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Minimum wage

2007 Schools Wikipedia Selection. Related subjects: Economics

   Minimum wage is the minimum hourly, daily or monthly wage that must be
   paid to employees or workers. Each country sets its own minimum wage
   laws and regulations, and more than 90% of all countries have some kind
   of minimum wage legislation.

   The first national minimum wage law was enacted by the government of
   New Zealand in 1896, followed by Australia in 1899 and United Kingdom
   in 1902. In the United States, statutory minimum wages were first
   introduced nationally in 1938, and in the United Kingdom in 1999. In
   the European Union, 18 out of 25 member states currently have national
   minimum wages. 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 and through the so
   called "invisible hand" of the market which adjusts the wage in
   function of demand and competition.

   Supporters assert that the minimum wage is a matter of social justice
   which helps reduce exploitation and ensures that workers can afford
   basic necessities (cf. living wage). Supporters deny claims of causal
   links between the minimum wage and adverse impacts upon employment, and
   suggest that in any event, greater social benefit derives from the
   minimum wage. Detractors contend that a minimum wage increases
   unemployment among low wage workers, thus harming rather than helping
   the poorest workers. Some also argue that it slows economic growth.

   Minimum wage legislation may be interpreted as making it either
   unlawful for employers to pay workers less than the minimum wage, or
   unlawful for workers 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. Although
   it is the employer who is fined and/or imprisoned for violations, the
   workers also lose their freedom, albeit indirectly.

Legislation in the Western Industrialized World

   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 1896, New Zealand established such arbitration boards with the
       Industrial Conciliation and Arbitration Act
     * In 1899, 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 1960s minimum wage laws were introduced into Latin America
       as part of the Alliance for Progress; however these minimum wages
       were, and are, low.

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

Australia

     * The notion of a 'basic wage' was first established in 1907 with the
       Harvester Judgement.
     * The current federal minimum wage for full or part time employees
       aged over 21 in Australia is $13.47 AUD (~$10.50 U.S. Dollars) per
       hour. [ ]
     * 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

New Zealand

     * The current minimum wage in New Zealand for adults aged 18 or over
       is $10.25 per hour. The current minimum rate for workers aged 16-18
       or apprentices of any age is $8.20, or 80% of the adult rate

Canada

   Under the Canadian Constitution's federal-provincial division of
   powers, the responsibility for enacting and enforcing labour laws rests
   with the ten provinces; the three territories also having been granted
   this power by virtue of federal legislation. This means that each
   province and territory has its own minimum wage. The lowest general
   minimum wage in force as of July 2006 is that of New Brunswick (
   $6.70/hour), the highest is that of Nunavut ( $8.50/hour). Some
   provinces allow lower wages to be paid to liquor servers and other tip
   earners, and/or to inexperienced employees. British Columbia allows
   employers to pay as little as $6/hour to an inexperienced worker.

   The federal government could theoretically set its own minimum wage
   rates for workers in federal jurisdiction industries ( railways for
   example). As of 2006 however, the federal minimum wage is defined to be
   the general adult minimum wage rate of the province or territory where
   the work is performed. This means, for example, that a railway company
   could not legally pay a worker in British Columbia less than $7/hour
   regardless of the worker's experience.

France

     * The current (July 2006) minimum wage in France is set at 8.27€
       (EUR) per hour (~10.46 US dollars). In 2004, 15% of the working
       population received the minimum wage.

Ireland

     * Ireland's minimum wage was introduced in 2000, and is currently €
       7.65 an hour, although a complex set of exemptions means that some
       people may be paid as little as 70% of this (€ 5.36), and it may
       further be reduced by up to € 7.73 a day if lodgings or food are
       provided as part of a job. Due to general difficulties in finding
       employees, virtually no jobs pay the minimum wage, with only 3.1%
       of employees receiving it in 2004.

United Kingdom

   Municipal regulation of wage levels began in some towns in 1524. Later,
   the Trade Boards Act of 1909 initially created four Trades Boards that
   set minimum wages which varied between industries 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 lower limit
   of pay, or '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 widen the scope of 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 was introduced for the first time by Prime
   Minister Tony Blair's Labour government in April 1999, at the rate of
   £3.60 (US$5.78 at 1st April 1999 rate) per hour for those workers aged
   22 and over. This rate was set after the Low Pay Commission, an
   independent body the Government appointed in July 1997 to advise it on
   low pay, recommended the rate. The LPC exists to this day to maintain
   the national minimum wages, which are uprated following its
   recommendations each October. The LPC board consists of nine members -
   three trade unionists, three employers, and three labour market
   relations experts. The Commission is widely regarded as a successful
   example of a 'social partnership', and undertakes consultations each
   year in order to gather all available evidence before making its
   recommendations.

   The current minimum wage in the UK for adults aged 22 or older is £5.35
   ($10.01US), compared with $5.15 in the US. For workers between the ages
   of 18 and 21, or any workers who are in the first six months of their
   job and receiving accredited training, the minimum wage is £4.45
   ($8.33US) per hour. The minimum hourly wage for all workers under the
   age of 18 (who are no longer of compulsory school age) is £3.30
   ($6.18US). There is no minimum wage for those still of compulsory
   school age.

   Some workers undertaking apprenticeships or accredited training can be
   exempted for a certain amount of time; this varies according to their
   age and the length of time they have been in employment. Other
   categories of worker who are exempt include Au Pairs, Share Fishermen,
   Clergy, those in the Armed Forces, Prisoners and some people working in
   family businesses.

   There are some areas in which minimum wage legislation becomes complex,
   including the aforementioned exemptions for apprentices and trainees
   and cases where the accommodation offset applies.

   Unlike other areas of employment rights legislation in the UK, the
   National Minimum Wage has compliance teams to support its enforcement.
   Workers who think they are being paid less than the minimum wage can
   either make a complaint directly to HM Revenue and Customs on 0845
   6000678 or seek advice from another source such as their local Citizens
   Advice Bureau or the Scottish Low Pay Unit - this is particularly
   recommended if other employment rights issues are involved, as the HMRC
   can only deal with minimum wage enquiries.

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 Industrial Recovery Act. However, in 1935's Schechter Poultry
   Corp. v. United States (295 U.S. 495), the United States Supreme Court
   declared the 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 ($9.12 in 2005 dollars.) The current
   federal minimum wage is now $5.15 an hour.
   Comparison of State and Federal Minimum Wage (out of date)
   Enlarge
   Comparison of State and Federal Minimum Wage (out of date)

   During his presidency, Bill Clinton gave states the power to set their
   minimum wages above the federal level. As of April 2006, 18 states had
   done so. Community organizing efforts initiated by ACORN were
   responsible for the increases in some states such as Florida, Nevada,
   and Ohio. Some government entities, such as counties and cities,
   observe minimum wages that are higher than the state as a whole. One
   notable example of this is Santa Fe, New Mexico, whose $9.50-per-hour
   minimum wage is currently the highest in the nation, while New Mexico
   itself observes the federal minimum. Another device to increase wages,
   living wage ordinances, generally apply only to businesses that are
   under contract to the local government itself.

   On November 7, 2006, voters in six states (Arizona, Colorado, Missouri,
   Montana, Nevada, and Ohio) approved state-wid increases in the state
   minimum wage. The amounts of these increases ranged from $1 to $1.70 an
   hour and all increases are designed to annually index to inflation.

   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. So far, Ohio, Oregon and Missouri
   have linked their minimum wages to the consumer price index.

   Minimum wage jobs rarely include health insurance coverage , although
   that is changing in some parts of the USA where the cost of living is
   high, such as California, and at some companies. For instance, Trader
   Joe's supermarkets give part-time employees health coverage.

Other countries

     * The current (2006) "monthly income for a full-time employee earning
       the national minimum wage" for twenty industrialised countries can
       be found here.

Debate over consequences of minimum wage laws

   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 shown here indicate that increases in the minimum wage
   are associated with increases in unemployment among lower-educated
   workers.
   Enlarge
   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 shown here indicate that increases in the minimum wage
   are associated with increases in unemployment among lower-educated
   workers.

   Classical microeconomic theory (Supply and Demand) says that by
   mandating a price floor above the equilibrium wage, minimum wage laws
   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.

   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. Whilst single employer
   market power seems extremely 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.

   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.
   Comparison of the minimum wage to unemployment among college educated
   workers in the U.S. The data shown here indicate that increases in the
   minimum wage are not associated with increases in unemployment among
   higher-educated workers.
   Enlarge
   Comparison of the minimum wage to unemployment among college educated
   workers in the U.S. The data shown here indicate that increases in the
   minimum wage are not associated with increases in unemployment among
   higher-educated workers.

   A 2003 survey by Dan Fuller and Doris Geide-Stevenson reports that 46%
   of academic economists in the US fully agreed with the statement, "a
   minimum wage increases unemployment among young and unskilled workers",
   28% partly agreed, and 27% disagreed. The authors of this study also
   reweighted data from a 1990 sample to show that at that time 62% of
   academic economists agreed with the statement above, while 19.5% partly
   agreed and 17.5% disagreed.
   Comparison of the minimum wage to unemployment among teenagers in the
   U.S. The data shown here indicate that increases in the minimum wage
   are associated with increases in unemployment among teenage workers.
   Enlarge
   Comparison of the minimum wage to unemployment among teenagers in the
   U.S. The data shown here indicate that increases in the minimum wage
   are associated with increases in unemployment among teenage workers.

   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 and by the
   conservative National Centre for Policy Analysis 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 that
   increases in the minimum wage may be (though weakly) associated with
   increases in unemployment among black workers (relative to white
   workers).
   Enlarge
   Comparison of the minimum wage to unemployment-population ratio among
   blacks relative to whites in the U.S. The data shown here indicate that
   increases in the minimum wage may be (though weakly) associated with
   increases in unemployment among black workers (relative to white
   workers).

   According to a claim by the Mackinac Centre for Public Policy, 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. However, most sources show that one out of five
   blacks is directly benefited by the minimum wage, and indeed African
   Americans support increasing the minimum wage at slightly higher levels
   than Americans as a whole.

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

Costs and benefits

   Supporters of the minimum wage claim it has these effects:
     * Increases the average living standard.
     * Reduces worker exploitation.
     * Can increase the economic efficiency of the economy where labour
       markets exhibit a high degree of market power on the part of
       employers.
     * Forces employers to recognise the inherent worth of human labor.
     * Stimulates consumption, by putting more money in the hands of
       low-income people who spend their entire paychecks .
     * Stimulates economic growth by discouraging labor-intensive
       industries, thereby encouraging more investment in capital and
       training .
     * Increases the work ethic of those who earn very little, as
       employers demand more return from the higher cost of hiring these
       employees.
     * Decreases the cost of government social welfare programmes through
       increasing labour supply amongst the low skilled.
     * 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 .
     * 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.

   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 .
     * Reduces profit margins of business owners employing minimum wage
       workers.
     * Increases prices for customers of employers of minimum wage
       workers, which would pass through to the general price level.
     * Reduces economic growth by skewing factor-choice incentives away
       from the optimum choice.
     * Decreases opportunities for low-skilled workers to gain the
       training and responsibility they need to move up the wage ladder
     * Increases the cost of government social programs due to assistance
       programs aiding the laid-off workers
     * Is less effective at reducing social exclusion than some other
       alternatives, for example training programs.
     * Is less effective than the Earned Income Tax Credit at targeting
       the truly needy, and is more damaging to businesses .
     * Decreases human capital by encouraging people to enter the job
       market instead of pursuing further education.
     * 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 .

   The aforementioned arguments, both pro and con, are largely empirical
   in nature. That is, debate of these arguments centers on the
   application of data and analytic techniques. By contrast, debate of
   theoretical arguments (see below) centre on the application of logical
   reasoning.

   Some labor union contracts are based on the minimum wage; this produces
   a natural constituency to lobby for increases among union workers who
   typically earn more than the minimum . Some public grants or taxes are
   also based on a multiple of the minimum wage, and this also can produce
   lobbying incentives in either direction. (For example, a worker may
   have an exemption if his earnings are below 2.5 times the minimum
   wage.)

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). 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 too high minimum wages.

Scholarly articles

   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. 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. 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, but in a later edited version found that the same general
   sample set did increase unemployment. See Neumark Waschler, American
   Economic Review, Volume 90 No. 5.

   Another possible explanation on why minimum wage laws may not decrease
   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 and unskilled workers would be paid approximately the
   same amount. However, a dramatic increase above this equilibrium point
   would likely bring about increased unemployment for the low and
   unskilled workers.

   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). Neither trade unions nor employer organisations
   contest the minimum wage, although especially the latter had done so
   heavily until 1999.

   From the other side, some leading economists accept the Card/Krueger
   works and agree with their results .

   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. 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."

   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.

Theoretical arguments

   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, 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.

   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. 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.

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