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 enforced in more than 90% of all countries.[2]
Both supporters and opponents of the minimum wage assert that the issue is a matter of ethics and social justice involving worker exploitation and earning ability.[1] Supporters claim that increases in the minimum wage increase workers' earning power and protect workers against employer exploitation. Opponents claim that increases in the minimum wage increase unemployment, and that (1) the reduction in earning power due to the unemployment outweighs the increase in earning power among minimum wage workers who remain employed, while (2) businesses effectively exploit the unemployed minimum wage workers by transferring their former wages to the minimum wage workers who remain employed.
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[edit] 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 £5.52 (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.
[edit] North America
[edit] Australia and New Zealand
Australia
Australia's minimum wage system has its origins in the 'Harvester Judgment' of 1907.
A 2005 study found that the Australian federal minimum wage was 58% of the median wage, compared to 45% in the UK and 34% in the U.S.[3] The typical minimum wage worker is in a middle-income household.[4]
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[5], replacing the role of the Australian Industrial Relations Commission that took submissions from a variety of sources to determine appropriate minimum wages. As of 2007, an unskilled labourer earns $13.74 per hour or $522.12 per week.[6]
New Zealand
In New Zealand the Government has decided to raise the minimum wage and abolish the youth wage (16 - 17 years olds) from April 1, 2008. The minimum wage will rise from $11.25 to $12 per hour. That’s $96 for an eight hour day, or $480 for a 40 hour week.
From 1 April 2008, the training wage will rise to $9.60 an hour before tax. That’s $76.80 for an eight hour day, and $384 for a 40 hour week. The training wage applies to people doing recognised industry training involving at least 60 credits a year.
[edit] Economics of the minimum wage
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 neoclassical 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, in the absence of 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.
[edit] Supply of labor curve
The amount of labor that workers supply is generally considered to be positively related to the nominal wage. Economists graph this relationship with the wage on the vertical axis and the quantity of labor supplied on the horizontal axis. The supply of labor curve then is upward sloping, and is shown as a line moving up and to the right.
The upward sloping labor supply curve results from the fact that, as wages rise, people in the labor force are incented to spend less time in leisure and more time working while people outside the labor force are incented to join the labor force. As wages rise, the cost of spending time in leisure and the cost of not being a labor force participant rises.
[edit] 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 the quantity of labor demanded 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.
A firm's cost is a function of the wage rate. As the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers.
[edit] Supply and demand for labour
Combining the demand and supply curves for labor allows us to examine the effect of a minimum wage. We will start by assuming that the supply and demand curves for labor will not change as a result of raising the minimum wage. This may be an incorrect assumption since jobs this low on the demand curve may be so integral to a business' function that they will not simply disappear because the business has to pay more to hire people for those positions.
The point at which the demand for labor curve and the supply of labor curve intersect is the labor market equilibrium. At the equilibrium, the number of people seeking jobs (the quantity supplied of labor) equals the number of jobs available (the quantity demanded of labor). If the wage rate rises above the equilibrium wage as shown in this chart, then the number of people seeking jobs would seem to exceed the number of jobs available. If the number of jobs is thus negatively affected, there would be fewer jobs available, and would theoretically lead to unemployment. Hence, in the absence of government intervention, competition among workers for the limited number of jobs would cause wages to fall until the wage rate reached the equilibrium. A minimum wage prevents wages from falling.
[edit] 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."[7]
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 monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor.[8] 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[who?] 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.
[edit] Debate
Supporters of the minimum wage claim it has these effects:
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Opponents of the minimum wage claim it has these effects:
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[edit] Debate over consequences
[edit] Equivalence to a tax and subsidy
As argued by former Council of Economic Advisors Chairman Gregory Mankiw, a minimum wage is equivalent to:
- A wage subsidy for unskilled workers, paid for by
- A tax on employers who hire unskilled workers.[29]
The first part of the policy provides some benefit to low wage workers while the second part creates more unemployment among low wage workers. This is why the minimum wage is often criticized as a self-contradictory policy. Others argue the small decrease in employment is offset by the increased benefit to workers.
[edit] Empirical studies
A classical economics 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 those whom they employ thus the least skilled and inexperienced will typically be 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.[32]
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.[33]
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[34] and by the National Center for Policy Analysis[35] 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. [5] 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[36], 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 effect on black employment.[37]
Today, the International Labour Organization (ILO)[2] and the OECD[12] do not consider that the minimum wage can be directly linked to unemployment in countries which have suffered job losses. Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000.[38] A review of its effects found no discernible impact on pay levels.[39]
Analysis | Source | Comparison | Prop. Effects on Wage | Prop Effects on Employment |
---|---|---|---|---|
New Jersey vs. Pennsylvania | New Jersey MW Increased to $5.05 April 1992 | Fast Food Joints Across States | 0.11* | 0.04 |
Texas Fast Food Joints | FED MW increased to $4.25 April 1991 | High- and Low-Wage Restaurants | 0.08* | 0.2* |
California Teenagers | California MW increase to $4.25 July 1988 | Teenagers in California | 0.1* | 0.12 |
Teenagers Across States | Fed MW increase to $4.25 1989 - 92 | Cross States | 0.08* | 0.00 |
Low Wage Workers Across States | FED MW increase to $4.25 | Across States | 0.07* | 0.02 |
MW - Minimum Wage FED - Federal
- indicates significance at 5%
[edit] Card and Krueger
The laws of demand and supply predict that an increase in the minimum wage will reduce employment.
In 1992, the Minimum wage in New Jersey increased by 18% while the adjacent state of Pennsylvania remained at $4.25. Card & Krueger gathered information on fast food restaurants that lay very close to the borders of Pennsylvania and New Jersey in an attempt to see what this effect had on employment within New Jersey. Classical economic would have concluded that relative employment should have decreased in New Jersey. Card and Krueger asked employers whether they intended to lay off workers in response to the increased minimum wage. Based on the employers' responses, the authors concluded that the increase in the minimum wage had no significant impact on employers' intentions to lay off employees.
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. They assume that the demand for low-wage workers is inelastic. Noteworthy is that these results do not refute the theory underlying the prediction that a minimum wage reduces employment. Rather, the results suggest that the effect predicted by the theory may, in some instances, be small enough as to be statistically zero.
Critics, however, argue that their research was flawed.[40] 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 found that the minimum wage increases were followed by decreases in employment. On the other hand, an assessment of data collected and analyzed by David Neumark and William Wascher did not initially contradict the Card/Krueger results,[41] but in a later edited version they found that the same general sample set did increase unemployment. The 18.8% wage hike resulted in "[statistically] insignificant—although almost always negative" employment effects.[42]
Another possible explanation for why the current minimum wage laws may not affect 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 unskilled workers would be paid approximately the same amount. However, an increase above this equilibrium point could likely bring about increased unemployment for the low and unskilled workers.
[edit] Reaction to 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).[43] Neither trade unions nor employer organizations contest the minimum wage, although the latter had especially done so heavily until 1999.
Some leading economists such as Greg Mankiw and Paul Krugman, do not accept the Card/Krueger results,[44] while many leading economists accept the Card/Krueger results,[45][46] The Joint Economic Committee 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.[47] 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), Card and Krueger's conclusions are contradicted by "common sense and past research".
They conclude that:[48]
“ | 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. | ” |
[edit] Minimum wage alternatives
Some critics of the minimum wage argue that 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. In this view, 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.[6]
Professor Kim Swales of the University of Strathclyde has, with others, submitted an alternative approach to the EC[49]. This provides incentives for a minimum wage without mandating it, by using tax breaks per employee to reduce the value added tax paid by employers. The report of the team's modelling states that this would not only increase employment levels but also increase GDP, i.e. it would reverse any unemployment and deadweight loss effects of a mandated minimum wage, acting as a Pigovian subsidy.
Lewis F. Abbott argues that employing companies are economic organizations, not charities or welfare agencies, and that national minimum wage fixing is a comparatively inefficient, costly, and dysfunctional method of raising the living standards of poorer households. It is much more practical and cost-effective for governments to seek to:
- maximize opportunities for work at whatever the going market rate for jobs (although virtually all full-time jobs pay more than the dole-money alternative, and even comparatively low-grade jobs offer valuable work experience and opportunities for advancement, etc.).
- top-up low wages with earned income tax credit or other direct cash subsidies if necessary; and
- save money in other areas -- e.g., cut purely social status-based welfare benefit payments to persons who do not require them, reduce monetary inflation, and remove various artificial political additions to basic living costs which necessitate income subsidies in the first place (e.g. regressive indirect taxes, tariffs on cheap food and clothing imports, and dear housing policies).[50]
[edit] See also
- 30 Days #1: Minimum Wage
- Garcia v. San Antonio Metropolitan Transit Authority
- Guaranteed minimum income
- Labor market
- Labour law
- List of minimum wages by country
- List of U.S.A. minimum wages
- List of minimum wages in Canada
- Living wage
- Maximum wage
- Nickel and Dimed
- Scratch Beginnings
- Positive rights
- Wage slave
[edit] References
- ^ a b American Academy of Political and Social Science. "The Cost of Living." Philadelphia, 1913.
- ^ a b ILO 2006: Minimum wages policy (PDF)
- ^ Leigh, Andrew (2005). "Does raising the minimum wage help the poor?". Discussion Paper No. 501. . Australian National University Centre for Economic Policy Research Retrieved on 2006-05-11.
- ^ Leigh, Andrew (2005). "Does raising the minimum wage help the poor?". Discussion Paper No. 501. . Australian National University Centre for Economic Policy Research Retrieved on 2006-05-11.
- ^ fairpay.gov.au - About the Commission. Australian Fair Pay Commission. Retrieved on 2007-07-05.
- ^ Executive Summary July 2007 (PDF). Australian Fair Pay Commission. Retrieved on 2007-11-27.
- ^ Gary Fields (1994). "The Unemployment Effects of Minimum Wages". . International Journal of Manpower Retrieved on 2007-02-12.
- ^ Manning, Alan (2003). Monopsony in motion: Imperfect Competition in Labor Markets. Princeton, NJ: Princeton University Press. ISBN 0691113122.
- ^ a b c Minimum Wage and Its Effects on Small Business
- ^ a b c d http://www.epi.org/content.cfm/issueguides_minwage Real Value of the Minimum Wage
- ^ a b c Richard B. Freeman (1994). "Minimum Wages – Again!". . International Journal of Manpower Retrieved on 2007-02-12.
- ^ a b OECD (2006): OECD Employment Outlook 2006 (read-only PDF)
- ^ Wal-Mart Warms to the State - Mises Institute
- ^ Eliminating Small Business
- ^ Wal-Mart's Perverse Strategy on the Minimum Wage
- ^ Tupy, Marian L. Minimum Interference, National Review Online, May 14, 2004
- ^ "The Wages of Politics", Wall Street Journal.
- ^ Offshoring High-Tech and Professional Jobs
- ^ Increasing the Mandated Minimum Wage: Who Pays the Price?
- ^ Why Wal-Mart Matters - Mises Institute
- ^ Aaronson, D. and E. French, 2006. Output Prices and the Minimum Wage. Employment Policies Institute.
- ^ a b c d A blunt instrument, The Economist, October 26, 2006 (English)
- ^ (Cato)
- ^ Williams, Walter (1989). South Africa's War Against Capitalism. New York: Praeger. ISBN 027593179X.
- ^ Keiner, Morris; Kudrle, Robert (2000). "Does Regulation Affect Economic Outcomes? The Case of Dentistry". Journal of Law and Economics 43: 548-582. doi: .
- ^ Wilson, Lilla. "How About a Real Minimum Wage Increase?", New York Times, 1989-11-17. Retrieved on 2008-02-24.
- ^ (Cato)
- ^ Lewis. F. Abbott, Statutory Minimum Wage Controls: A Critical Review of their Effects on Labour Markets, Employment, and Incomes. Industrial Systems Research Publications, Manchester UK, 2nd. edn. 2000. ISBN 978-0-906321-22-5.[1]
- ^ Greg Mankiw's Blog: Working at Cross Purposes
- ^ Statistical Abstract of the United States, Bureau of Labor Statistics [2]
- ^ U.S. Department of Labor, Employment Standards Administration [3]
- ^ Fuller, Dan; Geide-Stevenson, Doris (2003). "Consensus Among Economists: Revisited". Journal of Economic Review 34 (4): 369-387.
- ^ Robert Whaples (2006) "Do Economists Agree on Anything? Yes!," The Economists' Voice: Vol. 3 : Iss. 9, Article 1.
- ^ "The Effect of Minimum Wage Increases on Retail and Small Business Employment", Employment Policies Institute, May 2006.
- ^ "Minimum Wage Teen-age Job Killer", NATIONAL CENTER FOR POLICY ANALYSIS, May 20, 1999.
- ^ "Great Myths of the Great Depression (page 10)", Mackinac Center for Public Policy, April 22, 2006.
- ^ http://video.google.com/videoplay?docid=6813529239937418232&q=label%3Afree+market Milton Friedman Exposes The "Unholy Coalition" of Minimum Wage Supporters
- ^ National Minimum Wage. politics.co.uk. Retrieved on 2009-12-29.
- ^ Metcalf, David (April 2007). Why Has the British National Minimum Wage Had Little or No Impact on Employment?.
- ^ "Myth and Measurement: The New Economics of the Minimum Wage", Cato Institute, April 22, 2006.
- ^ http://www.epinet.org/briefingpapers/minimumw_bp_1996.pdf
- ^ Neumark & Wascher, American Economic Review, Volume 90 No. 5.
- ^ Low Pay Commission (2005). National Minimum Wage - Low Pay Commission Report 2005
- ^ Greg Mankiw. Krugman on the Minimum Wage
- ^ Joseph Stiglitz. Employment, social justice and societal well-being, International Labour Review, 141 (1-2), p. 9 - 29.
- ^ Economic Policy Institute. Hundreds of Leading Economists Say: Raise the Minimum Wage
- ^ 50 Years of Research on the Minimum Wage
- ^ Sense and Nonsense on the Minimum Wage
- ^ Swales, J.K.; D.R. Holden, and G. Beacon (1995). The employment effects of subsidies. Report to the Directorate of General Employment, Industrial Relations, and Social Affairs. Commission of the European Communities..
- ^ Lewis. F. Abbott, Statutory Minimum Wage Controls: A Critical Review of their Effects on Labour Markets, Employment, and Incomes. Industrial Systems Research Publications, Manchester UK, 2nd. edn. 2000. Chapter 7: "The Effects of Minimum Wage Controls on Incomes and Welfare". ISBN 978-0-906321-22-5.[4]
[edit] 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
- Measuring the Full Impact of Minimum and Living Wage Laws from Dollars & Sense magazine
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