A minimum wage is the lowest amount of money an employer is legally allowed to pay a worker. The federal minimum wage in the US is $7.25 per hour, but many states have passed laws raising their own minimum wages, with seven states and Washington DC having set their own rates above $10 per hour.
The federal minimum wage was first established by the Fair Labor Standards Act of 1938 at 25 cents per hour. It has been raised twenty-four times since then, including nine increases between 2007 and 2009 as part of President Barack Obama’s American Recovery and Reinvestment Act (ARRA).
States have also been raising their own minimum wages to keep pace with inflation or boost their economies, though some have set these rates lower than the federal level or even repealed previous increases. Twenty-nine states require employers to pay tipped workers less than the state’s standard minimum wage rate (or $2.13 per hour).
Annual Salary For Minimum Wage
A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century.[2] Because minimum wages increase the cost of labor, companies often try to avoid minimum wage laws by using gig workers, by moving labor to locations with lower or nonexistent minimum wages, or by automating job functions.[3]
The movement for minimum wages was first motivated as a way to stop the exploitation of workers in sweatshops, by employers who were thought to have unfair bargaining power over them. Over time, minimum wages came to be seen as a way to help lower-income families. Modern national laws enforcing compulsory union membership which prescribed minimum wages for their members were first passed in New Zealand in 1894.[4] Although minimum wage laws are now in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage.
Supply and demand models suggest that there may be employment losses from minimum wages; however, minimum wages can increase the efficiency of the labor market in monopsony scenarios, where individual employers have a degree of wage-setting power over the market as a whole.[5][6][7] Supporters of the minimum wage say it increases the standard of living of workers, reduces poverty, reduces inequality, and boosts morale.[8] In contrast, opponents of the minimum wage say it increases poverty and unemployment because some low-wage workers “will be unable to find work … [and] will be pushed into the ranks of the unemployed”.[9][10][11]
Contents
1 History
2 Minimum wage laws
2.1 Informal minimum wages
2.2 Setting minimum wage
3 Economic models
3.1 Supply and demand model
3.2 Monopsony
3.3 Criticisms of the supply and demand model
3.4 Mathematical models of the minimum wage and frictional labor markets
3.4.1 Welfare and labor market participation
3.4.2 Job search effort
4 Empirical studies
4.1 Card and Krueger
4.2 Research subsequent to Card and Krueger’s work
4.3 Statistical meta-analyses
5 Debate over consequences
6 Surveys of economists
7 Alternatives
7.1 Basic income
7.2 Guaranteed minimum income
7.3 Refundable tax credit
7.4 Collective bargaining
7.5 Wage subsidies
7.6 Education and training
8 By country
8.1 Lebanon
8.2 Republic of Ireland
8.3 South Korea
8.4 United States
8.5 Australia
9 See also
10 Notes
11 Further reading
12 External links
History
“It is a serious national evil that any class of his Majesty’s subjects should receive less than a living wage in return for their utmost exertions. It was formerly supposed that the working of the laws of supply and demand would naturally regulate or eliminate that evil … [and] … ultimately produce a fair price. Where … you have a powerful organisation on both sides … there you have a healthy bargaining … . But where you have what we call sweated trades, you have no organisation, no parity of bargaining, the good employer is undercut by the bad, and the bad employer is undercut by the worst … where those conditions prevail you have not a condition of progress, but a condition of progressive degeneration.”
Winston Churchill MP, Trade Boards Bill, Hansard House of Commons (28 April 1909) vol 4, col 388
Modern minimum wage laws trace their origin to the Ordinance of Labourers (1349), which was a decree by King Edward III that set a maximum wage for laborers in medieval England.[12][13] King Edward III, who was a wealthy landowner, was dependent, like his lords, on serfs to work the land. In the autumn of 1348, the Black Plague reached England and decimated the population.[14] The severe shortage of labor caused wages to soar and encouraged King Edward III to set a wage ceiling. Subsequent amendments to the ordinance, such as the Statute of Labourers (1351), increased the penalties for paying a wage above the set rates.[12]
While the laws governing wages initially set a ceiling on compensation, they were eventually used to set a living wage. An amendment to the Statute of Labourers in 1389 effectively fixed wages to the price of food. As time passed, the Justice of the Peace, who was charged with setting the maximum wage, also began to set formal minimum wages. The practice was eventually formalized with the passage of the Act Fixing a Minimum Wage in 1604 by King James I for workers in the textile industry.[12]
By the early 19th century, the Statutes of Labourers was repealed as the increasingly capitalistic United Kingdom embraced laissez-faire policies which disfavored regulations of wages (whether upper or lower limits).[12] The subsequent 19th century saw significant labor unrest affect many industrial nations. As trade unions were decriminalized during the century, attempts to control wages through collective agreement were made. However, this meant that a uniform minimum wage was not possible. In Principles of Political Economy in 1848, John Stuart Mill argued that because of the collective action problems that workers faced in organisation, it was a justified departure from laissez-faire policies (or freedom of contract) to regulate people’s wages and hours by the law.
It was not until the 1890s that the first modern legislative attempts to regulate minimum wages were seen in New Zealand[15][failed verification] and Australia.[16] The movement for a minimum wage was initially focused on stopping sweatshop labor and controlling the proliferation of sweatshops in manufacturing industries.[17] The sweatshops employed large numbers of women and young workers, paying them what were considered to be substandard wages. The sweatshop owners were thought to have unfair bargaining power over their employees, and a minimum wage was proposed as a means to make them pay fairly. Over time, the focus changed to helping people, especially families, become more self-sufficient.[18]
In the United States, the late 19th-century ideas for favoring a minimum wage also coincided with the eugenics movement. As a consequence, some economists at the time, including Royal Meeker and Henry Rogers Seager, argued for the adoption of a minimum wage not only to support the worker, but to support their desired semi- and skilled laborers while forcing the undesired workers (including the idle, immigrants, women, racial minorities, and the disabled) out of the labor market. The result, over the longer term, would be to limit the nondesired workers’ ability to earn money and have families, and thereby, remove them from the economists’ ideal society.[19]
Minimum wage laws
“It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”
President Franklin D. Roosevelt, 1933[20][21]
The first modern national minimum wages were enacted by the government recognition of unions which in turn established minimum wage policy among their members, as in New Zealand in 1894, followed by Australia in 1896 and the United Kingdom in 1909.[16] In the United States, statutory minimum wages were first introduced nationally in 1938,[22] and they were reintroduced and expanded in the United Kingdom in 1998.[23] There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries.[24][2] In the European Union, 21 out of 27 member states currently have national minimum wages.[25] Other countries, such as Sweden, Finland, Denmark, Switzerland, Austria, and Italy, have no minimum wage laws, but rely on employer groups and trade unions to set minimum earnings through collective bargaining.[26][27]
Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money—for example $7.25 per hour ($14,500 per year) under certain US state laws (or $2.13 for employees who receive tips, which is known as the tipped minimum wage), $11.00 in the US state of Washington,[28] or £8.91 (for those aged 25+) in the United Kingdom[29]—but also in terms of which pay period (for example Russia and China set monthly minimum wages) or the scope of coverage. Currently the United States federal minimum wage is $7.25 per hour. However, some states do not recognize the minimum wage law, such as Louisiana and Tennessee.[30] Other states have minimum wages below the federal minimum wage such as Georgia and Wyoming, although the federal minimum wage is enforced in those states.[31] Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage levels. India was one of the first developing countries to introduce minimum wage policy in its law in 1948. However, it is rarely implemented, even by contractors of government agencies. In Mumbai, as of 2017, the minimum wage was Rs. 348/day.[32] India also has one of the most complicated systems with more than 1,200 minimum wage rates depending on the geographical region.[33]
Informal minimum wages
Customs, tight labor markets, and extra-legal pressures from governments or labor unions can each produce a de facto minimum wage. So can international public opinion, by pressuring multinational companies to pay Third World workers wages usually found in more industrialized countries. The latter situation in Southeast Asia and Latin America was publicized in the 2000s, but it existed with companies in West Africa in the middle of the 20th century.[34]
Setting minimum wage
Among the indicators that might be used to establish an initial minimum wage rate are ones that minimize the loss of jobs while preserving international competitiveness.[35] Among these are general economic conditions as measured by real and nominal gross domestic product; inflation; labor supply and demand; wage levels, distribution and differentials; employment terms; productivity growth; labor costs; business operating costs; the number and trend of bankruptcies; economic freedom rankings; standards of living and the prevailing average wage rate.
In the business sector, concerns include the expected increased cost of doing business, threats to profitability, rising levels of unemployment (and subsequent higher government expenditure on welfare benefits raising tax rates), and the possible knock-on effects to the wages of more experienced workers who might already be earning the new statutory minimum wage, or slightly more.[36] Among workers and their representatives, political considerations weigh in as labor leaders seek to win support by demanding the highest possible rate.[37] Other concerns include purchasing power, inflation indexing and standardized working hours.
Economic models
See also: Labour economics
Supply and demand model
Graph showing the basic supply and demand model of the minimum wage in the labor market.
Main article: Supply and demand
According to the supply and demand model of the labor market shown in many economics textbooks, increasing the minimum wage decreases the employment of minimum-wage workers.[11] One such textbook states:[7]
If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. … the direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Others, particularly those with the lowest prelegislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed.
A firm’s cost is an increasing function of the wage rate. The higher the wage rate, the fewer hours an employer will demand of employees. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the right.[38] Since higher wages increase the quantity supplied, the supply of labor curve is upward sloping, and is shown as a line moving up and to the right.[38] If no minimum wage is in place, wages will adjust until quantity of labor demanded is equal to quantity supplied, reaching equilibrium, where the supply and demand curves intersect. Minimum wage behaves as a classical price floor on labor. Standard theory says that, if set above the equilibrium price, more labor will be willing to be provided by workers than will be demanded by employers, creating a surplus of labor, i.e. unemployment.[38] The economic model of markets predicts the same of other commodities (like milk and wheat, for example): Artificially raising the price of the commodity tends to cause an increase in quantity supplied and a decrease in quantity demanded. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government does not hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.[34]
The supply and demand model implies that by mandating a price floor above the equilibrium wage, minimum wage laws will cause unemployment.[39][40] This is because a greater number of people are willing to work at the higher wage while a smaller number of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and least experienced will typically be excluded. An imposition or increase of a minimum wage will generally only affect employment in the low-skill labor market, as the equilibrium wage is already at or below the minimum wage, whereas in higher skill labor markets the equilibrium wage is too high for a change in minimum wage to affect employment.[41]
Monopsony
Modern economics suggests that a moderate minimum wage may increase employment as labor markets are monopsonistic and workers lack bargaining power.
Main article: Monopsony
The supply and demand model predicts that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) when companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the model can account for. One complicating factor is possible monopsony in the labor 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 labor markets in the sense of the traditional ‘company town,’ asymmetric information, imperfect mobility, and the personal element of the labor transaction give some degree of wage-setting power to most firms.[42]
Modern economic theory predicts that although an excessive minimum wage may raise unemployment as it fixes a price above most demand for labor, a minimum wage at a more reasonable level can increase employment, and enhance growth and efficiency. This is because labor markets are monopsonistic and workers persistently lack bargaining power. When poorer workers have more to spend it stimulates effective aggregate demand for goods and services.[43][44]
