Minimum wage
Overview
 
A minimum wage is the lowest hourly, daily or monthly remuneration
Remuneration
Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...

 that employers may legally pay to workers. Equivalently, it is the lowest wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say that it increases the standard of living of workers, reduces poverty, and forces businesses to be more efficient.
Encyclopedia
A minimum wage is the lowest hourly, daily or monthly remuneration
Remuneration
Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...

 that employers may legally pay to workers. Equivalently, it is the lowest wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say that it increases the standard of living of workers, reduces poverty, and forces businesses to be more efficient. Opponents say that if it is high enough to be effective, it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming lesser skilled workers to the benefit of better skilled workers.

History

Statutory minimum wages were first proposed as a way to control the proliferation of sweat shops in manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...

 industries. The sweat shops 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 workers, 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. Today, minimum wage laws cover workers in most low-paid fields of employment.

The minimum wage has a strong social appeal, rooted in concern about the ability of markets to provide income equity
Economic inequality
Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality is related to the ideas of...

 for the least able members of the work force. For some people, the obvious solution to this concern is to redefine the wage structure politically to achieve a socially preferable distribution of income. Thus, minimum wage laws have usually been judged against the criterion of reducing poverty.

Although the goals of the minimum wage are widely accepted as proper, there is great disagreement as to whether the minimum wage is effective in attaining its goals. From the time of their introduction, minimum wage laws have been highly controversial politically, and have received much 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.

The classic exposition of the minimum wage's shortcomings in reducing poverty was provided by George Stigler
George Stigler
George Joseph Stigler was a U.S. economist. He won the Nobel Memorial Prize in Economic Sciences in 1982, and was a key leader of the Chicago School of Economics, along with his close friend Milton Friedman....

 in 1946:
  • Employment may fall more than in proportion to the wage increase, thereby reducing overall earnings;
  • As uncovered sectors of the economy absorb workers released from the covered sectors, the decrease in wages in the uncovered sectors may exceed the increase in wages in the covered ones;
  • The impact of the minimum wage on family income distribution may be negative unless the fewer but better jobs are allocated to members of needy families rather than to, for example, teenagers from families not in poverty;
  • Forbidding employers to pay less than a legal minimum is equivalent to forbidding workers to sell their labour for less than the minimum wage. The legal restriction that employers cannot pay less than a legislated wage is equivalent to the legal restriction that workers cannot work at all in the protected sector unless they can find employers willing to hire them at that wage.


Direct empirical studies indicate that anti-poverty effects in the U.S. would be quite modest, even if there were no unemployment effects. Very few low-wage workers come from families in poverty. Those primarily affected by minimum wage laws are teenagers and low-skilled adult females who work part time, and any wage rate effects on their income is strictly proportional to the hours of work they are offered. So, if market outcomes for low-skilled families are to be supplemented in a socially satisfactory way, factors other than wage rates must also be considered. Employment opportunities and the factors that limit labor market participation must be considered as well. Economist Thomas Sowell
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...

 has also argued that regardless of custom or law, the real minimum wage is always zero, and zero is what some people would receive if they fail to find jobs when they try to enter the workforce, or they lose the jobs they already have.

Minimum wage law

First enacted in New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

 in 1894, there is now legislation or binding collective bargaining regarding minimum wage in more than 90% of all countries.

Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money (e.g. US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

7.25 per hour under U.S. Federal law, $8.67 in the U.S. state of Washington, and £6.08 (for those aged 21+) in the United Kingdom), but also in terms of which pay period (e.g. Russia and China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...

 set monthly minimums) or the scope of coverage. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage level. (See also: List of minimum wages by country)

Informal minimum wages

Sometimes a minimum wage exists without a law. Custom 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 has been publicized in recent years, but it existed with companies in West Africa in the middle of the twentieth century. Blanket minimum wage levels for all industries could also be set as a fixed percentage of the GDP per capita or the income tax threshold of the nation.

Considerations in fixing an initial 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. 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
Index of Economic Freedom
The Index of Economic Freedom is a series of 10 economic measurements created by The Heritage Foundation and The Wall Street Journal. Its stated objective is to measure the degree of economic freedom in the world's nations....

 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.

Among workers and their representatives, political consideration weigh in as labor leaders seek to win support by demanding the highest possible rate.
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.

Simple supply and demand

An analysis of supply and demand of the type shown in introductory mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...

 textbooks implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

. This is because a greater number of people 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 least experienced will typically be excluded.

According to the model shown in nearly all introductory textbooks on economics, increasing the minimum wage decreases the employment of minimum-wage workers. 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. 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.

It illustrates the point with a supply and demand diagram similar to the one below.
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.

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.

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. 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
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...

, where the supply and demand curves intersect. Minimum wage behaves as a classical price floor
Price floor
A price floor is a government- or group-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price.-Effectiveness of price floors:...

 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
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...

 of labor, i.e., unemployment.

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 doesn't hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.

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
Monopsony
In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...

 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
Company town
A company town is a town or city in which much or all real estate, buildings , utilities, hospitals, small businesses such as grocery stores and gas stations, and other necessities or luxuries of life within its borders are owned by a single company...

,' asymmetric information, imperfect mobility, and the 'personal' element of the labor transaction give some degree of wage-setting power to most firms.

Criticism of the "textbook model"

The argument that minimum wages decrease employment is based on a simple supply and demand model of the labor market. A number of economists (for example Pierangelo Garegnani, Robert L. Vienneau, and Arrigo Opocher & Ian Steedman), building on the work of Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...

, argue that that model, even given all its assumptions, is logically incoherent. Michael Anyadike-Danes and Wyne Godley argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model. Graham White 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
Cornell University
Cornell University is an Ivy League university located in Ithaca, New York, United States. It is a private land-grant university, receiving annual funding from the State of New York for certain educational missions...

, 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."

An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...

 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. In such a case the diagram above 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 downward labor demand curve shown in the diagram above, monopsonistic employers would use a steeper downward 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
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

 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
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

, with the optimal level being equal to the marginal productivity of labor. This view emphasizes the role of minimum wages as a market regulation
Regulated market
A regulated market or controlled market, is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/or to whom they are distributed...

 policy akin to antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...

 policies, as opposed to an illusory "free lunch
Free lunch
The phrase free lunch, in U.S. literature from about 1870 to 1920, refers to a tradition once common in saloons in many places in the United States. These establishments included a "free" lunch, varying from rudimentary to quite elaborate, with the purchase of at least one drink. These free lunches...

" 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; 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.

Three other possible reasons minimum wages do not affect employment were suggested by Alan Blinder
Alan Blinder
Alan Stuart Blinder is an American economist. He serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, Vice Chairman of The Observatory Group, and as co-director of Princeton’s Center for Economic Policy Studies,...

: higher wages may reduce turnover
Turnover (employment)
In a human resources context, turnover or staff turnover or labour turnover is the rate at which an employer gains and loses employees. Simple ways to describe it are "how long employees tend to stay" or "the rate of traffic through the revolving door." Turnover is measured for individual companies...

, 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."

Debate over consequences

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 labour unions, whose members' jobs 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. 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.

The following table summarizes the arguments made by those for and against minimum wage laws:
Arguments in favour of Minimum Wage Laws

Supporters of the minimum wage claim it has these effects:
  • Increases the standard of living for the poorest and most vulnerable class in society and raises average.
  • Motivates and encourages employees to work harder
  • Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.
  • Increases the work ethic
    Work ethic
    Work ethic is a set of values based on hard work and diligence. It is also a belief in the moral benefit of work and its ability to enhance character. An example would be the Protestant work ethic...

     of those who earn very little, as employers demand more return from the higher cost of hiring these employees.
  • Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.
  • Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs
    Illegal drug trade
    The illegal drug trade is a global black market, dedicated to cultivation, manufacture, distribution and sale of those substances which are subject to drug prohibition laws. Most jurisdictions prohibit trade, except under license, of many types of drugs by drug prohibition laws.A UN report said the...

  • Encourages efficiency and automation of industry.
  • Removes low paying jobs, forcing workers to train for, and move to, higher paying jobs.
  • Increases technological development. Costly technology that increases business efficiency is more appealing as the price of labour increases.

Arguments against Minimum Wage Laws

Opponents of the minimum wage claim it has these effects:
  • 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.
  • Hurts small business more than large business.
  • 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.
  • May cause price inflation
    Inflation
    In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

     as businesses try to compensate by raising the prices of the goods being sold.
  • Benefits some workers at the expense of the poorest and least productive.
  • Can result in the exclusion of certain groups from the labor force.
  • 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.
  • Is less effective than other methods (e.g. the Earned Income Tax Credit
    Earned income tax credit
    The United States federal earned income tax credit or earned income credit is a refundable tax credit primarily for individuals and families who have low to moderate earned income. Greater tax credit is given to those who also have qualifying children...

    ) at reducing poverty, and is more damaging to businesses than those other methods.
  • Discourages further education among the poor by enticing people to enter the job market.

In 2006, the International Labour Organization
International Labour Organization
The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...

 (ILO) argued that the minimum wage could not be directly linked to unemployment in countries that have suffered job losses. In April 2010, the Organisation for Economic Co-operation and Development
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...

 (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. 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. The study showed a correlation, but did not claim to prove causation.

Although strongly opposed by both the business community and the Conservative Party
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...

 when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000. A review of its effects found no discernible impact on employment levels. However, prices in the minimum wage sector were found to have risen significantly faster than prices in non-minimum wage sectors, most notably in the four years following the implementation of the minimum wage.

Since the introduction of a national minimum wage in the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

 in 1999, its effects on employment were subject to extensive research and observation by the Low Pay Commission. The Low Pay Commission found that, rather than make employees redundant, employers have reduced their rate of hiring, reduced staff hours, increased prices, and have found ways to cause current workers to be more productive (especially service companies). Neither trade unions nor employer organizations contest the minimum wage, although the latter had especially done so heavily until 1999.

Empirical studies

Economists disagree as to the measurable impact of minimum wages in the 'real world'. This disagreement usually takes the form of competing empirical
Empirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....

 tests of the elasticities
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...

 of demand and supply
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

 in labor markets
Labour economics
Labor economics seeks to understand the functioning and dynamics of the market for labor. Labor markets function through the interaction of workers and employers...

 and the degree to which markets differ from the efficiency that models of perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

 predict.

Economists have done empirical studies on numerous aspects of the minimum wage, prominently including:
  • Employment effects, the most frequently studied aspect
  • Effects on the distribution of wages and earnings among low-paid and higher-paid workers
  • Effects on the distribution of incomes among low-income and higher-income families
  • Effects on the skills of workers through job training and the deferring of work to acquire education
  • Effects on prices and profits
  • Effects on on-the-job training


Until the mid-1990s, a strong consensus existed among economists, both conservative and liberal, that the minimum wage reduced employment, especially among younger and low-skill workers. 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 in particular that teenagers were made worse off by the unemployment associated with the minimum wage.

Brown et al. (1983) note 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, for the effect on the teenage unemployment rate, the studies exhibited wider variation in their estimates, from zero to over 3 percent. In contrast to the simple supply/demand figure above, 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
Ordinary least squares
In statistics, ordinary least squares or linear least squares is a method for estimating the unknown parameters in a linear regression model. This method minimizes the sum of squared vertical distances between the observed responses in the dataset and the responses predicted by the linear...

 vs. generalized least squares
Generalized least squares
In statistics, generalized least squares is a technique for estimating the unknown parameters in a linear regression model. The GLS is applied when the variances of the observations are unequal , or when there is a certain degree of correlation between the observations...

 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.

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.

Some research suggests that the unemployment effects of small minimum wage increases are dominated by other factors. 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.

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."

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
David Card
David Edward Card is a Canadian labour economist and professor at the University of California, Berkeley.Card earned his B.A. degree from Queen's University in 1978 and his Ph.D. degree in Economics in 1983 from Princeton University....

 and Alan Krueger
Alan B. Krueger
Alan Bennett Krueger is an American economist, Bendheim Professor of Economics and Public Affairs at Princeton University and Research Associate at the National Bureau of Economic Research. On March 7, 2009, he was nominated by President Barack Obama to be United States Assistant Secretary of the...

 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. Based on data from the employers' responses, the authors concluded that the increase in the minimum wage increased employment in the New Jersey restaurants.

Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage. 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.

Critics, however, argue that their research was flawed. 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, 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.

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 in the absence of 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.

Reaction to Card and Krueger

Some leading economists such as Kevin M. Murphy
Kevin M. Murphy
Kevin Miles Murphy is the George J. Stigler Distinguished Service Professor of Economics at the University of Chicago Booth School of Business and a Senior Fellow at the Hoover Institution....

 and Nobel laureate Gary Becker
Gary Becker
Gary Stanley Becker is an American economist. He is a professor of economics, sociology at the University of Chicago and a professor at the Booth School of Business. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992, and received the United States' Presidential Medal of Freedom...

 do not accept the Card/Krueger results, while some others, like Nobel laureates Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 and Joseph Stiglitz, accept them.

According to economists Donald Deere (Texas A&M
Texas A&M University
Texas A&M University is a coeducational public research university located in College Station, Texas . It is the flagship institution of the Texas A&M University System. The sixth-largest university in the United States, A&M's enrollment for Fall 2011 was over 50,000 for the first time in school...

), Kevin Murphy (University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...

), and Finis Welch (Texas A&M), Card and Krueger's conclusions are contradicted by "common sense and past research". They conclude:
Nobel laureate James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...

 responded to the Card and Krueger study in the Wall Street Journal, arguing:
Alan Krueger responded in The Washington Post:
Nobel laureate Paul Krugman, has argued in favour of the Card and Krueger result, stating that Card and Krueger;

Neumark and Wascher

In a 2008 book, David Neumark
David Neumark
David Neumark is an American economist and a Professor of Economics at the University of California, Irvine.- Early years :...

 and William L. Wascher described their analysis of studies on the minimum wage, from several countries covering a period of over 50 years (but primarily from the 1990s onward). According to the Neumark and Wascher, a large majority of the studies show negative effects for the minimum wage; those showing positive effects are few, questionable, and disproportionately discussed.

Based on the published studies they considered, Neumark and Wascher conclude that the minimum wage is not good social policy. They emphasize three conclusions: First, while acknowledging Card and Krueger, they found that studies since the early 1990s have strongly pointed to a "reduction in employment opportunities for low-skilled and directly affected workers." Second, they found some evidence that the minimum wage is harmful to poverty-stricken families, and "virtually no evidence" that it helps them. Third, they found that the minimum wage lowers adult wages of young workers who encounter it, by reducing their ultimate level of education.

Statistical meta-analyses

Several researchers have conducted statistical meta-analyses
Meta-analysis
In statistics, a meta-analysis combines the results of several studies that address a set of related research hypotheses. In its simplest form, this is normally by identification of a common measure of effect size, for which a weighted average might be the output of a meta-analyses. Here the...

 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
Publication bias
Publication bias is the tendency of researchers, editors, and pharmaceutical companies to handle the reporting of experimental results that are positive differently from results that are negative or inconclusive, leading to bias in the overall published literature...

 (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
Statistical significance
In statistics, a result is called statistically significant if it is unlikely to have occurred by chance. The phrase test of significance was coined by Ronald Fisher....

 at the .05 level). Though a serious methodological indictment, opponents of the minimum wage largely ignored this issue; as Thomas C. Leonard noted, "The silence is fairly deafening."

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 concludes that there is evidence of publication bias, and that correction of this bias shows no relationship between the minimum wage and unemployment. In 2008, Hristos Doucouliagos and T.D. Stanley conducted a similar meta-analysis of 64 U.S. studies on dis-employment 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."

Surveys of economists

Until the 1990s, economists generally agreed that raising the minimum wage reduced employment. This consensus was weakened when some well-publicized empirical studies showed the opposite, although others confirmed the original view. Today's consensus, if one exists, is that increasing the minimum wage has, at worst, minor negative effects.

According to a 1978 article in the American Economic Review
American Economic Review
The American Economic Review is a peer-reviewed academic journal of economics publishing seven issues annually by the American Economic Association. First published in 1911, it is considered one of the most prestigious journals in the field. The current editor-in-chief is Penny Goldberg . The...

, 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers.

A 2000 survey by Dan Fuller and Doris Geide-Stevenson reports that of a sample of 308 American Economic Association
American Economic Association
The American Economic Association, or AEA, is a learned society in the field of economics, headquartered in Nashville, Tennessee. It publishes one of the most prestigious academic journals in economics: the American Economic Review...

 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. They state that the reduction on consensus on this question is "likely" due to the Card and Krueger research and subsequent debate.

A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association
American Economic Association
The American Economic Association, or AEA, is a learned society in the field of economics, headquartered in Nashville, Tennessee. It publishes one of the most prestigious academic journals in economics: the American Economic Review...

. Whaples found that 37.7% of respondents supported an increase in the minimum wage, 14.3% wanted it kept at the current level, 1.3% wanted it decreased, and 46.8% wanted it completely eliminated.

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 split exactly 50-50 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. 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."

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
Economic Policy Institute
The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...

. 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.

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

A basic income
Basic income
A basic income guarantee is a proposed system of social security, that regularly provides each citizen with a sum of money. In contrast to income redistribution between nations themselves, the phrase basic income defines payments to individuals rather than households, groups, or nations, in order...

 (or negative income tax
Negative income tax
In economics, a negative income tax is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented...

) is a system of social security
Social security
Social security is primarily a social insurance program providing social protection or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...

, that periodically provides each citizen with a sum of money that is sufficient to live on. Except for citizenship, a basic income is entirely unconditional. There is no means test, and the richest as well as the poorest citizens would receive it. A basic income is often proposed in the form of a citizen's dividend
Citizen's dividend
Citizen's dividend or citizen's income is a proposed state policy based upon the principle that the natural world is the common property of all persons . It is proposed that all citizens receive regular payments from revenue raised by the state through leasing or selling natural resources for...

 (a transfer payment from the government). 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
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...

.

In 1968 James Tobin
James Tobin
James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...

, Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...

, John Kenneth Galbraith
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...

 and another 1,200 economists signed a document calling for the US Congress to introduce in that year a system of income guarantees and supplements. Both Tobin and Samuelson have also come out against the minimum wage. In the 1972 presidential campaign, Senator George McGovern
George McGovern
George Stanley McGovern is an historian, author, and former U.S. Representative, U.S. Senator, and the Democratic Party nominee in the 1972 presidential election....

 called for a 'demogrant' that was very similar to a basic income.

Winners of the Nobel Prize in Economics that fully support a basic income include Herbert Simon
Herbert Simon
Herbert Alexander Simon was an American political scientist, economist, sociologist, and psychologist, and professor—most notably at Carnegie Mellon University—whose research ranged across the fields of cognitive psychology, cognitive science, computer science, public administration, economics,...

, Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...

, James Meade
James Meade
James Edward Meade CB, FBA was a British economist and winner of the 1977 Nobel Memorial Prize in Economic Sciences jointly with the Swedish economist Bertil Ohlin for their "Pathbreaking contribution to the theory of international trade and international capital movements."Meade was born in...

, Robert Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...

, Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, Jan Tinbergen
Jan Tinbergen
Jan Tinbergen , was a Dutch economist. He was awarded the first Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis of economic processes...

, James Tobin
James Tobin
James Tobin was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He developed the ideas of Keynesian economics, and advocated government intervention to...


and James Meade
James Meade
James Edward Meade CB, FBA was a British economist and winner of the 1977 Nobel Memorial Prize in Economic Sciences jointly with the Swedish economist Bertil Ohlin for their "Pathbreaking contribution to the theory of international trade and international capital movements."Meade was born in...

.

Guaranteed minimum income

A guaranteed minimum income
Guaranteed minimum income
Guaranteed minimum income is a system of social welfare provision that guarantees that all citizens or families have an income sufficient to live on, provided they meet certain conditions. Eligibility is typically determined by citizenship, a means test and either availability for the labour...

 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.

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
Earned income tax credit
The United States federal earned income tax credit or earned income credit is a refundable tax credit primarily for individuals and families who have low to moderate earned income. Greater tax credit is given to those who also have qualifying children...

 and the additional child tax credit
Child tax credit
A child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per...

 in the U.S., and working tax credit
Working tax credit
The Working Tax Credit is a state benefit in the United Kingdom made to people who work on a low income. It is a part of the current system of refundable tax credits introduced in April 2003 and is a means-tested social security benefit...

s and child tax credit
Child tax credit
A child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per...

s in the UK. Such a system is slightly different from a negative income tax
Negative income tax
In economics, a negative income tax is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented...

, in that the refundable tax credit is usually only paid to households that have earned at least some income.

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. The federal EITC program has been expanded by a number of presidents including Jimmy Carter, Ronald Reagan, George H.W. Bush, and Bill Clinton. 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." The ability of the earned income tax credit to deliver larger monetary benefits to 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
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

.

Collective bargaining

Germany, Italy, Sweden and Denmark are examples of developed nations where there is no minimum wage that is required by legislation. Instead, minimum wage standards in different sectors are set by collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...

.

See also

  • Average worker's wage
    Average worker's wage
    An average worker's wage is the mean salary of a group of workers. This measure is often monitored and used by Government or other organisations as a benchmark for the wage level of individual workers in an industry, area or country....

  • List of minimum wages by country
  • Basic income
    Basic income
    A basic income guarantee is a proposed system of social security, that regularly provides each citizen with a sum of money. In contrast to income redistribution between nations themselves, the phrase basic income defines payments to individuals rather than households, groups, or nations, in order...

  • Labor market
  • Labour law
    Labour law
    Labour law is the body of laws, administrative rulings, and precedents which address the legal rights of, and restrictions on, working people and their organizations. As such, it mediates many aspects of the relationship between trade unions, employers and employees...

  • Living wage
    Living wage
    In public policy, a living wage is the minimum hourly income necessary for a worker to meet basic needs . These needs include shelter and other incidentals such as clothing and nutrition...

  • Maximum wage
    Maximum wage
    A maximum wage, also often called a wage ceiling, is a legal limit on how much income an individual can earn. This is a related economic concept that is complementary to the minimum wage used currently by some states to enforce minimum earnings...

  • Minimum wage law
    Minimum wage law
    Minimum wage law is the body of law which prohibits employers from hiring employees or workers for less than a given hourly, daily or monthly minimum wage. More than 90% of all countries have some kind of minimum wage legislation....

  • Minimum Wage Fixing Convention, 1970
    Minimum Wage Fixing Convention, 1970
    Minimum Wage Fixing Convention, 1970 is an International Labour Organization Convention.It was established in 1970, with the preamble stating:...

  • Guaranteed minimum income
    Guaranteed minimum income
    Guaranteed minimum income is a system of social welfare provision that guarantees that all citizens or families have an income sufficient to live on, provided they meet certain conditions. Eligibility is typically determined by citizenship, a means test and either availability for the labour...

  • Positive rights

  • List of sovereign states in Europe by minimum wage
  • List of U.S. minimum wages
  • List of minimum wages in Canada
  • List of minimum wages in China (PRC)
  • Minimum wage history
    Minimum wage history
    The history of minimum wage is about the attempts and measures governments have made to introduce a standard amount of periodic pay below which employers could not let their workers fall.-Nineteenth century:...

  • Garcia v. San Antonio Metropolitan Transit Authority
    Garcia v. San Antonio Metropolitan Transit Authority
    Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 , is a United States Supreme Court decision that holds that the Congress has the power under the Commerce Clause of the Constitution to extend the Fair Labor Standards Act, which requires that employers provide minimum wage and...

  • Nickel and Dimed
    Nickel and Dimed
    Nickel and Dimed: On Getting By in America is a book written by Barbara Ehrenreich. Written from the perspective of the undercover journalist, it sets out to investigate the impact of the 1996 welfare reform act on the "working poor" in the United States...

  • Scratch Beginnings
    Scratch Beginnings
    Scratch Beginnings is a book by Adam Shepard, a graduate of Merrimack College, about his attempt to live the American Dream. It was conceived as a refutation of the books Nickel and Dimed and Bait and Switch by Barbara Ehrenreich.-Background:...

  • Wage slave


External links



Support
  • The Minimum Wage: Information, Opinion, Research (pro-minimum wage site with links to a variety of viewpoints)
  • Issues about Minimum Wage from the AFL-CIO
    AFL-CIO
    The American Federation of Labor and Congress of Industrial Organizations, commonly AFL–CIO, is a national trade union center, the largest federation of unions in the United States, made up of 56 national and international unions, together representing more than 11 million workers...

     (U.S. labor federation favoring the minimum wage)
  • Issue Guide on the Minimum Wage from the Economic Policy Institute
    Economic Policy Institute
    The Economic Policy Institute is a 501 non-profit, liberal, nonpartisan think tank that seeks to broaden the public debate about strategies to achieve a prosperous and fair economy...



Opposed
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