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 nineteenth century,[1] minimum wage laws are now in force in more than 90% of all countries.[2]

The magnitude of 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 what they consider to be basic necessities (cf. In 1896, New Zealand established such arbitration boards with the Industrial Conciliation and Arbitration Act).[1] Also 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, but set basic wages for six industries that were considered to pay low wages.[3]. 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.[3] By 1902, other Australian states, such as New South Wales and Western Australia, had also formed wages boards.[1]

In 1907, the Harvester decision was handed down in Australia. It established a 'living wage' for a man, his wife and two children to "live in frugal comfort." 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 1912, the state of Massachusetts, United States, set minimum wages for women and children. In the United States, statutory minimum wages were first introduced nationally in 1938[4] In the 1960s, minimum wage laws were introduced into Latin America as part of the Alliance for Progress; however these minimum wages were, and are, low[5]

In the United States, statutory minimum wages were first introduced nationally in 1938,[6].[7] In the European Union, 18 out of 27 member states currently have national minimum wages.[8] Northern manufacturing firms lobbied for the minimum wage so as to prevent firms located in the south, where labor was cheaper, from competing. 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]

Minimum wage law

Minimum wage laws vary greatly across many different jurisdictions, not only in setting a particular amount of money (e.g. US$5.85 per hour under U.S. Federal law, or £5.35 (for those aged 22+) in the United Kingdom), but also in terms of which pay period (e.g. Russia and China set monthly minimums) or the scope of coverage. For instance, not all workers may be paid a full minimum wage, because exceptions may be made for teenagers or those under 21. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage level.

Europe

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.[11]

North America

Australia

In Australia, on 14 December 2005, the Australian Fair Pay Commission was established under the Workplace Relations Amendment (WorkChoices) Act 2005. It is the responsibility of the commission to adjust the standard federal minimum wage.[12] As of 1 December 2006, the Australian standard federal minimum wage is AUD$13.47 per hour or AUD$511.86 per week.[13]

Minimum wage economics

Economic theory analyzes 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.

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.

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

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.

Standard theory criticism

Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues 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."[14]

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.[15] 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 collusion is not a pre-requisite for market power; segmented markets, information costs, imperfect mobility and the 'personal' element of labor markets all represent movements away from the idealized perfectly competitive labor market.

Debate

Support

Supporters of the minimum wage claim it has these effects:

  • Increases the average living standard.[16]
  • Creates incentive to work. (Contrast with welfare transfer payments.)[17]
  • Does not have budget consequence on government. "Neither taxes nor public sector borrowing requirements rise." (Contrast with negative income taxes such as the EITC.)[17]
  • Minimum wage is administratively simple; workers only need to report violations of wages less than minimum, minimizing a need for a large enforcement agency.[17]
  • Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.[16]
  • Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.[16]
  • Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.[16]
  • 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.[16]Template:Huh

Opposition

Opponents of the minimum wage claim it has these effects:

  • Hurts small businesses, benefiting large ones[18]
  • Lowers competitiveness[19]
  • Reduces quantity demanded of 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.[20]
  • Hurts the least employable by making them unemployable, in effect pricing them out of the market.[21]
  • 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,[22] which disproportionately affects the prices that poor people pay for goods and services.[23]
  • Does not improve the situation of those in poverty. "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."[24]
  • 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.[25] 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.[23]
  • Business spend less on training their employees.[23]
  • Is less effective than the Earned Income Tax Credit at targeting the truly needy, and is more damaging to businesses.[23]
  • Decreases human capital by encouraging people to enter the job market instead of pursuing further education.[23]
  • 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]
  • Reduces economic growth by skewing factor-choice incentives away from the optimum choice.[26]
  • Decreases economic growth by encouraging labor-intensive employment
  • Increase in underemployment
  • Increase in offshoring[27]
  • Increase in crime[28]

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.
File:Unemp by race.gif
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.

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. Though single employer market power is unlikely to exist in most labour markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the 'personal' element of the labour transaction give some degree of wage-setting power to most firms.

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 efficiency that models of perfect competition predict.

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.[29]

A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association. Whaples found that 37.7% of respondants supported an increase in the minimum wage while 46.8% wanted it completely eliminated.[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.

Some research suggests that the unemployment effects of small minimum wage increases are dominated by other factors. [3] 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 1938 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.

Minimum wage alternatives

The primary purpose of the minimum wage is to give higher income to low wage earners, but the minimum wage is not 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.[36]

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.[37]


Notes

  1. ↑ 1.0 1.1 1.2 1.3 1.4 American Academy of Political and Social Science. "The Cost of Living." Philadelphia, 1913.
  2. ↑ 2.0 2.1 ILO 2006: Minimum wages policy (PDF)
  3. ↑ 3.0 3.1 Waltman, Jerold. "The Politics of the Minimum Wage." University of Illinois Press. 2000
  4. ↑ Sanjiv Sachdev (2003). "Raising the rate: An evaluation of the uprating mechanism for the minimum wage". Employee Relations. Retrieved 2007-02-12.
  5. ↑ Bethell, Leslie (June 29, 1990). The Cambridge History of Latin America. Cambridge University Press. ISBN 0-521-24518-4.  p. 342.
  6. ↑ Sanjiv Sachdev (2003). "Raising the rate: An evaluation of the uprating mechanism for the minimum wage". Employee Relations. Retrieved 2007-02-12.
  7. ↑ History of the National Minimum Wage. Employment Matters. United Kingdom Department of Trade and Industry (17 June 2006). Retrieved 2006-06-22. Note: Date enacted was 1 April 1999
  8. ↑ 8.0 8.1 Eurostat (2006): Minimum Wages 2006 - Variations from 82 to 1503 euro gross per month(PDF)
  9. ↑ Ehrenberg, Ronald G. Labor Markets and Integrating National Economies, Brookings Institution Press (1994), p. 41
  10. ↑ http://www.dol.gov/esa/minwage/america.htm
  11. ↑ Ehrenberg, Ronald G. Labor Markets and Integrating National Economies, Brookings Institution Press (1994), p. 41
  12. ↑ fairpay.gov.au - About the Commission. Australian Fair Pay Commission. Retrieved 2007-07-05.
  13. ↑ fairpay.gov.au - 2006 Minimum Wage Decision. Australian Fair Pay Commission. Retrieved 2007-07-05.
  14. ↑ Gary Fields (1994). "The Unemployment Effects of Minimum Wages". International Journal of Manpower. Retrieved 2007-02-12.
  15. ↑ Alan Manning (2003) Monopsony in motion: Imperfect Competition in Labor Markets (ISBN 0-691-11312-2)
  16. ↑ 16.0 16.1 16.2 16.3 16.4 http://www.epi.org/content.cfm/issueguides_minwage Real Value of the Minimum Wage
  17. ↑ 17.0 17.1 17.2 Richard B. Freeman (1994). "Minimum Wages – Again!". International Journal of Manpower. Retrieved 2007-02-12.
  18. ↑ http://www.epinet.org/content.cfm/webfeatures_viewpoints_raising_minimum_wage_2004
  19. ↑ http://www.heritage.org/Research/Labor/wm899.cfm
  20. ↑ Tupy, Marian L. Minimum Interference, National Review Online, May 14, 2004
  21. ↑ (Cato)
  22. ↑ Aaronson, D. and E. French, 2006. Output Prices and the Minimum Wage. Employment Policies Institute.
  23. ↑ 23.0 23.1 23.2 23.3 23.4 A blunt instrument, The Economist, October 26, 2006 (English)
  24. ↑ (Cato)
  25. ↑ Williams, Walter (1989): South Africa's War Against Capitalism, Praeger Publishers
  26. ↑ Keiner, M. and R. Kudrle, 2000. Does Regulation Affect Economic Outcomes? The Case of Dentistry. Journal of Law and Economics.
  27. ↑ http://www.nwu-oppose-offshoring.org/offshoring-campaign/high-tech-offshoring.html
  28. ↑ http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
  29. ↑ Fuller, Dan und Doris Geide-Stevenson (2003): Consensus Among Economists: Revisited, in: Journal of Economic Review, Vol. 34, No. 4, Seite 369-387 (PDF)
  30. ↑ Robert Whaples (2006) "Do Economists Agree on Anything? Yes!," The Economists' Voice: Vol. 3 : Iss. 9, Article 1.
  31. ↑ "The Effect of Minimum Wage Increases on Retail and Small Business Employment", Employment Policies Institute, May 2006.
  32. ↑ "Minimum Wage Teen-age Job Killer", NATIONAL CENTER FOR POLICY ANALYSIS, May 20, 1999.
  33. ↑ "Great Myths of the Great Depression (page 10)", Mackinac Center for Public Policy, April 22, 2006.
  34. ↑ http://video.google.com/videoplay?docid=6813529239937418232&q=label%3Afree+market Milton Friedman Exposes The "Unholy Coalition" of Minimum Wage Supporters
  35. ↑ OECD (2006): OECD Employment Outlook 2006 (read-only PDF)
  36. ↑ [1]
  37. ↑ [2]

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