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Home > Minimum wage

1 History

Minimum wage laws were first introduced in New Zealand. The chronology of moves to legislate minimum wages is as follows:

• New Zealand in 1894
• Australian state of Victoria in 1896
• United Kingdom in 1909
• United States, the state of Massachusetts in 1912

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

2 Consequences of minimum wage laws

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

2.1 Hypothetical costs and benefits

Minimum wages may have the effect of:

• Reducing low-paid work, which may be viewed as unfair and exploitative.
• Reducing the dependency of the low-paid on welfare-state benefits, which may in turn reduce taxes or allow increases of other government outlays.
• Stimulating economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training.
• Encouraging many of those who would normally take low-wage jobs to stay in (or return to) school and thus to accumulate human capital.

On the other hand, minimum wages may have the effect of:

• Discouraging employment of low-wage earners, and generally increasing unemployment.
• Raising employment barriers for people with little or no work experience or formal education: if a worker's labor is not worth the minimum, he may not find employment at all.
• Curbing economic growth by increasing the cost of labor.
• Increasing the price of goods and services, since employers pass on employment costs in the form of higher prices. (Opponents of minimum wage often see a negative income tax, e.g., as a way to support the lower-waged jobs, with the money coming from those who pay taxes, not those who pay for the products including the unemployed)
• Decreasing incentive for some low-skilled workers to gain skills.
• Where implemented locally, making labor more expensive than in other areas, which may discourage inward investmentInward investment is the injection of money from an external source into a region, in order to purchase capital goods for a branch of a corporation to locate or develop its presence in the region. Foreign sources, such as trans-national corporations or mu and encourage local businesses to relocate their operations elsewhere.

The effects of minimum wage laws, both positive and negative, may be increased by 'knock-on effects', with increased wages for workers already earning above the minimum wage. For example, some labor union contracts are based on a fixed percentage or dollar amount above the minimum wage. Certain public grants or taxes are based on a multiple of the minimum wage. (For example, a worker may have an exemption if his earnings are below 2.5 minimum wages.)

2.2 Debate

The costs and benefits arising from minimum wages are subject to considerable disagreement among economistAn economist is someone who studies Economics. See also List of economists. The Economist is also a news journal published in London. Life, physical, and social science occupations Social science occupations.s, though the consensus among economics textbooks is that minimum wage laws should be avoided whenever possible as the costs exceed the benefits. This unified view has been disputed by empirical research done by David Card and Alan Krueger. In their 1997 book Myth and Measurement: The New Economics of the Minimum Wage (BooksEnthsiast.com), they found the negative employment effects of minimum-wage laws to be minimal if not non-existent (at least for the United States). For example, they look at the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990-91 increases in the federal minimum wage. In each case, Card and Kreuger present evidence ostensibly showing that increases in the minimum wage led to increases in pay, but no loss in jobs. That is, it appears that the demand for low-wage workers is inelasticElasticity has meanings in two different fields: In physics and mechanical engineering, the theory of elasticity describes how a solid object moves and deforms in response to external stress. An alternative meaning of elasticity is a property of an object. Also, these authors reexamine the existing literature on the minimum wage and argue that it, too, lacks support for the claim that a higher minimum wage cuts the availability of jobs.

Critics of this research, however, argue that their research was flawed.[1],[2] For example, Card and Krueger gathered their data by telephoning employers in California and New Jersey, asking them whether they intended to increase, decrease, or or make no change in their employment. Subsequent attempts to verify the claims requested payroll cards from employers to verify employment, and ostensibly found that the minimum wage increases were followed by decreases in employment. On the other hand, data analysis by David Neumark and William Wascher, economists who are usually critical of minimum-wage increases, supported the Card/Krueger results.[3]

Some idea of the empirical problems of this debate can be seen by looking at recent trends in the United States. The minimum wage fell about 29% in real terms between 1979 and 2003. This should have helped fight the problem of youth unemployment (since these workers are likely to have fewer skills than older workers). But young workers between the ages of 16 and 19 suffered from increased rates of unemployment (relative to those of workers 20 and older) than before this fall. Similarly, poverty rates in the United States ended their long-term decline after 1979. This suggests that critics of the minimum wage need to present a more complete theory of the origins of unemployment of young or poor people.

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