Minimum wage
A minimum wage is the lowest remuneration that employers can legally pay their workers—the price floor below which workers may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century.
Supply and demand models suggest that there may be welfare and employment losses from minimum wages. However, if the labor market is in a state of monopsony, minimum wages can increase the efficiency of the market. There is debate about the full effects of minimum wages.
The movement for minimum wages was first motivated as a way to stop the exploitation of workers in sweatshops, by employers who were thought to have unfair bargaining power over them. Over time, minimum wages came to be seen as a way to help lower-income families. Modern national laws enforcing compulsory union membership which prescribed minimum wages for their members were first passed in New Zealand and Australia in the 1890s.
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, and boosts morale. In contrast, opponents of the minimum wage say it increases poverty, increases unemployment because some low-wage workers "will be unable to find work... will be pushed into the ranks of the unemployed" and is damaging to businesses, because excessively high minimum wages require businesses to raise the prices of their product or service to accommodate the extra expense of paying a higher wage.
History
Modern minimum wage laws trace their origin to the Ordinance of Labourers, which was a decree by King Edward III that set a maximum wage for laborers in medieval England. 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. 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, increased the penalties for paying a wage above the set rates.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.
By the early 19th century, the Statutes of Labourers was repealed as increasingly capitalistic England embraced laissez-faire policies which disfavored regulations of wages. 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 to regulate people's wages and hours by the law.
It was not until the 1890s that the first modern legislative attempts to regulate minimum wages were seen in New Zealand and Australia. The movement for a minimum wage was initially focused on stopping sweatshop labor and controlling the proliferation of sweatshops in manufacturing industries. 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.
Minimum wage laws
The first modern national minimum wages were enacted by the government recognition of unions which in turn established minimum wage policy among their members, as in New Zealand in 1894, followed by Australia in 1896 and the United Kingdom in 1909. In the United States, statutory minimum wages were first introduced nationally in 1938, and they were reintroduced and expanded in the United Kingdom in 1998. There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries. In the European Union, 22 member states out of 28 currently have national minimum wages. 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.Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money—for example $7.25 per hour under certain US state laws, $11.00 in the US state of Washington, or £7.83 in the United Kingdom—but also in terms of which pay period or the scope of coverage. Currently the United States federal minimum wage is $7.25 per hour. However, some states do not recognize the minimum wage law, such as Louisiana and Tennessee. Other states operate below the federal minimum wage such as Georgia and Wyoming. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage levels. India was one of the first developing countries to introduce minimum wage policy in its law in 1948. However, it is rarely implemented, even by contractors of government agencies. In Mumbai, as of 2017, the minimum wage was Rs. 348/day.
India also has one of the most complicated systems with more than 1,200 minimum wage rates depending on the geographical region.
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 20th century.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. 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 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 considerations 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 have been set under the Fair Labor Standards Act of 1938. 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. To adjust for increased rates of worker productivity in the United States, raising the minimum wage to $22 an hour has been presented.
Economic models
Supply and demand model
According to the supply and demand model of the labor market shown in many economics textbooks, increasing the minimum wage decreases the employment of minimum-wage workers. One such textbook states:A firm's cost is an increasing function of the wage rate. The higher the wage rate, the fewer hours an employer will demand of employees. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers. The demand of labor curve is therefore shown as a line moving down and to the right. 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. If no minimum wage is in place, wages will adjust until quantity of labor demanded is equal to quantity supplied, reaching equilibrium, where the supply and demand curves intersect. Minimum wage behaves as a classical price floor on labor. Standard theory says that, if set above the equilibrium price, more labor will be willing to be provided by workers than will be demanded by employers, creating a surplus of labor, i.e. unemployment. The economic model of markets predicts the same of other commodities : Artificially raising the price of the commodity tends to cause an increase in quantity supplied and a decrease in quantity demanded. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government does not hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.
The supply and demand model implies that by mandating a price floor above the equilibrium wage, minimum wage laws will cause unemployment. 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.
Monopsony
The supply and demand model predicts that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired when companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the model can account for. One complicating factor is possible monopsony in the labor market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Though single employer market power is unlikely to exist in most labor markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the personal element of the labor transaction give some degree of wage-setting power to most firms.Modern economic theory predicts that although an excessive minimum wage may raise unemployment as it fixes a price above most demand for labor, a minimum wage at a more reasonable level can increase employment, and enhance growth and efficiency. This is because labor markets are monopsonistic and workers persistently lack bargaining power. When poorer workers have more to spend it stimulates effective aggregate demand for goods and services.
Criticisms of the supply and demand model
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, 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 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 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. countries as a share of average full-time wage, 2013.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... one sector with minimum-wage coverage and the other without it ," 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 have significantly more market power than do sellers. 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 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. 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. 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.
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."
Mathematical models of the minimum wage and frictional labor markets
The following mathematical models are more quantitative in orientation, and highlight some of the difficulties in determining the impact of the minimum wage on labor market outcomes. Specifically, these models focus on labor markets with frictions.Welfare and labor market participation
Assume that the decision to participate in the labor market results from a trade-off between being an unemployed job seeker and not participating at all. All individuals whose expected utility outside the labor market is less than the expected utility of an unemployed person decide to participate in the labor market. In the basic search and matching model, the expected utility of unemployed persons and that of employed persons are defined by:Let be the wage, the interest rate, the instantaneous income of unemployed persons, the exogenous job destruction rate, the labor market tightness, and the job finding rate. The profits and expected from a filled job and a vacant one are:where is the cost of a vacant job and is the productivity. When the free entry condition is satisfied, these two equalities yield the following relationship between the wage and labor market tightness :
If represents a minimum wage that applies to all workers, this equation completely determines the equilibrium value of the labor market tightness. There are two conditions associated with the matching function:This implies that is a decreasing function of the minimum wage, and so is the job finding rate. A hike in the minimum wage degrades the profitability of a job, so firms post fewer vacancies and the job finding rate falls off. Now let's rewrite to be:Using the relationship between the wage and labor market tightness to eliminate the wage from the last equation gives us:
If we maximize in this equation, with respect to the labor market tightness, we find that:where is the elasticity of the matching function:This result shows that the expected utility of unemployed workers is maximized when the minimum wage is set at a level that corresponds to the wage level of the decentralized economy in which the bargaining power parameter is equal to the elasticity. The level of the negotiated wage is.
If, then an increase in the minimum wage increases participation and the unemployment rate, with an ambiguous impact on employment. When the bargaining power of workers is less than, an increases in the minimum wage improves the welfare of the unemployed - this suggests that minimum wage hikes can improve labor market efficiency, at least up to the point when bargaining power equals. On the other hand, if, any increases in the minimum wage entails a decline in labor market participation and an increase in unemployment.
Job search effort
In the model just presented, we found that the minimum wage always increases unemployment. This result does not necessarily hold when the search effort of workers in endogenous.Consider a model where the intensity of the job search is designated by the scalar, which can be interpreted as the amount of time and/or intensity of the effort devoted to search. Assume that the arrival rate of job offers is and that the wage distribution is degenerated to a single wage. Denote to be the cost arising from the search effort, with. Then the discounted utilities are given by:Therefore, the optimal search effort is such that the marginal cost of performing the search is equation to the marginal return:This implies that the optimal search effort increases as the difference between the expected utility of the job holder and the expected utility of the job seeker grows. In fact, this difference actually grows with the wage. To see this, take the difference of the two discounted utilities to find:Then differentiating with respect to and rearranging gives us:where is the optimal search effort. This implies that a wage increase drives up job search effort and, therefore, the job finding rate. Additionally, the unemployment rate at equilibrium is given by:A hike in the wage, which increases the search effort and the job finding rate, decreases the unemployment rate. So it is possible that a hike in the minimum wage may, by boosting the search effort of job seekers, boost employment. Taken in sum with the previous section, the minimum wage in labor markets with frictions can improve employment and decrease the unemployment rate when it is sufficiently low. However, a high minimum wage is detrimental to employment and increases the unemployment rate.
Empirical studies
Economists disagree as to the measurable impact of minimum wages in practice. 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:
- 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
Brown et al. 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. 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, 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 updated Brown et al.'s research with data through 1986 to provide new estimates encompassing a period when the real 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 after the increase confirmed a strong economy with increased employment above previous years in Florida and better than in the US 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."
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. 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.
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."
The restaurant industry is commonly studied because of its high number of minimum wage workers. A 2018 study from the Center on Wage and Employment Dynamics at the University of California, Berkeley focusing on food services showed that minimum wage increases in Washington, Chicago, Seattle, San Francisco, Oakland, and San Jose gave workers higher pay without hampering job growth. A 2017 study of restaurants in the San Francisco Bay Area examined the period 2008-2016 and the effect that a minimum wage increase had on the probability of restaurants going out of business, and broke out results based on the restaurant's rating on the review site Yelp. The study found no effect for 5-star restaurants but those with increasingly lower ratings were increasingly likely to go out of business. It also noted that the Yelp star rating was correlated with likelihood of minority ownership and minority customer base. Importantly, it noted that restaurants below 4 star in rating were proportionally more likely to hire low-skilled workers. The minimum wage increases during this period did not prevent growth in the industry overall – the number of restaurants in San Francisco went from 3,600 in 2012 to 7,600 in 2016. An August 2019 study from The New School's Center for New York City Affairs and the think tank National Employment Law Project, which advocates for raising the minimum wage, found that the restaurant industry in New York City has been "thriving" following an increase in the minimum wage to $15 an hour.
A 2019 study in the Quarterly Journal of Economics found that minimum wage increases did not have an impact on the overall number of low-wage jobs in the five years subsequent to the wage increase. However, it did find disemployment in 'tradeable' sectors, defined as those sectors most reliant on entry level or low skilled labor.
In another study, which shared authors with the above, published in the American Economic Review found that a large and persistent increase in the minimum wage in Hungary produced some disemployment with the large majority of additional cost being passed on to consumers. The authors also found that firms began substituting capital for labor over time.
Card and Krueger
In 1992, the minimum wage in New Jersey increased from $4.25 to $5.05 per hour, while in the adjacent state of Pennsylvania it 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. A basic supply and demand model predicts 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 slightly 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.
Research subsequent to Card and Krueger's work
In 1996, David Neumark and William Wascher reexamined Card and Krueger's result using administrative payroll records from a sample of large fast food restaurant chains, and reported that minimum wage increases were followed by decreases in employment. An assessment of data collected and analyzed by Neumark and Wascher did not initially contradict the Card and Krueger results, 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. Neumark and Wascher's conclusions were subsequently rebutted in a 2000 paper by Card and Krueger. 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. A 2014 analysis based on panel data found that the minimum wage reduces employment among teenagers.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.
Further application of the methodology used by Card and Krueger by other researchers yielded results similar to their original findings, across additional data sets. A 2010 study by three economists, 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.
However, a 2011 study by Baskaya and Rubinstein of Brown University found that at the federal level, "a rise in minimum wage have 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." 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." 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.
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." This study by Meer and West was later critiqued for its trends of assumption in the context of narrowly defined low-wage groups. 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. A 2019 paper published in the Quarterly Journal of Economics by Cengiz, Dube, Lindner and Zipperer argues that the job losses found using a Meer and West type methodology "tend to be driven by an unrealistically large drop in the number of jobs at the upper tail of the wage distribution, which is unlikely to be a causal effect of the minimum wage." 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." 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".
A 2017 study found that in Seattle, increasing the minimum wage to $13 per hour lowered income of low-wage workers by $125 per month, due to the resulting reduction in hours worked, as industries made changes to make their businesses less labor intensive. The authors argue that previous research that found no negative effects on hours worked are flawed because they only look at select industries, or only look at teenagers, instead of entire economies.
Finally, a study by Overstreet in 2019 examined increases to the minimum wage in Arizona. Utilizing data spanning from 1976 to 2017, Overstreet found that a 1% increase in the minimum wage was significantly correlated with a 1.13% increase in per capita income in Arizona. This study could show that smaller increases in minimum wage may not distort labor market as significantly as larger increases experienced in other cities and states. Thus, the small increases experienced in Arizona may have actually led to a slight increase in economic growth.
In 2019, economists from Georgia Tech published a study that found a strong correlation between incresases to the minimum wage and detectable harm to the financial conditions of small businesses, including a higher rate of bankruptcy, lower hiring rates, lower credit scores, and higher interest payments. The researchers noted that these small businesses were also correlated with minority ownership and minority customer bases.
In July 2019, the Congressional Budget Office published the impact on proposed national $15/hour legislation. It noted that workers who retained full employment would see a modest improvement in take home pay offset by a small decrease in working conditions and non-pecuniary benefits. However, this benefit is offset by three primary factors; the reduction in hours worked, the reduction in total employment, and the increased cost of goods and services. Those factors result in a decrease of about $33 Billion in total income and nearly 1.7-3.7 million lost jobs in the first three years.
In response to an April 2016 Council of Economic Advisers report advocating the raising of the minimum wage to deter crime, economists used data from the 1998-2016 Uniform Crime Reports, National Incident-Based Reporting System, and National Longitudinal Study of Youth to assess the impact of the minimum wage on crime. They found that increasing the minimum wage resulted in increased property crime arrests among those ages 16-to-24. They estimated that an increase of the Federal minimum wage to $15/hour would "generate criminal externality costs of nearly $2.4 billion."
Economists in Denmark, relying on a discontinuity in wage rates when a worker turns 18, found that employment fell by 33% and total hours fell by 45% when the minimum wage law was in effect.
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. They point out that later studies, which had more data and lower standard errors, did not show the expected increase in t-statistic. Though a serious methodological indictment, opponents of the minimum wage largely ignored this issue; as Thomas 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 concluded 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 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." In 2013, a meta-analysis of 16 UK studies found no significant effects on employment attributable to the minimum wage. a 2007 meta-analyses by David Neumark of 96 studies found a consistent, but not always statistically significant, negative effect on employment from increases in the minimum wage.
Debate over consequences
Minimum wage laws affect workers in most low-paid fields of employment and have usually been judged against the criterion of reducing poverty. 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.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. 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 favor of minimum wage laws | Arguments against minimum wage laws |
Supporters of the minimum wage claim it has these effects:
| Opponents of the minimum wage claim it has these effects:
|
- 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 labor 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.
Although strongly opposed by both the business community and the Conservative Party when introduced in the UK in 1999, the Conservatives reversed their opposition in 2000. 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, 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. 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. 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. 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.
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. However, subsequently at least two of the business owners quoted did expand.
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.
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. 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”.
A 2019 study published in the American Journal of Preventive Medicine showed that in the United States, those states which have implemented a higher minimum wage saw a decline in the growth of suicide rates. The researchers say that for every one dollar increase, the annual suicide growth rate fell by 1.9%. The study covers all 50 states for the years 2006 to 2016.
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. By 1992 the survey found 79% of economists in agreement with that statement, and by 2000, 46% were in full agreement with the statement and 28% agreed with provisos. The authors of the 2000 study also reweighted data from a 1990 sample to show that at that time 62% of academic economists agreed with the statement above, while 20% agreed with provisos and 18% 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. Whaples found that 47% respondents wanted the minimum wage eliminated, 38% supported an increase, 14% wanted it kept at the current level, and 1% wanted it decreased. 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.
Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. 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, 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. 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.
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.
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 is a system of social security that periodically provides each citizen with a sum of money that is sufficient to live on frugally. Supporters of the basic-income idea argue 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, jobseekers could spend more time looking for a more appropriate or satisfying job, or they could wait until a higher-paying job appeared. Alternatively, they could spend more time increasing their skills, 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.Proponents argue that a basic income that is based on a broad tax base would be more economically efficient than a minimum wage, 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.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 US, 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.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 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.
The Adam Smith Institute prefers cutting taxes on the poor and middle class instead of raising wages as an alternative to the minimum wage.
Collective bargaining
Italy, Sweden, Norway, Finland, and Denmark are examples of developed nations where there is no minimum wage that is required by legislation. Such nations, particularly the Nordics, have very high union participation rates. Instead, minimum wage standards in different sectors are set by collective bargaining.Wage subsidies
Some economists such as Scott Sumner and Edmund Phelps advocate a wage subsidy program. A wage subsidy is a payment made by a government for work people do. It is based either on an hourly basis or by income earned. Advocates argue that the primary deficiencies of the EITC and the minimum wage are best avoided by a wage subsidy. However, the wage subsidy in the United States suffers from a lack of political support from either major political party.Education and training
Providing education or funding apprenticeships or technical training can provide a bridge for low skilled workers to move into wages above a minimum wage. For example, Germany has adopted a state funded apprenticeship program that combines on-the-job and classroom training. Having more skills makes workers more valuable and more productive, but having a high minimum wage for low-skill jobs reduces the incentive to seek education and training. Moving some workers to higher-paying jobs will decrease the supply of workers willing to accept low-skill jobs, increasing the market wage for those low skilled jobs. However, in that solution the wage will still not increase above the marginal return for the role and will likely promote automation or business closure.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 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. U.S. Senator Bernie Sanders introduced a bill in 2015 that would raise the minimum wage to $15, and in his 2016 campaign for president ran on a platform of increasing it. Although Sanders did not become the nominee, the Democratic National Committee adopted his $15 minimum wage push in their 2016 party platform.In late March 2016, Governor of California Jerry Brown reached a deal to raise the minimum wage to $15 by 2022 for big businesses and 2023 for smaller businesses.
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. One study concluded that "Employers are disinclined to hire workers because the US federal minimum wage is very high relative to the local average".
, unions were exempt from recent minimum wage increases in Chicago, Illinois, SeaTac, Washington, and Milwaukee County, Wisconsin, as well as the California cities of Los Angeles, San Francisco, Long Beach, San Jose, Richmond, and Oakland.
Scholars found in 2019 that, in America, "Between 1990 and 2015, raising the minimum wage by $1 in each state might have saved more than 27,000 lives, according to a report published this week in the Journal of Epidemiology & Community Health. An increase of $2 in each state's minimum wage could have prevented more than 57,000 suicides." The researchers stated, "The effect of a US$1 increase in the minimum wage ranged from a 3.4% decrease to a 5.9% decrease in the suicide rate among adults aged 18–64 years with a high school education or less. We detected significant effect modification by unemployment rate, with the largest effects of minimum wage on reducing suicides observed at higher unemployment levels." They concluded, "Minimum wage increases appear to reduce the suicide rate among those with a high school education or less, and may reduce disparities between socioeconomic groups. Effects appear greatest during periods of high unemployment."
Countries by minimum wage to average wage ratio
| Country | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 |
| Australia | 0.54 | 0.54 | 0.53 | 0.54 | 0.53 | 0.53 | 0.54 | 0.55 |
| Belgium | 0.5 | 0.51 | 0.51 | 0.51 | 0.49 | 0.49 | 0.49 | 0.47 |
| Canada | 0.44 | 0.45 | 0.45 | 0.44 | 0.45 | 0.45 | 0.46 | 0.46 |
| Chile | 0.71 | 0.67 | 0.67 | 0.67 | 0.68 | 0.66 | 0.69 | 0.71 |
| Czech Republic | 0.38 | 0.37 | 0.36 | 0.37 | 0.37 | 0.39 | 0.4 | 0.41 |
| Estonia | 0.4 | 0.39 | 0.38 | 0.4 | 0.4 | 0.41 | 0.41 | 0.41 |
| France | 0.62 | 0.62 | 0.63 | 0.63 | 0.63 | 0.62 | 0.62 | 0.62 |
| Greece | 0.48 | 0.52 | 0.44 | 0.46 | 0.47 | 0.48 | 0.48 | 0.48 |
| Hungary | 0.47 | 0.49 | 0.54 | 0.54 | 0.54 | 0.53 | 0.51 | 0.53 |
| Ireland | 0.44 | 0.43 | 0.43 | 0.43 | 0.45 | 0.43 | 0.46 | 0.46 |
| Israel | 0.56 | 0.56 | 0.56 | 0.57 | 0.55 | 0.57 | 0.58 | 0.59 |
| Japan | 0.37 | 0.38 | 0.38 | 0.39 | 0.39 | 0.4 | 0.4 | 0.42 |
| Korea | 0.45 | 0.45 | 0.43 | 0.44 | 0.46 | 0.49 | 0.5 | 0.53 |
| Luxembourg | 0.56 | 0.56 | 0.56 | 0.56 | 0.56 | 0.55 | 0.54 | 0.53 |
| Mexico | 0.35 | 0.36 | 0.36 | 0.37 | 0.37 | 0.37 | 0.37 | 0.4 |
| Netherlands | 0.47 | 0.47 | 0.47 | 0.47 | 0.46 | 0.46 | 0.47 | 0.47 |
| New Zealand | 0.59 | 0.59 | 0.59 | 0.59 | 0.6 | 0.6 | 0.61 | 0.6 |
| Poland | 0.45 | 0.45 | 0.48 | 0.5 | 0.51 | 0.51 | 0.53 | 0.54 |
| Portugal | 0.53 | 0.53 | 0.52 | 0.52 | 0.55 | 0.56 | 0.59 | 0.61 |
| Slovakia | 0.46 | 0.46 | 0.45 | 0.46 | 0.45 | 0.47 | 0.48 | 0.48 |
| Slovenia | 0.59 | 0.61 | 0.62 | 0.64 | 0.6 | 0.6 | 0.59 | 0.58 |
| Spain | 0.38 | 0.38 | 0.38 | 0.38 | 0.37 | 0.37 | 0.37 | 0.4 |
| Turkey | 0.7 | 0.71 | 0.73 | 0.72 | 0.69 | 0.7 | 0.74 | 0.74 |
| United Kingdom | 0.46 | 0.47 | 0.47 | 0.47 | 0.48 | 0.49 | 0.49 | 0.54 |
| United States | 0.39 | 0.38 | 0.38 | 0.37 | 0.37 | 0.36 | 0.35 | 0.34 |
| Latvia | 0.49 | 0.51 | 0.49 | 0.47 | 0.49 | 0.52 | 0.51 | 0.48 |
| Lithuania | 0.5 | 0.48 | 0.48 | 0.55 | 0.51 | 0.5 | 0.56 | 0.54 |
| Romania | 0.43 | 0.45 | 0.45 | 0.48 | 0.51 | 0.55 | 0.56 | 0.6 |