Minimum wage

A minimum wage is the lowest remuneration that employers may legally pay to workers. Equivalently, it is the price floor below which workers may not sell their labor. Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say it increases the standard of living of workers, reduces poverty, reduces inequality, boosts morale and forces businesses to be more efficient.[1] In contrast, opponents of the minimum wage say it increases poverty, increases unemployment (particularly among unskilled or inexperienced workers) and is damaging to businesses.[2][3][4]

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.[5][6] 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.[7] 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.[5]

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.[5]

By the early 19th century, the Statutes of Labourers was repealed as increasingly capitalistic England embraced laissez-faire policies which disfavored regulations of wages (whether upper or lower limits).[5] 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 law.

It was not until the 1890s that the first modern legislative attempts to regulate minimum wages were seen in New Zealand and Australia.[8] The movement for a minimum wage was initially focused on stopping sweatshop labor and controlling the proliferation of sweatshops in manufacturing industries.[9] 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.[10]

Minimum wage laws

Hourly minimum wages in select developed economies in 2013. For a complete list of global wages see: List of minimum wages by country. Wages are given in US$ exchange rates.[11]

The first national minimum wage law was enacted by the government of New Zealand in 1894, followed by Australia in 1896 and the United Kingdom in 1909.[8] In the United States, statutory minimum wages were first introduced nationally in 1938,[12] and they were reintroduced and expanded in the United Kingdom in 1998.[13] There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries.[14][15] In the European Union, 22 member states out of 28 currently have national minimum wages.[16] 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.[17][18]

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), $9.47 in the US state of Washington,[19] or £6.50 (for those aged 21+) in the United Kingdom[20]—but also in terms of which pay period (for example Russia and China set monthly minimum wages) or the scope of coverage. 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. It also has one of the most complicated systems with more than 1200 minimum wage rates.[21]

Informal minimum wages

Customs and extra-legal pressures from governments or labor unions can 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 twentieth century.[22]

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.[23] 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.[24] Among workers and their representatives, political consideration weigh in as labor leaders seek to win support by demanding the highest possible rate.[25] Other concerns include purchasing power, inflation indexing and standardized working hours.

In the United States, the minimum wage promulgated by the Fair Labor Standards Act of 1938 was intentionally set at a high, national level to render low-technology, low-wage factories in the South obsolete.[26] According to the Economic Policy Institute, the minimum wage in the United States would have been $18.28 in 2013 if the minimum wage had kept pace with labor productivity.[27] To adjust for increased rates of worker productivity in the United States, raising the minimum wage to $22 (or more) an hour has been presented.[28][29][30][31]

Economics models

Supply and demand

Main article: Supply and demand
Graph showing the mainstream conception of the labor market

An analysis of supply and demand of the type shown in many mainstream economics textbooks implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment.[32][33] 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.[34]

According to the supply and demand model shown in many textbooks on economics, increasing the minimum wage decreases the employment of minimum-wage workers.[35] One such textbook says:

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. This is known as the "ripple effect". The ripple effect shows that when you increase the minimum wage the wages of all others will consequently increase due the need for relativity.[36] 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 or out of the labor force. Some argue that by increasing the federal minimum wage, however, the economy will be adversely affected due to small businesses not being able to keep up with the need to subsequently increase all workers wages.[37][38]

Modern economic theory suggests an excessive minimum wage may raise unemployment as it fixes a price above demand for labor, but a reasonable minimum wage enhances growth because workers lack bargaining power and labor markets are persistently monopsonistic. When poorer workers have more to spend it stimulates effective aggregate demand for goods and services.[39][40]

The textbook illustrates the point with a supply and demand diagram similar to the one above. In the diagram it is assumed that workers are willing to labor for more hours if paid a higher wage. Economists graph this relationship with the wage on the vertical axis and the quantity (hours) of labor supplied on the horizontal axis. 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.[41]

A firm's cost is a function of the wage rate. It is assumed that the higher the wage, the fewer hours an employer will demand of an employee. 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.[41]

Combining the demand and supply curves for labor allows us to examine the effect of the 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 assumption has been questioned.[42] If no minimum wage is in place, workers and employers will continue to adjust the quantity of labor supplied according to price until the quantity of labor demanded is equal to the quantity of labor supplied, reaching equilibrium price, 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.[41]

In other words, the simplest and most basic economics says this about commodities like labor (and wheat, for example): Artificially raising the price of the commodity tends to cause the supply of it to increase and the demand for it to lessen. 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.[22]

So the basic theory says that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) because companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the basic theory 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.[43]

Criticism of the neoclassical model

Minimum wage levels in OECD countries as a share of average full-time wage, 2013.[44]

The argument that a minimum wage decreases employment is based on a simple supply and demand model of the labor market. A number of economists (for example Pierangelo Garegnani,[45] Robert L. Vienneau,[46] and Arrigo Opocher & Ian Steedman[47]), building on the work of Piero Sraffa, argue that that model, even given all its assumptions, is logically incoherent. Michael Anyadike-Danes and Wynne Godley[48] argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifiable theory, and consequently empirical evidence hardly exists for that model. Graham White[49] argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an "intellectually coherent" argument in economic theory.

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."[50]

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). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, search costs, information costs, imperfect mobility and the personal element of labor markets.[1] In such a case a simple supply and demand graph would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the upward labor supply curve shown in a supply and demand diagram, monopsonistic employers would use a steeper upward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation.

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 product of labor.[51] 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.

Another reason minimum wage may not affect employment in certain industries is that the demand for the product the employees produce is highly inelastic.[52] For example, if management is forced to increase wages, management can pass on the increase in wage to consumers in the form of higher prices. Since demand for the product is highly inelastic, consumers continue to buy the product at the higher price and so the manager is not forced to lay off workers. Economist Paul Krugman argues this explanation neglects to explain why the firm was not charging this higher price absent the minimum wage.[53]

Three other possible reasons minimum wages do not affect employment were suggested by Alan Blinder: higher wages may reduce turnover, and hence training costs; raising the minimum wage may "render moot" the potential problem of recruiting workers at a higher wage than current workers; and minimum wage workers might represent such a small proportion of a business's cost that the increase is too small to matter. He admits that he does not know if these are correct, but argues that "the list demonstrates that one can accept the new empirical findings and still be a card-carrying economist."[54]

Empirical studies

Estimated minimum wage effects on employment from a meta-study of 64 other studies showed insignificant employment effect (both practically and statistically) from minimum-wage raises. The most precise estimates were heavily clustered at or near zero employment effects (elasticity = 0).[55]

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 supply and demand in labor markets and the degree to which markets differ from the efficiency that models of perfect competition predict.

Economists have done empirical studies on different aspects of the minimum wage, including:[10]

Until the mid-1990s, a general consensus existed among economists, both conservative and liberal, that the minimum wage reduced employment, especially among younger and low-skill workers.[35] In addition to the basic supply-demand intuition, there were a number of empirical studies that supported this view. For example, Gramlich (1976) found that many of the benefits went to higher income families, and that teenagers were made worse off by the unemployment associated with the minimum wage.[56]

Brown et al. (1983) noted that time series studies to that point had found that for a 10 percent increase in the minimum wage, there was a decrease in teenage employment of 1–3 percent. However, the studies found wider variation, from 0 to over 3 percent, in their estimates for the effect on teenage unemployment (teenagers without a job and looking for one). In contrast to the simple supply and demand diagram, it was commonly found that teenagers withdrew from the labor force in response to the minimum wage, which produced the possibility of equal reductions in the supply as well as the demand for labor at a higher minimum wage and hence no impact on the unemployment rate. Using a variety of specifications of the employment and unemployment equations (using ordinary least squares vs. generalized least squares regression procedures, and linear vs. logarithmic specifications), they found that a 10 percent increase in the minimum wage caused a 1 percent decrease in teenage employment, and no change in the teenage unemployment rate. The study also found a small, but statistically significant, increase in unemployment for adults aged 20–24.[57]

CBO table illustrating projections of the effects of minimum wage increases on employment and income, under two scenarios

Wellington (1991) updated Brown et al.'s research with data through 1986 to provide new estimates encompassing a period when the real (i.e., inflation-adjusted) value of the minimum wage was declining, because it had not increased since 1981. She found that a 10% increase in the minimum wage decreased the absolute teenage employment by 0.6%, with no effect on the teen or young adult unemployment rates.[58]

Some research suggests that the unemployment effects of small minimum wage increases are dominated by other factors.[59] In Florida, where voters approved an increase in 2004, a follow-up comprehensive study after the increase confirmed a strong economy with increased employment above previous years in Florida and better than in the US as a whole.[60] When it comes to on-the-job training, some believe the increase in wages is taken out of training expenses. A 2001 empirical study found that there is "no evidence that minimum wages reduce training, and little evidence that they tend to increase training."[61]

Some empirical studies have tried to ascertain the benefits of a minimum wage beyond employment effects. In an analysis of census data, Joseph Sabia and Robert Nielson found no statistically significant evidence that minimum wage increases helped reduce financial, housing, health, or food insecurity.[62] This study was undertaken by the Employment Policies Institute, a think tank funded by the food, beverage and hospitality industries. In 2012, Michael Reich published an economic analysis that suggested that a proposed minimum wage hike in San Diego might stimulate the city's economy by about $190 million.[63]

The Economist wrote in December 2013: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs....America's federal minimum wage, at 38% of median income, is one of the rich world's lowest. Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage. ... High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world’s highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds."[64]

Card and Krueger

In 1992, the minimum wage in New Jersey increased from $4.25 to $5.05 per hour (an 18.8% increase) while the adjacent state of Pennsylvania remained at $4.25. David Card and Alan Krueger gathered information on fast food restaurants in New Jersey and eastern Pennsylvania in an attempt to see what effect this increase had on employment within New Jersey. Basic economic theory would have implied that relative employment should have decreased in New Jersey. Card and Krueger surveyed employers before the April 1992 New Jersey increase, and again in November–December 1992, asking managers for data on the full-time equivalent staff level of their restaurants both times.[65] Based on data from the employers' responses, the authors concluded that the increase in the minimum wage slightly increased employment in the New Jersey restaurants.[65]

One possible explanation that 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, according to this explanation, in the absence of the minimum wage law unskilled workers would be paid approximately the same amount and an increase above this equilibrium point could likely bring about increased unemployment for the low and unskilled workers.[41]

Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage.[66] They argued that the negative employment effects of minimum wage laws are minimal if not non-existent. 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 addition to their own findings, they reanalyzed earlier studies with updated data, generally finding that the older results of a negative employment effect did not hold up in the larger datasets.[67]

Research subsequent to Card and Krueger's work

A 2010 study published in the Review of Economics and Statistics compared 288 pairs of contiguous U.S. counties with minimum wage differentials from 1990 to 2006 and found no adverse employment effects from a minimum wage increase. Contiguous counties with different minimum wages are in purple. All other counties are in white.[68]

In subsequent research, David Neumark and William Wascher attempted to verify Card and Krueger's results by using administrative payroll records from a sample of large fast food restaurant chains in order to verify employment. They found that the minimum wage increases were followed by decreases in employment. On the other hand, an assessment of data collected and analyzed by Neumark and Wascher did not initially contradict the Card and Krueger results,[69] but in a later edited version they found a four percent decrease in employment, and reported that "the estimated disemployment effects in the payroll data are often statistically significant at the 5- or 10-percent level although there are some estimators and subsamples that yield insignificant—although almost always negative" employment effects.[70][71] However, this paper's conclusions were rebutted in a 2000 paper by Card and Krueger.[72] A 2011 paper has reconciled the difference between Card and Krueger's survey data and Neumark and Wascher's payroll-based data. The paper shows that both datasets evidence conditional employment effects that are positive for small restaurants, but are negative for large fast-food restaurants.[73]

In 1996 and 1997, the federal minimum wage was increased from $4.25 to $5.15, thereby increasing the minimum wage by $0.90 in Pennsylvania but by just $0.10 in New Jersey; this allowed for an examination of the effects of minimum wage increases in the same area, subsequent to the 1992 change studied by Card and Krueger. A study by Hoffman and Trace found the result anticipated by traditional theory: a detrimental effect on employment.[74]

Further application of the methodology used by Card and Krueger by other researchers yielded results similar to their original findings, across additional data sets.[75] A 2010 study by three economists (Arindrajit Dube of the University of Massachusetts Amherst, William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley), compared adjacent counties in different states where the minimum wage had been raised in one of the states. They analyzed employment trends for several categories of low-wage workers from 1990 to 2006 and found that increases in minimum wages had no negative effects on low-wage employment and successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants.[75][76]

However, a 2011 study by Baskaya and Rubinstein of Brown University found that at the federal level, "a rise in minimum wage have [sic] an instantaneous impact on wage rates and a corresponding negative impact on employment", stating, "Minimum wage increases boost teenage wage rates and reduce teenage employment."[77] Another 2011 study by Sen, Rybczynski, and Van De Waal found that "a 10% increase in the minimum wage is significantly correlated with a 3−5% drop in teen employment."[78] A 2012 study by Sabia, Hansen, and Burkhauser found that "minimum wage increases can have substantial adverse labor demand effects for low-skilled individuals", with the largest effects on those aged 16 to 24.[79]

A 2013 study by Meer and West concluded that "the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments ... most pronounced for younger workers and in industries with a higher proportion of low-wage workers."[80] This study by Meer and West was later critiqued for its trends of assumption in the context of narrowly defined low-wage groups.[81] The authors replied to the critiques and released additional data which addressed the criticism of their methodology, but did not resolve the issue of whether their data showed a causal relationship.[82][83] Another 2013 study by Suzana Laporšek of the University of Primorska, on youth unemployment in Europe claimed there was "a negative, statistically significant impact of minimum wage on youth employment."[84] A 2013 study by labor economists Tony Fang and Carl Lin which studied minimum wages and employment in China, found that "minimum wage changes have significant adverse effects on employment in the Eastern and Central regions of China, and result in disemployment for females, young adults, and low-skilled workers".[85][86]

Statistical meta-analyses

Several researchers have conducted statistical meta-analyses of the employment effects of the minimum wage. In 1995, Card and Krueger analyzed 14 earlier time-series studies on minimum wages and concluded that there was clear evidence of publication bias (in favor of studies that found a statistically significant negative employment effect). They point out that later studies, which had more data and lower standard errors, did not show the expected increase in t-statistic (almost all the studies had a t-statistic of about two, just above the level of statistical significance at the .05 level).[87] Though a serious methodological indictment, opponents of the minimum wage largely ignored this issue; as Thomas Leonard noted, "The silence is fairly deafening."[88]

In 2005, T.D. Stanley showed that Card and Krueger's results could signify either publication bias or the absence of a minimum wage effect. However, using a different methodology, Stanley concluded that there is evidence of publication bias and that correction of this bias shows no relationship between the minimum wage and unemployment.[89] In 2008, Hristos Doucouliagos and T.D. Stanley conducted a similar meta-analysis of 64 U.S. studies on disemployment effects and concluded that Card and Krueger's initial claim of publication bias is still correct. Moreover, they concluded, "Once this publication selection is corrected, little or no evidence of a negative association between minimum wages and employment remains."[90]

Consistent with the results from Doucouliagos and Stanley, and Card and Krueger, Baskaya and Rubinstein's 2011 study, which analyzed 24 papers on the minimum wage, found "mild positive, yet statistically insignificant association between the change in the employment of teenagers" at state minimum wage levels. However, when minimum wage is set at the federal level, they found "notable wage impacts and large corresponding disemployment effects".[77]

Debate over consequences

Minimum wage laws affect workers in most low-paid fields of employment[10] and have usually been judged against the criterion of reducing poverty.[91] Minimum wage laws receive less support from economists than from the general public. Despite decades of experience and economic research, debates about the costs and benefits of minimum wages continue today.[10]

Various groups have great ideological, political, financial, and emotional investments in issues surrounding minimum wage laws. For example, agencies that administer the laws have a vested interest in showing that "their" laws do not create unemployment, as do labor unions whose members' finances are protected by minimum wage laws. On the other side of the issue, low-wage employers such as restaurants finance the Employment Policies Institute, which has released numerous studies opposing the minimum wage.[92][93] The presence of these powerful groups and factors means that the debate on the issue is not always based on dispassionate analysis. Additionally, it is extraordinarily difficult to separate the effects of minimum wage from all the other variables that affect employment.[22]

The following table summarizes the arguments made by those for and against minimum wage laws:

Arguments in favor of minimum wage laws

Supporters of the minimum wage claim it has these effects:

  • Removes financial stress and encourages education, resulting in better paying jobs.
  • Positive impact on small business owners and industry.[94]
  • Increased job growth/creation.[95][96]
  • Increases the standard of living for the poorest and most vulnerable class in society and raises average.[97]
  • Increases incentives to take jobs, as opposed to other methods of transferring income to the poor that are not tied to employment (such as food subsidies for the poor or welfare payments for the unemployed).[98]
  • Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks. Hence increases circulation of money through the economy.[97]
  • Encourages efficiency and automation of industry.[99]
  • Removes low paying jobs, forcing workers to train for, and move to, higher paying jobs.[100][101]
  • Increases technological development. Costly technology that increases business efficiency is more appealing as the price of labor increases.[102]
  • Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.[97]
  • Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.[97]
  • Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs[103][104]
Arguments against minimum wage laws

Opponents of the minimum wage claim it has these effects:

  • Minimum wage alone isn't effective at alleviating poverty, and in fact produces a net increase poverty due to disemployment effects.[105]
  • As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets and hampers firms in reducing wage costs during trade downturns. This generates various industrial-economic inefficiencies.[106]
  • Hurts small business more than large business.[107]
  • Reduces quantity demanded of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.[108][109]
  • May cause price inflation as businesses try to compensate by raising the prices of the goods being sold.[110][111]
  • Benefits some workers at the expense of the poorest and least productive.[112]
  • Can result in the exclusion of certain groups (ethnic, gender etc.) from the labor force.[113]
  • Small firms with limited payroll budgets cannot offer their most valuable employees fair and attractive wages above unskilled workers paid the artificially high minimum, and see a rising hurdle-cost of adding workers.[107]
  • Is less effective than other methods (e.g. the Earned Income Tax Credit) at reducing poverty, and is more damaging to businesses than those other methods.[114]
  • Discourages further education among the poor by enticing people to enter the job market.[114]
  • Discriminates against, through pricing out, less qualified workers (including newcomers to the labor market, e.g. young workers) by keeping them from accumulating work experience and qualifications, hence potentially graduating to higher wages later.[3]
  • Slows growth in the creation of low-skilled jobs[80]
  • Results in jobs moving to other areas or countries which allow lower-cost labor.
  • Results in higher long-term unemployment.[115]
  • Results in higher prices for consumers, where products and services are produced by minimum-wage workers[116] (though non-labor costs represent a greater proportion of costs to consumers in industries like fast food and discount retail)[117][118]

A widely circulated argument that the minimum wage was ineffective at reducing poverty was provided by George Stigler in 1949:

In 2006, the International Labour Organization (ILO) argued that the minimum wage could not be directly linked to unemployment in countries that have suffered job losses.[15] In April 2010, the Organisation for Economic Co-operation and Development (OECD) released a report arguing that countries could alleviate teen unemployment by "lowering the cost of employing low-skilled youth" through a sub-minimum training wage.[119] A study of U.S. states showed that businesses' annual and average payrolls grow faster and employment grew at a faster rate in states with a minimum wage.[120] The study showed a correlation, but did not claim to prove causation.

Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the Conservatives reversed their opposition in 2000.[121] Accounts differ as to the effects of the minimum wage. The Centre for Economic Performance found no discernible impact on employment levels from the wage increases,[122] while the Low Pay Commission found that employers had reduced their rate of hiring and employee hours employed, and found ways to cause current workers to be more productive (especially service companies).[123] The Institute for the Study of Labor found prices in the minimum wage sector rose significantly faster than prices in non-minimum wage sectors, in the four years following the implementation of the minimum wage.[124] Neither trade unions nor employer organizations contest the minimum wage, although the latter had especially done so heavily until 1999.

In 2014, supporters of minimum wage cited a study that found that job creation within the United States is faster in states that raised their minimum wages.[95][125][126] In 2014, supporters of minimum wage cited news organizations who reported the state with the highest minimum-wage garnered more job creation than the rest of the United States.[95][96][127][128][129][130][131]

In 2014, in Seattle, Washington, liberal and progressive business owners who had supported the city's new $15 minimum wage said they might hold off on expanding their businesses and thus creating new jobs, due to the uncertain timescale of the wage increase implementation.[132] However, subsequently at least two of the business owners quoted did expand.[133][134]

The dollar value of the minimum wage loses purchasing power over time due to inflation. Minimum wage laws, for instance proposals to index the minimum wage to average wages, have the potential to keep the dollar value of the minimum wage relevant and predictable.[135]

With regard to the economic effects of introducing minimum wage legislation in Germany in January 2015, recent developments have shown that the feared increase in unemployment has not materialized, however, in some economic sectors and regions of the country, it came to a decline in job opportunities particularly for temporary and part-time workers, and some low-wage jobs have disappeared entirely.[136] Because of this overall positive development, the Deutsche Bundesbank revised its opinion, and ascertained that “the impact of the introduction of the minimum wage on the total volume of work appears to be very limited in the present business cycle”.[137]

Surveys of economists

According to a 1978 article in the American Economic Review, 90% of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers.[138] By 1992 the survey found 79% of economists in agreement with that statement,[139] and by 2000, 45.6% were in full agreement with the statement and 27.9% agreed with provisos (73.5% total).[140][141] The authors of the 2000 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. They state that the reduction on consensus on this question is "likely" due to the Card and Krueger research and subsequent debate.[142]

A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association (AEA). Whaples found that 46.8% respondents wanted the minimum wage eliminated, 37.7% supported an increase, 14.3% wanted it kept at the current level, and 1.3% wanted it decreased.[143] Another survey in 2007 conducted by the University of New Hampshire Survey Center found that 73% of labor economists surveyed in the United States believed 150% of the then-current minimum wage would result in employment losses and 68% believed a mandated minimum wage would cause an increase in hiring of workers with greater skills. 31% felt that no hiring changes would result.[144]

Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents were nearly evenly divided when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution.[145] Daniel B. Klein and Stewart Dompe conclude, on the basis of previous surveys, "the average level of support for the minimum wage is somewhat higher among labor economists than among AEA members."[146]

In 2007, Klein and Dompe conducted a non-anonymous survey of supporters of the minimum wage who had signed the "Raise the Minimum Wage" statement published by the Economic Policy Institute. 95 of the 605 signatories responded. They found that a majority signed on the grounds that it transferred income from employers to workers, or equalized bargaining power between them in the labor market. In addition, a majority considered disemployment to be a moderate potential drawback to the increase they supported.[146]

In 2013, a diverse group of 37 economics professors was surveyed on their view of the minimum wage's impact on employment. 34% of respondents agreed with the statement, "Raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skilled workers to find employment." 32% disagreed and the remaining respondents were uncertain or had no opinion on the question. 47% agreed with the statement, "The distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy", while 11% disagreed.[147]

Alternatives

Economists and other political commentators have proposed alternatives to the minimum wage. They argue that these alternatives may address the issue of poverty better than a minimum wage, as it would benefit a broader population of low wage earners, not cause any unemployment, and distribute the costs widely rather than concentrating it on employers of low wage workers.

Basic income

Main article: Basic Income

A basic income (or negative income tax) is a system of social security that periodically provides each citizen with a sum of money that is sufficient to live on frugally. It is argued that recipients of the basic income would have considerably more bargaining power when negotiating a wage with an employer as there would be no risk of destitution for not taking the employment. As a result, the jobseeker could spend more time looking for a more appropriate or satisfying job, or they could wait until a higher-paying job appeared. Alternately, they could spend more time increasing their skills in university, which would make them more suitable for higher-paying jobs, as well as provide numerous other benefits. Experiments on Basic Income and NIT in Canada and the USA show that people spent more time studying while the program was running.[148]

Proponents argue that a basic income that is based on a broad tax base would be more economically efficient, as the minimum wage effectively imposes a high marginal tax on employers, causing losses in efficiency.

Guaranteed minimum income

A guaranteed minimum income is another proposed system of social welfare provision. It is similar to a basic income or negative income tax system, except that it is normally conditional and subject to a means test. Some proposals also stipulate a willingness to participate in the labor market, or a willingness to perform community services.[149]

Refundable tax credit

A refundable tax credit is a mechanism whereby the tax system can reduce the tax owed by a household to below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system. Examples of refundable tax credits include the earned income tax credit and the additional child tax credit in the U.S., and working tax credits and child tax credits in the UK. Such a system is slightly different from a negative income tax, in that the refundable tax credit is usually only paid to households that have earned at least some income. This policy is more targeted against poverty than the minimum wage, because it avoids subsidizing low-income workers who are supported by high-income households (for example, teenagers still living with their parents).[150]

In the United States, earned income tax credit rates, also known as EITC or EIC, vary by state—some are refundable while other states do not allow a refundable tax credit.[151] The federal EITC program has been expanded by a number of presidents including Jimmy Carter, Ronald Reagan, George H.W. Bush, and Bill Clinton.[152] In 1986, President Reagan described the EITC as "the best anti poverty, the best pro-family, the best job creation measure to come out of Congress."[153] The ability of the earned income tax credit to deliver larger monetary benefits to the poor workers than an increase in the minimum wage and at a lower cost to society was documented in a 2007 report by the Congressional Budget Office.[154]

The Adam Smith Institute prefers cutting taxes on the poor and middle class instead of raising wages as an alternative to the minimum wage.[155]

Collective bargaining

Italy, Sweden, Norway, Finland, and Denmark are examples of developed nations where there is no minimum wage that is required by legislation.[16][18] Such nations, particularly the Nordics, have very high union participation rates.[156] Instead, minimum wage standards in different sectors are set by collective bargaining.[157]

US movement

In January 2014, seven Nobel economists—Kenneth Arrow, Peter Diamond, Eric Maskin, Thomas Schelling, Robert Solow, Michael Spence, and Joseph Stiglitz—and 600 other economists wrote a letter to the US Congress and the US President urging that, by 2016, the US government should raise the minimum wage to $10.10. They endorsed the Minimum Wage Fairness Act which was introduced by US Senator Tom Harkin in 2013.[158][159] Democratic presidential candidate Bernie Sanders has introduced a bill to the Senate that would raise the minimum wage to $15.[160][161]

In late March 2016, Governor of California Jerry Brown reached a deal to raise the minimum wage to 15 dollars by 2022 for big businesses and 2023 for smaller businesses.[162]

In contrast, the relatively high minimum wage in Puerto Rico has been blamed by various politicians and commentators as a highly significant factor in the Puerto Rican government-debt crisis [163][164][165] One study concluded that 'Employers are disinclined to hire workers because the US federal minimum wage is very high relative to the local average'.[166]

See also

Notes

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  3. 1 2 "The Young and the Jobless". The Wall Street Journal. 2009-10-03. Retrieved 2014-01-11.
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  5. 1 2 3 4 Mihm, Stephen (5 September 2013). "How the Black Death Spawned the Minimum Wage". Bloomberg View. Retrieved 17 April 2014.
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  148. ↑ http://www.economonitor.com/dolanecon/2014/08/25/a-universal-basic-income-and-work-incentives-part-2-evidence/
  149. ↑ "Suggestion: Raise welfare children in institutions". Star-News. Jan 28, 1972. Retrieved November 19, 2013.
  150. ↑ David Scharfenberg (April 28, 2014). "What The Research Says In The Minimum Wage Debate". WBUR.
  151. ↑ "50 State Resources Map on State EITCs". The Hatcher Group. Retrieved June 16, 2010.
  152. ↑ "New Research Findings on the Effects of the Earned Income Tax Credit". Center on Budget and Policy Priorities. Retrieved June 30, 2010.
  153. ↑ Furman, Jason (April 10, 2006). "Tax Reform and Poverty". Center on Budget and Policy Priorities. Retrieved December 7, 2013.
  154. ↑ "Response to a Request by Senator Grassley About the Effects of Increasing the Federal Minimum Wage Versus Expanding the Earned Income Tax Credit" (PDF). Congressional Budget Office. January 9, 2007. Retrieved July 25, 2008.
  155. ↑ http://www.adamsmith.org/news/press-releases/comment-minimum-wage-rise-risks-harming-workers-cut-taxes-on-the-poor-instead
  156. ↑ Olson, Parmy (9/01/2009). The Best Minimum Wages In Europe. Forbes. Retrieved 21 February 2014.
  157. ↑ "Labor Criticizes". Lewiston Morning Tribune. Associated Press. March 2, 1933. pp. 1, 6.
  158. ↑ 75 economists back minimum wage hike CNN Money, January 14, 2014
  159. ↑ Over 600 Economists Sign Letter In Support of $10.10 Minimum Wage Economist Statement on the Federal Minimum Wage, Economic Policy Institute
  160. ↑ "Sanders Introduces Bill for $15-an-Hour Minimum Wage". Sen. Bernie Sanders. Retrieved 2015-09-15.
  161. ↑ The rapid success of Fight for $15: 'This is a trend that cannot be stopped' S. Greenhouse, The Guardian, US-News, 24 Jul 2015
  162. ↑ California Reaches Deal For $15 Minimum Wage S. Bernstein, The Huffington Post, 28 Mar 2016
  163. ↑ When the Minimum Wage Really Bites: The Effect of the U.S.-Level Minimum on Puerto Rico Alida Castillo-Freeman, Richard B. Freeman (1992) in Immigration and the Workforce: Economic Consequences for the United States and Source Areas
  164. ↑ Puerto Rico’s crisis illustrates the risks of minimum wage hikes C. Lane, Washington Post, July 8, 2015
  165. ↑ Memo To The Fight For $15: Puerto Rico Happens With A Too High Minimum Wage Tim Worstall, Forbes.com, July 3, 2015.
  166. ↑ Puerto Rico - A Way Forward by A. Krueger, R. Teja and A. Wolfe, June 29, 2015

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