MINIMUM WAGE

Minimum Wage

Minimum Wage

Introduction

Minimum wage is A government intervention in the labour market that does not allow employers to pay a wage below a set minimum. This applies even if both the employer and employee want to agree to a wage below the legal minimum. The idea behind such legislation is to help low-skilled workers to achieve some minimum standard of living. In the United States, the federal government sets a national minimum wage, at $5.15 in 2005. However, individual states are free to set higher minimum wages (Kosters, 2006).

Some cities, such as Boston, Massachusetts, and Ann Arbor, Michigan, have established living-wage laws whereby wages are generally significantly higher than the national minimum wage. The prevailing view in economic theory is that minimum wages lead to fewer jobs for low-skilled workers. However, some economists argue that a minimum wage could lead to increased employment if employers possessed significant power in the labour market. Consistent empirical support in either direction has proven elusive. The minimum wage could also have significant effects on the education decisions of teenagers. There is also a question of whether this legislation truly targets the working poor or simply serves as a wealth transfer to teenagers from middle-income households.

Arguments Against the Minimum Wage

Economists are divided on the impact of a minimum wage on labour markets and the economy. Neoclassical economists oppose establishing minimum wage rates and, by extension, any increases to them. They report that artificially raising wages above the law of supply and demand hurts those it is intended to benefit by increasing unemployment, contributing to inflation, and discouraging business investment and growth. The extra labour costs force employers to hire fewer low-skilled employees and/or increase their prices. Some employers offset minimum wage increases by reducing other employee benefits. Minimum wage increases attract middle-class teenagers into the labour market, which creates more competition for low-skilled adults seeking employment.

In response, economists supportive of minimum wage increases report that higher hourly wages have little or no effect on unemployment rates and actually stimulate economic growth by increasing the purchasing power of low-income employees. At the same time, recipients of higher minimum wages reduce their dependence on financial assistance from the government.

Early History of the Minimum Wage

For most of recorded history, minimum wage laws did not exist. In Wealth of Nations, published in 1776, the Scottish philosopher and economist Adam Smith observed that employers naturally formed coalitions among themselves to offer low wages. Given the overabundance of low-skilled labourers, they possessed a superior bargaining position. Some employers paid below subsistence wages, an income level insufficient for an employee to purchase food and shelter. In 1845, Irish peasants working full time died of starvation because they did not earn enough money to purchase home-grown oats and grains stored on nearby British ships.

During the late 1800s, the idea of establishing a minimum living wage gained a wide spectrum of support among labour unions, socialists, and leaders of both the Catholic and Protestant social ...