” that summarizes the OECD countries’ experience with the minimum wages legislated in selected countries in the “teenagers” demographic categories ( OECD 2002, Blau, 2002. ) We shall summarize the major findings of the literature ( 2004 ) , Table 1:

Legend of the below lines of characteristics:

• Country: Country Youth minimum wages as % of adult minimum at the end of 2002, at age: 16 / 17 / 18 / 19 / 20 [ Employment to population ratio of persons aged 15 to 24 in 1990 ] [ same ratio in 1992 ]

• Australia: 50 / 60 / 70 / 80 / 90 [ 61.1 ] [ 59.6 ]

• Belgium: 70 / 76 / 82 / 88 / 94 [ 30.4 ] [ 28.5 ]

• Canada: 100 / 100 / 100 / 100 /100 [ 61.1] [ 57.3 ]

• France: 80 / 90 / 100 / 100 / 100 [ 29.5 ] [ 24.1]

• Greece: 100 / 100 / 100 / 100 / 100 [ 30.3 ] [ 27.0 ]

• Ireland: 70 / 70 /100 / 100 / 100 [ 41.4 ] [ 45.3 ]

• Netherlands: 34.5 / 39.5 / 45.5 / 54.5 / 63.5 [ 53.0 ] [ 70.5 ]

• New Zealand: 80 / 80 / 100 / 100 / 100 [ 58.3 ] [ 56.8 ]

• Portugal: 100 / 100 / 100 / 100 / 100 [ 54.8 ] [ 41.9 ]

• Spain: 100 / 100 / 100 / 100 / 100 [ 38.3 ] [ 36.6 ]

• UK: Exempt / 85 / 85 / 85 / N/A [ 70.1] [ 61.0 ]

• USA: 82.3 82.3 100 100 100 [ 59.8 ] [ 55. 7 ]

The line comparisons above, show that ---with exception, what looks really like a huge outlier, of Netherlands--- standard economic doctrine of the “Minimum wage legislation” negative ( or, at best, ambiguous ) effect on the youth employment still holds.

In the case of Netherlands, there are some very interesting information tid-bits. It looks like some explanation might stem from the fact that over the past two decades the Netherlands has instituted and revamped the array of active labour market programmes that apply in its labour markets, through its Foundation of Labour and Social-Economic Council. The policy initiatives implemented have “social partnership”, not “neo-liberal” origins and character.The Dutch initiatives exhibit deep integration between training and skills formation and employment. Perhaps this is the way to go everywhere; if will and money could be found.

Conclusion

From the above survey, there are no easy answers to wards the “minimim wage legislation” topic. What is the solution to the minimum wage/living wage issue? Statistics can be gathered to support both sides of the argument. While there are no easy answers, a good first step is to frame the debate in realistic terms. Referring to the minimum wage as a wage designed to support a family confuses the issue. Families need a living wage, not a minimum wage. With that said, working at McDonalds or the local gas station isn't a career. These are jobs designed to help entry-level workers join the workforce, not to support the financial needs of a family.

On the core issue of minimum wage itself, political wrangling is unlikely to result in a real solution. A more practical solution is to join the workforce at the low end of the wage scale, build your skills, get an education and move up the ladder to a better paying job just as members of the workforce have done for generations. The Dutch example seems to have achieved two major things:

• To prove the general economic way of thinking about the simplistic attitude of the “minimum wage legislation” --- that will probably never work anywhere--- as it was, in excerpts from various academics ( inclusive quite a few Nobel laureates ) , presented in this survey.

• To point towards more complex solution than the simple legislative “orders”. Such a solution would have to carve--- and perhaps to “oil” --- the partnership between the young job seekers and employers based on system of education and “know-how” learning with feed-backs through which the teenagers, who are “willing” to join the general work-force, could obtain the ( still increasing ) skills assuring the good living standards for them and, later, for their families.

References:

• Bartlett, Bruce R.,” The Impact of Federal Minimum Wage Increase on Small Business”, before the Committee on Small Business, U.S. House of Representatives, the Hon. Jan Meyers, Chair, May 15, 1996
• Belchamber, Grant,” Minimum wages and youth employment,” Australian Council of Trade Union, 2004
• Blau, Francine D. and Lawrence M. Kahn, Russell – US Labor Market Performance in International Perspective by Sage Foundation, New York, 2002
• Coyne, A. , “The injustice of the minimum wage”, National Post, January 10, 2007
• Hayek, F. A.,"Unions, Inflation and Profits," in: Studies in Philosophy, Politics and Economics Simon and Schuster, New York, 1969, p. 281.
• Kibbe, Matthew B.,” The Minimum Wage: Washingtons Perennial Myth, Cato Policy Analysis No. 106, May 23, 1988
• Neumark, D., and W. Wascher, Do Minimum Wages Fight Poverty?, NBER Working Paper 6127, 1997

Committee on Small Business, U.S. House of Representatives, the Hon. Jan Meyers, Chair, May 15, 1996

• OECD Employment Outlook (various); UK Low Pay Commission Reports (various); At Home and Abroad, Geneva , 2002
• Ricardo, David, The principles of political economy and taxation, Everyman’s Edition, London, 1973
• Samuelson, P. A., and W. Nordhaus, Economics, ( 17th ed.), McGraw-Hill,Inc., New York,1985
• Samuelson, P.A., and W.D. Nordhaus, Micro-Economics ( 14th ed. ), McGraw-Hill,Inc. , New York 1992
• Saunders, Ron, “Should We Jack Up Minimum Wage?”, Toronto Star, February 7, 2007
• Stigler, George J.,“The economics of minimum wage legislation”, American Economic Review, vol. 36, 1946, , pp. 358-365

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
• Retiring Comfortably at Minimum Wage
• Fighting For a Minimum Wage - The Indypendent, Clark Merrefield

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