Minimum wage

The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as set by statute. It is different from the lowest wage determined by the forces of supply and demand in a free market. In most cases, the minimum wage acts as a price floor. Each country sets its own minimum wage laws and regulations, and many countries have no minimum wage.

History

The first moves to legislate wages did not set minimum wages, rather the laws created arbitration boards and councils to resolve labour conflicts before the recourse to strikes.

• In 1894, New Zealand established such arbitration boards with the Industrial Conciliation and Arbitration Act
• In 1896, the state of Victoria, Australia established similar boards
• In 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"

The established similar boards

• In 1909, the Trade Boards Act was enacted in the United Kingdom, establishing four such boards
• In 1912, the state of Massachusetts, United States, set minimum wages for women and children

In the United States and other countries, minimum wage laws were a common demand of labor unions

Consequences of minimum wage laws

If the law is successfully enforced, and if they are high enough in real terms (or relative to the average wage), minimum wage laws are alleged to have various benefits and costs.

Hypothetical costs and benefits

Minimum wages may have the positive effect of:

• Reducing low-paid work, which may be unfair and exploitative.
• Stimulating economic growth by increasing the purchasing power of workers.
• Stimulating economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training.
• Encouraging many of those who would normally take low-wage jobs to stay in (or return to) school and thus to accumulate human capital.

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

• Curbing economic growth by increasing the cost of labor.
• Increasing the price of goods and services, since employers may be able to pass on wage costs in the form of higher prices, which means that minimum wage may decrease the purchasing power of workers, which may also result in the exploitation of the consumer.
• Decreasing incentive for some low-skilled workers to gain skills.
• Where implemented locally, making labor more expensive than in other areas, which may discourage inward investment and encourage local businesses to relocate their operations elsewhere.
• Cause higher unemployment rates among the low skilled and uneducated labor as the price of labor increases to favor the more skilled or machines.

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).

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 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 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 [4]). This avoids funding problems by not having an actual subsidy but a virtual one — the funds flow is always from employers to the government, being netted off by the virtual subsidy before funds ever change hands. This may also be analysed by means of game theory (e.g "the prisoner's dilemma" or "the tragedy of the commons").

Alternatively, in the United States, many economists see the Earned Income Tax Credit (EITC, a wage subsidy) in the Federal income tax as providing the poverty-fighting benefits of the minimum wage without the non-budgetary costs, while being superior to most welfare state anti-poverty programs. One problem has been that many of the working poor (the target of this program) have a hard time with the tax forms needed to receive the EITC payment. There may also be long delays between when the money is needed and when the EITC payments are received. That is, a person might become eligible for the EITC in April but then get laid off for the rest of the year. But this person would not get help from the credit until nearly a year later (since Americans pay their taxes in April). Further, like with the minimum wage, those people working at home taking care of children and other loved ones do not receive any benefits; only those doing paid labor are rewarded.

Finally, if these kinds of "complications" do not exist, it is possible that the benefit of the tax credit is received by the employer: assume that for low-skill workers the equilibrium market wage equals "X." Before the EITC is introduced, all of this wage is paid by their employers. After the EITC is instituted, the workers receive Y + Z, where Y is the new wage paid by employers and Z is the tax credit. If the labor market returns to the same equilibrium, then X = Y + Z. This means that the low-skill workers receive exactly the same amount as before the EITC was introduced and that the employer is paying less to the employees. This issue needs to be examined further...

Worldwide minimum wages

The list below gives the official minimum wage rates in some countries. Some countries are more effective than others at enforcing these laws, so that the effective minimum wage may be lower than the official one. Exchange rates as of 11 July 2005.

Country	Minimum wage	% of GDP per capita
Australia	AUD 484.40 (US$362) per week; most workers receive higher wages through enterprise agreements or individual contracts. Trainees and apprentices, who combine employment with accredited training have minimum wage rates which vary between AUD 173.00 (US$129) and AUD 453.00 (US$338) per week depending on the level of schooling completed.	54%*
Austria	none by law; instead, nationwide collective bargaining agreements set minimum wages by job classification for each industry; the accepted unofficial annual minimum wage is €10,000 to €11,000 ( US$12,066 to US$13,272)	31-34%
Belgium	€1,243 (US$1,500) a month for workers over 21 years of age; 18-year-olds must be paid at least 82% of the minimum, 19-year-olds 88%, and 20-year-olds 94% of the minimum.	48%
Brazil	R$300 (US$128) a month; annually adjusted by the Federal government. Each state is free to set its own minimum wage, provided it is not lower than the Federal wage.	37%
Bulgaria	160 leva (US$95/82 euro) per month (as of Jan 2006)	33%
Canada	set by each province and territory; hourly wages vary from CAD$5.90 (US$4.97) to CAD$8.00 (US$6.75) to CAD$8.50 (US$7.17); Ontario and Alberta have a minimum wage rate for students lower than their respective minimums for adult workers, British Columbia has a lower rate for the first 500 hours in the workforce regardless of age; see List of minimum wages in Canada	29/39/41%*
Chile	starting July 1, 2005, 127,500 pesos (US$218) per month for those aged 18–65; 95,927 pesos (US$164) for those younger than 18 and for those older than 65; and 82,889 pesos (US$142) for honorary payments; starting July 1, 2006, 135,000 (US$231); 101,491 (US$174); and 87,697 pesos (US$150), respectively (Chilean Law 20,039 [5])	42%
Cuba	225 pesos (US$243) per month as of International Labor Day, 2005, increased from 100 pesos per month previously.
China	none nationally, but the Labor Law allows local governments to set a minimum wage.
Denmark	none by law, but national labor agreements effectively set a wage floor; the average net wage including pension benefits of adult workers in 2003 was 177 kroner (US$29) per hour. If you are a member of a trade union, which most employees in Denmark are, the normal minimum wage for unskilled workers will be around 88 kroner (US$14) per hour.
Finland	€5.39 (US$6.50) per hour or €926.40 (US$1,118) per month, except where collective bargaining agreements have negotiated higher sector-specific minimum wages (anywhere from €1,000 to over €2,000)	34%
France	€7.61 (US$9.18) per hour	51%*
Germany	none by law (but in discussion); set by collective bargaining agreements
Ghana	9200 Ghanaian cedis per day ($1.08 USD/day) (Data and exchange rate as of 2003 PDF)
Greece	€28 (US$34) daily and €616 (US$743) monthly; set by the GSEE and the Employers' Association through collective bargaining and routinely ratified by the Ministry of Labor	42%
Hong Kong	applies only to foreign labourers
Hungary	53,000 HUF (US$259) per month; set by the IRC through agreement among its participants, representatives of the Government, employers, and employees	28%
Israel	Above age 18: 47.5% of the average income on 1 April of each year. In 2005: 3335.18 NIS (approx US$732.04) per month. Under age 18, varies.	48%
Italy	none by law; instead set by a collective bargaining agreements on a sector-by-sector basis; when an employer and a union fail to reach an agreement, courts may determine fair wages on the basis of practice in comparable activities, although this rarely occurs in practice
Republic of Ireland	€7.65 (US$9.23) per hour	35%*
Jersey	£5.08 (US$9.04) per hour, except for trainees (for up to a year) £3.82 (US$6.80) per hour. As defined in the Employment (Jersey) Law 2003.
Luxembourg	varies according to the worker's age and number of dependents; for a single worker over the age of 18 is €1,403 (US$1,693) per month for unskilled workers, and €1,684 (US$2,032) per month for skilled workers	26/31%
Mexico	MXP $46.80, $45.35 or $44.05 per day (approx. USD $4.29, $4.16, or $4.04), depending on the geographic zone; as of January 1, 2005
Netherlands	€1,249.20 (US$1,507.15) per month plus 8% holiday allowance, summing to €1,349.14 (US$1,627.84) (the amount is less for those 22 years old or younger)	47%
New Zealand	NZ$9.50 (US$6.45) per hour for workers 18 years old or older, and NZ$7.60 (US$5.16) per hour for those aged 16 or 17. (Increased to these levels on 21 March 2005). From March 27, 2006, these rates increase to NZ$10.25 and NZ$8.20 respectively. [6]	49%*
Portugal	€374.70 (US$452.11) per month; covers full-time workers as well as rural workers and domestic employees ages 18 and over	30%
Poland	899 PLN (US$282) from January 1, 2006	36%
Russia	720 rubles (US$25) per month; raised to 800 rubles (US$28) from September 1, 2005, and to be raised to 1,100 rubles (US$38) from May 1, 2006	6%
Romania	330 RON (US$119) per month	40%
Spain	€513 (US$621) per month from January 1, 2005	26%
Sweden	none by law; set by collective bargaining contracts every year
Switzerland	none by law; it is normally 3,000 CHF (US$2,330) a month set by collective agreements	53%
Turkey	531 TL (US$394) per month; reviewed every 6 months by the Minimum Wage Commission, a tripartite government-industry-union body	78%
United Kingdom	£5.05 (US$8.91) per hour for 22-year-olds and above (except those within the first six months of their job and receiving accredited training) (£5.35 from October 2006) £4.25 (US$7.50) per hour for 18-to-21-year-olds and those within the first six months of their job and receiving accredited training (£4.45 from October 2006) £3.00 (US$5.27) per hour for under-18s who have finished compulsory education None for those who have not yet finished compulsory education (the age when a person finishes compulsory education is either 15 or 16, depending on where their birthday falls in the school year)	45/38/28/0%*
United States	the federal minimum wage is $5.15 per hour, although workers under age 20 can be paid $4.25 an hour for their first 90 days. Some states also have minimum wage laws ranging from $2.65 in Kansas (for some jobs not covered by the federal rate), to $7.63 an hour in Washington. Some cities and counties have living wage ordinances of up to $15.00 an hour although the groups of workers it applies to are often limited. (29 USC Sec. 206) (OK Statutes 40-197.5) (Revised Code of Washington Sec. 49.46.020) [7]	25%*

• (*) 40 h/week; 50 weeks/year
• GDP information from list of countries by GDP (nominal) per capita

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.)

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.

In early 2006, on Tuesday, January 17th, 2006, Maryland became the 18th state in the nation to enact a law that will make Maryland's minimum wage higer 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 "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," Kennedy said. "These states are acting because year after year, Congress has failed to act, and more and more hard-working Americans are paying an unfair price." Source.

See List of U.S. state minimum wages.

United Kingdom

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.

Australia

• The current minimum wage in Australia is $12.75 AUD (~$9 U.S. Dollars) per hour [8].

• 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