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.[1]
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 (with only one employer available who is hiring), minimum wages can increase the efficiency of the market. There is debate about the full effects of minimum wages.[2][3][4]
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.[5] In contrast, opponents of the minimum wage say it increases poverty, increases unemployment because some low-wage workers "will be unable to find work...[and] will be pushed into the ranks of the unemployed"[6][7][8] 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
Modern minimum wage laws trace their origin to the Ordinance of Labourers (1349), which was a decree by King Edward III that set a maximum wage for laborers in medieval England.[10][11] 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.[12] The severe shortage of labor caused wages to soar and encouraged King Edward III to set a wage ceiling. Subsequent amendments to the ordinance, such as the Statute of Labourers (1351), increased the penalties for paying a wage above the set rates.[10]
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.[10]
By the early 19th century, the Statutes of Labourers was repealed as increasingly capitalistic England embraced laissez-faire policies which disfavored regulations of wages (whether upper or lower limits).[10] The subsequent 19th century saw significant labor unrest affect many industrial nations. As trade unions were decriminalized during the century, attempts to control wages through collective agreement were made. However, this meant that a uniform minimum wage was not possible. In Principles of Political Economy in 1848, John Stuart Mill argued that because of the collective action problems that workers faced in organisation, it was a justified departure from laissez-faire policies (or freedom of contract) to regulate people's wages and hours by the law.
It was not until the 1890s that the first modern legislative attempts to regulate minimum wages were seen in New Zealand and Australia.[13] The movement for a minimum wage was initially focused on stopping sweatshop labor and controlling the proliferation of sweatshops in manufacturing industries.[14] 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.[15]
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.[13] In the United States, statutory minimum wages were first introduced nationally in 1938,[17] and they were reintroduced and expanded in the United Kingdom in 1998.[18] There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries.[19][1] In the European Union, 22 member states out of 28 currently have national minimum wages.[20] 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.[21][22]
Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money—for example $7.25 per hour ($14,500 per year) under certain US state laws (or $2.13 for employees who receive tips, which is known as the tipped minimum wage), $11.00 in the US state of Washington,[23] or £7.83 (for those aged 25+) in the United Kingdom[24]—but also in terms of which pay period (for example Russia and China set monthly minimum wages) or the scope of coverage. Currently the United States federal minimum wage is $7.25 per hour. However, some states do not recognize the minimum wage law, such as Louisiana and Tennessee.[25] 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.[26] India also has one of the most complicated systems with more than 1,200 minimum wage rates depending on the geographical region.[27]
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.[28]
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.[29] Among these are general economic conditions as measured by real and nominal gross domestic product; inflation; labor supply and demand; wage levels, distribution and differentials; employment terms; productivity growth; labor costs; business operating costs; the number and trend of bankruptcies; economic freedom rankings; standards of living and the prevailing average wage rate.
In the business sector, concerns include the expected increased cost of doing business, threats to profitability, rising levels of unemployment (and subsequent higher government expenditure on welfare benefits raising tax rates), and the possible knock-on effects to the wages of more experienced workers who might already be earning the new statutory minimum wage, or slightly more.[30] Among workers and their representatives, political considerations weigh in as labor leaders seek to win support by demanding the highest possible rate.[31] 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.[32] To adjust for increased rates of worker productivity in the United States, raising the minimum wage to $22 (or more) an hour has been presented.[33][34][35][36]
Economic models
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.[8] One such textbook states:[4]
If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. … the direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Others, particularly those with the lowest prelegislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed.
A firm's cost is an increasing function of the wage rate. The higher the wage rate, the fewer hours an employer will demand of employees. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the right.[37] 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.[37] 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.[37] The economic model of markets predicts the same of other commodities (like milk and wheat, for example): Artificially raising the price of the commodity tends to cause an increase in quantity supplied and a decrease in quantity demanded. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government does not hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.[28]
The supply and demand model implies that by mandating a price floor above the equilibrium wage, minimum wage laws will cause unemployment.[38][39] 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.[40]
Monopsony
The supply and demand model predicts that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) when companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the model can account for. One complicating factor is possible monopsony in the labor market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Though single employer market power is unlikely to exist in most labor markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the personal element of the labor transaction give some degree of wage-setting power to most firms.[41]
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.[42][43]
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 (for example Pierangelo Garegnani,[44] Robert L. Vienneau,[45] and Arrigo Opocher & Ian Steedman[46]), 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[47] 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[48] argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an "intellectually coherent" argument in economic theory.
Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues that the standard textbook model for the minimum wage is ambiguous, and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage... [and with] one sector with minimum-wage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on."[50]
An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, search costs, information costs, imperfect mobility and the personal element of labor markets.[citation needed] In such a case a simple supply and demand graph would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the upward labor supply curve shown in a supply and demand diagram, monopsonistic employers would use a steeper upward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation.
Such a case is a type of market failure and results in workers being paid less than their marginal value. Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal product of labor.[51] This view emphasizes the role of minimum wages as a market regulation policy akin to antitrust policies, as opposed to an illusory "free lunch" for low-wage workers.
Another reason minimum wage may not affect employment in certain industries is that the demand for the product the employees produce is highly inelastic.[52] For example, if management is forced to increase wages, management can pass on the increase in wage to consumers in the form of higher prices. Since demand for the product is highly inelastic, consumers continue to buy the product at the higher price and so the manager is not forced to lay off workers. Economist Paul Krugman argues this explanation neglects to explain why the firm was not charging this higher price absent the minimum wage.[53]
Three other possible reasons minimum wages do not affect employment were suggested by Alan Blinder: higher wages may reduce turnover, and hence training costs; raising the minimum wage may "render moot" the potential problem of recruiting workers at a higher wage than current workers; and minimum wage workers might represent such a small proportion of a business's cost that the increase is too small to matter. He admits that he does not know if these are correct, but argues that "the list demonstrates that one can accept the new empirical findings and still be a card-carrying economist
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 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.[72] 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.[72]
Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage.[73] 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.[74]
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,[76] 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.[77][78] Neumark and Wascher's conclusions were subsequently rebutted in a 2000 paper by Card and Krueger.[79] 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.[80] A 2014 analysis based on panel data found that the minimum wage reduces employment among teenagers.[81]
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.[82]
Further application of the methodology used by Card and Krueger by other researchers yielded results similar to their original findings, across additional data sets.[83] A 2010 study by three economists (Arindrajit Dube of the University of Massachusetts Amherst, William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley), compared adjacent counties in different states where the minimum wage had been raised in one of the states. They analyzed employment trends for several categories of low-wage workers from 1990 to 2006 and found that increases in minimum wages had no negative effects on low-wage employment and successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants.[83][84]
However, a 2011 study by Baskaya and Rubinstein of Brown University found that at the federal level, "a rise in minimum wage have [sic] an instantaneous impact on wage rates and a corresponding negative impact on employment", stating, "Minimum wage increases boost teenage wage rates and reduce teenage employment."[85] 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."[86] 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.[87]
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."[88] This study by Meer and West was later critiqued for its trends of assumption in the context of narrowly defined low-wage groups.[89] 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.[90][91] 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."[92] 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."[93] 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".[94][95]
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.[96]
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.[97]
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. [98]
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 (the CBO also noted this figure increases over time). [99]
In response to an April 2016 Council of Economic Advisers (CEA) report advocating the raising of the minimum wage to deter crime, economists used data from the 1998-2016 Uniform Crime Reports (UCR), National Incident-Based Reporting System (NIBRS), and National Longitudinal Study of Youth (NLSY) 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." [100]
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. [101]
Statistical meta-analyses
Several researchers have conducted statistical meta-analyses of the employment effects of the minimum wage. In 1995, Card and Krueger analyzed 14 earlier time-series studies on minimum wages and concluded that there was clear evidence of publication bias (in favor of studies that found a statistically significant negative employment effect). They point out that later studies, which had more data and lower standard errors, did not show the expected increase in t-statistic (almost all the studies had a t-statistic of about two, just above the level of statistical significance at the .05 level).[102] Though a serious methodological indictment, opponents of the minimum wage largely ignored this issue; as Thomas Leonard noted, "The silence is fairly deafening."[103]
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.[104] 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."[105] In 2013, a meta-analysis of 16 UK studies found no significant effects on employment attributable to the minimum wage.[106] 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.[107]
Debate over consequences
Minimum wage laws affect workers in most low-paid fields of employment[15] and have usually been judged against the criterion of reducing poverty.[108] 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.[15]
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.[109][110] 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.[28]
The following table summarizes the arguments made by those for and against minimum wage laws
A widely circulated argument that the minimum wage was ineffective at reducing poverty was provided by George Stigler in 1949:
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.[108]
In 2006, the International Labour Organization (ILO) argued that the minimum wage could not be directly linked to unemployment in countries that have suffered job losses.[1] In April 2010, the Organisation for Economic Co-operation and Development (OECD) released a report arguing that countries could alleviate teen unemployment by "lowering the cost of employing low-skilled youth" through a sub-minimum training wage.[145] 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.[146] The study showed a correlation, but did not claim to prove causation.
Although strongly opposed by both the business community and the Conservative Party when introduced in the UK in 1999, the Conservatives reversed their opposition in 2000.[147] 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,[148] while the Low Pay Commission found that employers had reduced their rate of hiring and employee hours employed, and found ways to cause current workers to be more productive (especially service companies).[149] 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.[150] 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.[120][151][152] 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.[120][153][154][155][156][157][158]
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.[159] However, subsequently at least two of the business owners quoted did expand.[160][161]
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.[162]
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.[163] 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”.[164]
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.[165]
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.[166] By 1992 the survey found 79% of economists in agreement with that statement,[167] and by 2000, 46% were in full agreement with the statement and 28% agreed with provisos (74% total).[168][169] 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.[170]
A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association (AEA). 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.[171] 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.[172]
Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents were nearly evenly divided when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution.[173] 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."[174]
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.[174]
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.[175]
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 (or negative income tax - NIT) 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 (via education and training), 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[which?] was running.[176][need quotation to verify]
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.[citation needed]
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.[177]
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 (for example, teenagers still living with their parents).[178]
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.[179] The federal EITC program has been expanded by a number of presidents including Jimmy Carter, Ronald Reagan, George H.W. Bush, and Bill Clinton.[180] 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."[181] 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.[182]
The Adam Smith Institute prefers cutting taxes on the poor and middle class instead of raising wages as an alternative to the minimum wage.[183]
Collective bargaining
Italy, Sweden, Norway, Finland, and Denmark are examples of developed nations where there is no minimum wage that is required by legislation.[20][22] Such nations, particularly the Nordics, have very high union participation rates.[184] Instead, minimum wage standards in different sectors are set by collective bargaining.[185]
Wage subsidies
Some economists such as Scott Sumner[186] and Edmund Phelps[187] 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.[188][189] However, the wage subsidy in the United States suffers from a lack of political support from either major political party.[190][191]
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.[192] 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.[193] 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 (assuming a stable labor market). 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.
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 (with only one employer available who is hiring), minimum wages can increase the efficiency of the market. There is debate about the full effects of minimum wages.[2][3][4]
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.[5] In contrast, opponents of the minimum wage say it increases poverty, increases unemployment because some low-wage workers "will be unable to find work...[and] will be pushed into the ranks of the unemployed"[6][7][8] 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
Modern minimum wage laws trace their origin to the Ordinance of Labourers (1349), which was a decree by King Edward III that set a maximum wage for laborers in medieval England.[10][11] 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.[12] The severe shortage of labor caused wages to soar and encouraged King Edward III to set a wage ceiling. Subsequent amendments to the ordinance, such as the Statute of Labourers (1351), increased the penalties for paying a wage above the set rates.[10]
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.[10]
By the early 19th century, the Statutes of Labourers was repealed as increasingly capitalistic England embraced laissez-faire policies which disfavored regulations of wages (whether upper or lower limits).[10] The subsequent 19th century saw significant labor unrest affect many industrial nations. As trade unions were decriminalized during the century, attempts to control wages through collective agreement were made. However, this meant that a uniform minimum wage was not possible. In Principles of Political Economy in 1848, John Stuart Mill argued that because of the collective action problems that workers faced in organisation, it was a justified departure from laissez-faire policies (or freedom of contract) to regulate people's wages and hours by the law.
It was not until the 1890s that the first modern legislative attempts to regulate minimum wages were seen in New Zealand and Australia.[13] The movement for a minimum wage was initially focused on stopping sweatshop labor and controlling the proliferation of sweatshops in manufacturing industries.[14] 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.[15]
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.[13] In the United States, statutory minimum wages were first introduced nationally in 1938,[17] and they were reintroduced and expanded in the United Kingdom in 1998.[18] There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries.[19][1] In the European Union, 22 member states out of 28 currently have national minimum wages.[20] 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.[21][22]
Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money—for example $7.25 per hour ($14,500 per year) under certain US state laws (or $2.13 for employees who receive tips, which is known as the tipped minimum wage), $11.00 in the US state of Washington,[23] or £7.83 (for those aged 25+) in the United Kingdom[24]—but also in terms of which pay period (for example Russia and China set monthly minimum wages) or the scope of coverage. Currently the United States federal minimum wage is $7.25 per hour. However, some states do not recognize the minimum wage law, such as Louisiana and Tennessee.[25] 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.[26] India also has one of the most complicated systems with more than 1,200 minimum wage rates depending on the geographical region.[27]
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.[28]
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.[29] Among these are general economic conditions as measured by real and nominal gross domestic product; inflation; labor supply and demand; wage levels, distribution and differentials; employment terms; productivity growth; labor costs; business operating costs; the number and trend of bankruptcies; economic freedom rankings; standards of living and the prevailing average wage rate.
In the business sector, concerns include the expected increased cost of doing business, threats to profitability, rising levels of unemployment (and subsequent higher government expenditure on welfare benefits raising tax rates), and the possible knock-on effects to the wages of more experienced workers who might already be earning the new statutory minimum wage, or slightly more.[30] Among workers and their representatives, political considerations weigh in as labor leaders seek to win support by demanding the highest possible rate.[31] 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.[32] To adjust for increased rates of worker productivity in the United States, raising the minimum wage to $22 (or more) an hour has been presented.[33][34][35][36]
Economic models
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.[8] One such textbook states:[4]
If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. … the direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Others, particularly those with the lowest prelegislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed.
A firm's cost is an increasing function of the wage rate. The higher the wage rate, the fewer hours an employer will demand of employees. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the right.[37] 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.[37] 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.[37] The economic model of markets predicts the same of other commodities (like milk and wheat, for example): Artificially raising the price of the commodity tends to cause an increase in quantity supplied and a decrease in quantity demanded. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government does not hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.[28]
The supply and demand model implies that by mandating a price floor above the equilibrium wage, minimum wage laws will cause unemployment.[38][39] 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.[40]
Monopsony
The supply and demand model predicts that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) when companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the model can account for. One complicating factor is possible monopsony in the labor market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Though single employer market power is unlikely to exist in most labor markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the personal element of the labor transaction give some degree of wage-setting power to most firms.[41]
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.[42][43]
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 (for example Pierangelo Garegnani,[44] Robert L. Vienneau,[45] and Arrigo Opocher & Ian Steedman[46]), 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[47] 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[48] argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an "intellectually coherent" argument in economic theory.
Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues that the standard textbook model for the minimum wage is ambiguous, and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage... [and with] one sector with minimum-wage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on."[50]
An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, search costs, information costs, imperfect mobility and the personal element of labor markets.[citation needed] In such a case a simple supply and demand graph would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the upward labor supply curve shown in a supply and demand diagram, monopsonistic employers would use a steeper upward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation.
Such a case is a type of market failure and results in workers being paid less than their marginal value. Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal product of labor.[51] This view emphasizes the role of minimum wages as a market regulation policy akin to antitrust policies, as opposed to an illusory "free lunch" for low-wage workers.
Another reason minimum wage may not affect employment in certain industries is that the demand for the product the employees produce is highly inelastic.[52] For example, if management is forced to increase wages, management can pass on the increase in wage to consumers in the form of higher prices. Since demand for the product is highly inelastic, consumers continue to buy the product at the higher price and so the manager is not forced to lay off workers. Economist Paul Krugman argues this explanation neglects to explain why the firm was not charging this higher price absent the minimum wage.[53]
Three other possible reasons minimum wages do not affect employment were suggested by Alan Blinder: higher wages may reduce turnover, and hence training costs; raising the minimum wage may "render moot" the potential problem of recruiting workers at a higher wage than current workers; and minimum wage workers might represent such a small proportion of a business's cost that the increase is too small to matter. He admits that he does not know if these are correct, but argues that "the list demonstrates that one can accept the new empirical findings and still be a card-carrying economist
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 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.[72] 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.[72]
Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage.[73] 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.[74]
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,[76] 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.[77][78] Neumark and Wascher's conclusions were subsequently rebutted in a 2000 paper by Card and Krueger.[79] 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.[80] A 2014 analysis based on panel data found that the minimum wage reduces employment among teenagers.[81]
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.[82]
Further application of the methodology used by Card and Krueger by other researchers yielded results similar to their original findings, across additional data sets.[83] A 2010 study by three economists (Arindrajit Dube of the University of Massachusetts Amherst, William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley), compared adjacent counties in different states where the minimum wage had been raised in one of the states. They analyzed employment trends for several categories of low-wage workers from 1990 to 2006 and found that increases in minimum wages had no negative effects on low-wage employment and successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants.[83][84]
However, a 2011 study by Baskaya and Rubinstein of Brown University found that at the federal level, "a rise in minimum wage have [sic] an instantaneous impact on wage rates and a corresponding negative impact on employment", stating, "Minimum wage increases boost teenage wage rates and reduce teenage employment."[85] 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."[86] 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.[87]
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."[88] This study by Meer and West was later critiqued for its trends of assumption in the context of narrowly defined low-wage groups.[89] 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.[90][91] 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."[92] 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."[93] 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".[94][95]
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.[96]
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.[97]
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. [98]
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 (the CBO also noted this figure increases over time). [99]
In response to an April 2016 Council of Economic Advisers (CEA) report advocating the raising of the minimum wage to deter crime, economists used data from the 1998-2016 Uniform Crime Reports (UCR), National Incident-Based Reporting System (NIBRS), and National Longitudinal Study of Youth (NLSY) 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." [100]
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. [101]
Statistical meta-analyses
Several researchers have conducted statistical meta-analyses of the employment effects of the minimum wage. In 1995, Card and Krueger analyzed 14 earlier time-series studies on minimum wages and concluded that there was clear evidence of publication bias (in favor of studies that found a statistically significant negative employment effect). They point out that later studies, which had more data and lower standard errors, did not show the expected increase in t-statistic (almost all the studies had a t-statistic of about two, just above the level of statistical significance at the .05 level).[102] Though a serious methodological indictment, opponents of the minimum wage largely ignored this issue; as Thomas Leonard noted, "The silence is fairly deafening."[103]
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.[104] 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."[105] In 2013, a meta-analysis of 16 UK studies found no significant effects on employment attributable to the minimum wage.[106] 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.[107]
Debate over consequences
Minimum wage laws affect workers in most low-paid fields of employment[15] and have usually been judged against the criterion of reducing poverty.[108] 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.[15]
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.[109][110] 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.[28]
The following table summarizes the arguments made by those for and against minimum wage laws
A widely circulated argument that the minimum wage was ineffective at reducing poverty was provided by George Stigler in 1949:
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.[108]
In 2006, the International Labour Organization (ILO) argued that the minimum wage could not be directly linked to unemployment in countries that have suffered job losses.[1] In April 2010, the Organisation for Economic Co-operation and Development (OECD) released a report arguing that countries could alleviate teen unemployment by "lowering the cost of employing low-skilled youth" through a sub-minimum training wage.[145] 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.[146] The study showed a correlation, but did not claim to prove causation.
Although strongly opposed by both the business community and the Conservative Party when introduced in the UK in 1999, the Conservatives reversed their opposition in 2000.[147] 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,[148] while the Low Pay Commission found that employers had reduced their rate of hiring and employee hours employed, and found ways to cause current workers to be more productive (especially service companies).[149] 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.[150] 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.[120][151][152] 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.[120][153][154][155][156][157][158]
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.[159] However, subsequently at least two of the business owners quoted did expand.[160][161]
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.[162]
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.[163] 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”.[164]
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.[165]
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.[166] By 1992 the survey found 79% of economists in agreement with that statement,[167] and by 2000, 46% were in full agreement with the statement and 28% agreed with provisos (74% total).[168][169] 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.[170]
A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association (AEA). 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.[171] 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.[172]
Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents were nearly evenly divided when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution.[173] 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."[174]
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.[174]
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.[175]
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 (or negative income tax - NIT) 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 (via education and training), 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[which?] was running.[176][need quotation to verify]
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.[citation needed]
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.[177]
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 (for example, teenagers still living with their parents).[178]
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.[179] The federal EITC program has been expanded by a number of presidents including Jimmy Carter, Ronald Reagan, George H.W. Bush, and Bill Clinton.[180] 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."[181] 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.[182]
The Adam Smith Institute prefers cutting taxes on the poor and middle class instead of raising wages as an alternative to the minimum wage.[183]
Collective bargaining
Italy, Sweden, Norway, Finland, and Denmark are examples of developed nations where there is no minimum wage that is required by legislation.[20][22] Such nations, particularly the Nordics, have very high union participation rates.[184] Instead, minimum wage standards in different sectors are set by collective bargaining.[185]
Wage subsidies
Some economists such as Scott Sumner[186] and Edmund Phelps[187] 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.[188][189] However, the wage subsidy in the United States suffers from a lack of political support from either major political party.[190][191]
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.[192] 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.[193] 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 (assuming a stable labor market). 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.
