A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say that it increases the standard of living of workers and reduces poverty. Opponents say that if it is high enough to be effective, it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming lesser skilled workers to the benefit of better skilled workers.
Minimum wages were first proposed as a way to control the proliferation of sweat shops in manufacturing industries. The sweat shops employed large numbers of women and young workers, paying them what were considered to be substandard wages. The sweatshop owners were thought to have unfair bargaining power over their workers, and a minimum wage was proposed as a means to make them pay "fairly." Over time, the focus changed to helping people, especially families, become more self sufficient. Today, minimum wage laws cover workers in most low-paid fields of employment.
The minimum wage has a strong social appeal, rooted in concern about the ability of markets to provide income equity for the least able members of the work force. An obvious solution to this concern is to redefine the wage structure politically to achieve a socially preferable distribution of income. Thus, minimum wage laws have usually been judged against the criterion of reducing poverty.
Although the goals of the minimum wage are widely accepted as proper, there is great disagreement as to whether the minimum wage is effective in attaining its goals. From the time of their introduction, minimum wage laws have been highly controversial politically, and have received much less support from economists than from the general public. Despite decades of experience and economic research, debates about the costs and benefits of minimum wages continue even today.
The classic exposition of the minimum wage's shortcomings in reducing poverty was provided by George Stigler in 1946:
Direct empirical studies indicate that anti-poverty effects in the U.S. would be quite modest, even if there were no unemployment effects. Very few low-wage workers come from families in poverty. Those primarily affected by minimum wage laws are teenagers and low-skilled adult females who work part time, and any wage rate effects on their income is strictly proportional to the hours of work they are offered. So, if market outcomes for low-skilled families are to be supplemented in a socially satisfactory way, factors other than wage rates must also be considered. Employment opportunities and the factors that limit labor market participation must be considered as well. Economist Thomas Sowell has also argued that regardless of custom or law, the real minimum wage is always zero, and zero is what some people would receive if they fail to find jobs when they try to enter the workforce, or they lose the jobs they already have.
Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money (e.g. US$7.25 per hour under U.S. Federal law, $8.55 in the U.S. state of Washington, and £5.80 (for those aged 22+) in the United Kingdom), but also in terms of which pay period (e.g. Russia and China set monthly minimums) or the scope of coverage. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage level. (See also: list of minimum wages by country)
Sometimes a minimum wage exists without a law. Custom and extra-legal pressures from governments or labor unions can produce a de facto minimum wage. So can international public opinion, by pressuring multinational companies to pay Third World workers wages usually found in more industrialized countries. The latter situation in Southeast Asia and Latin America has been publicized in recent years, but it existed with companies in West Africa in the middle of the twentieth century.
An analysis of supply and demand of the type shown in introductory mainstream economics textbooks implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment. This is because a greater number of workers are willing to work at the higher wage while a smaller numbers of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and inexperienced will typically be excluded.
According to the model shown in nearly all introductory textbooks on economics, increasing the minimum wage decreases the employment of minimum-wage workers. One such textbook says:
"If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. ... The direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Other, particularly those with the lowest prelegislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed or out of the labor force."
It illustrates the point with a supply and demand diagram similar to the one below.
It is assumed that workers are willing to labor for more hours if paid a higher wage. Economists graph this relationship with the wage on the vertical axis and the quantity (hours) of labor supplied on the horizontal axis. Since higher wages increase the quantity supplied, the supply of labor curve is upward sloping, and is shown as a line moving up and to the right.
A firm's cost is a function of the wage rate. It is assumed that the higher the wage, the fewer hours an employer will demand of an employee. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the right.
Combining the demand and supply curves for labor allows us to examine the effect of the minimum wage. We will start by assuming that the supply and demand curves for labor will not change as a result of raising the minimum wage. This assumption has been questioned. If no minimum wage is in place, workers and employers will continue to adjust the quantity of labor supplied according to price until the quantity of labor demanded is equal to the quantity of labor supplied, reaching equilibrium price, 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.
In other words, the simplest and most basic economics says this about commodities like labor (and wheat, for example): Artificially raising the price of the commodity tends to cause the supply of it to increase and the demand for it to lessen. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government doesn't hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.
So the basic theory says that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) because companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the basic theory can account for.
One complicating factor is possible monopsony 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.
The argument that minimum wages decrease employment is based on a simple supply and demand model of the labor market. A number of economists (for example Pierangelo Garegnani, Robert L. Vienneau, and Arrigo Opocher & Ian Steedman), building on the work of Piero Sraffa, argue that that model, even given all its assumptions, is logically incoherent. Michael Anyadike-Danes and Wyne Godley  argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model. Graham White  argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an "intellectually coherent" argument in economic theory.
Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues that the standard "textbook model" for the minimum wage is "ambiguous", and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage… [and with] one sector with minimum-wage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on."
An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, information costs, imperfect mobility and the 'personal' element of labor markets. In such a case the diagram above would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the downward labor demand curve shown in the diagram above, monopsonistic employers would use a steeper downward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation.
Such a case is a type of market failure 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 productivity 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.
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."
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' jobs are protected by minimum wage laws. On the other side of the issue, low-wage employers such as restaurants finance the Employment Policies Institute, which has released numerous studies opposing the minimum wage. The presence of these powerful groups and factors means that the debate on the issue is not always based on dispassionate analysis. Additionally, it is extraordinarily difficult to separate the effects of minimum wage from all the other variables that affect employment.
The following table summarizes the arguments made by those for and against minimum wage laws:
Supporters of the minimum wage claim it has these effects:
Opponents of the minimum wage claim it has these effects:
Today, the International Labour Organization (ILO) and the OECD do not consider that the minimum wage can be directly linked to unemployment in countries which have suffered job losses. A study of U.S. states showed that businesses' annual and average payrolls grow faster and employment grew at a faster rate in states with a minimum wage. The study showed a correlation, but did not claim to prove causation.
Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000. A review of its effects found no discernible impact on employment levels.
Since the introduction of a national minimum wage in the UK in 1999, its effects on employment were subject to extensive research and observation by the Low Pay Commission. The Low Pay Commission found that, rather than make employees redundant, employers have reduced their rate of hiring, reduced staff hours, increased prices, and have found ways to cause current workers to be more productive (especially service companies). Neither trade unions nor employer organizations contest the minimum wage, although the latter had especially done so heavily until 1999.
Economists disagree as to the measurable impact of minimum wages in the 'real world'. This disagreement usually takes the form of competing empirical tests of the elasticities of demand and supply 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 numerous aspects of the minimum wage, prominently including:
Until the mid-1990s, a strong consensus existed among economists, both conservative and liberal, that the minimum wage reduced employment, especially among younger and low-skill workers. In addition to the basic supply-demand intuition, there were a number of empirical studies that supported this view. For example, Gramlich (1976) found that many of the benefits went to higher income families, and in particular that teenagers were made worse off by the unemployment associated with the minimum wage.
Brown et al. (1983) note that time series studies to that point had found that for a 10 percent increase in the minimum wage, there was a decrease in teenage employment of 1-3 percent. However, for the effect on the teenage unemployment rate, the studies exhibited wider variation in their estimates, from zero to over 3 percent. In contrast to the simple supply/demand figure above, it was commonly found that teenagers withdrew from the labor force in response to the minimum wage, which produced the possibility of equal reductions in the supply as well as the demand for labor at a higher minimum wage and hence no impact on the unemployment rate. Using a variety of specifications of the employment and unemployment equations (using ordinary least squares vs. generalized least squares regression procedures, and linear vs. logarithmic specifications), they found that a 10 percent increase in the minimum wage caused a 1 percent decrease in teenage employment, and no change in the teenage unemployment rate. The study also found a small, but statistically significant, increase in unemployment for adults aged 20–24.
Wellington (1991) updated Brown et al.'s research with data through 1986 to provide new estimates encompassing a period when the real (i.e., inflation-adjusted) value of the minimum wage was declining, due to the fact that it had not increased since 1981. She found that a 10% increase in the minimum wage decreased teenage employment by 0.6 percentage points, with no effect on either the teen or young adult unemployment rates.
Some research suggests that the unemployment effects of small minimum wage increases are dominated by other factors.  In Florida, where voters approved an increase in 2004, a follow-up comprehensive study confirms a strong economy with increased employment above previous years in Florida and better than in the U.S. as a whole.
In 1992, the minimum wage in New Jersey increased from $4.25 to $5.05 per hour (an 18.8% increase) while the adjacent state of Pennsylvania remained at $4.25. David Card 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. Basic economic theory would have implied that relative employment should have decreased in New Jersey. Card and Krueger surveyed employers before the April 1992 New Jersey increase, and again in November-December 1992, asking managers for data on the full-time equivalent staff level of their restaurants both times. Based on the employers' responses, the authors concluded that the increase in the minimum wage increased employment in the New Jersey restaurants.
Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage (ISBN 0-691-04823-1). They argued that the negative employment effects of minimum wage laws are minimal if not non-existent. For example, they look at the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990-91 increases in the federal minimum wage. In addition to their own findings, they reanalyzed earlier studies with updated data, generally finding that the older results of a negative employment effect did not hold up in the larger datasets.
Critics, however, argue that their research was flawed. Subsequent attempts to verify the claims requested payroll cards from employers to verify employment, and found that the minimum wage increases were followed by decreases in employment. On the other hand, an assessment of data collected and analyzed by David Neumark and William Wascher did not initially contradict the Card/Krueger results, but in a later edited version they found that the same general sample set did increase unemployment. The 18.8% wage hike resulted in "[statistically] insignificant—although almost always negative" employment effects.
Another possible explanation for why the current minimum wage laws may not affect unemployment in the United States is that the minimum wage is set close to the equilibrium point for low and unskilled workers. Thus in the absence of the minimum wage law unskilled workers would be paid approximately the same amount. However, an increase above this equilibrium point could likely bring about increased unemployment for the low and unskilled workers.
Some leading economists such as Greg Mankiw, Kevin M. Murphy and Nobel laureate Gary Becker do not accept the Card/Krueger results, while some others, like Nobel laureates Paul Krugman and Joseph Stiglitz do accept them as correct. In 1995, the Republican Staff of the Joint Economic Committee of the United States Congress published a study critical of Card and Krueger's work. They note that it conflicts with other studies done on minimum wage laws within the United States over the past 50 years. According to the JEC analysis, minimum wage laws have been shown to cause large amounts of unemployment, especially among low-income, unskilled, black, and teenaged populations, as well as cause a host of other mal-effects, such as higher turnover, less training, and fewer fringe benefits.
According to economists Donald Deere (Texas A&M), Kevin Murphy (University of Chicago), and Finis Weltch (Texas A&M), Card and Krueger's conclusions are contradicted by "common sense and past research". They conclude that:
Each of the four studies examines a different piece of the minimum wage/employment relationship. Three of them consider a single state, and two of them look at only a handful of firms in one industry. From these isolated findings Card and Krueger paint a big picture wherein increased minimum wages do not decrease, and may increase, employment. Our view is that there is something wrong with this picture. Artificial increases in the price of unskilled laborers inevitably lead to their reduced employment; the conventional wisdom remains intact.
...no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimum scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.
Alan Krueger responded in The Washington Post:
More was at stake here than the minimum wage – the methodology of public policy analysis was also at issue. Some economists, such as James Buchanan, have simply rejected the notion that their view of economic theory possibly could be proved wrong by data.
Nobel laureate Paul Krugman, has argued in favour of the Card and Krueger result, stating that Card and Krueger;
... found no evidence that minimum wage increases in the range that the United States has experiences led to job losses. Their work has been attacked because it seems to contradict Econ 101 and because it was ideologically disturbing to many. Yet it has stood up very well to repeated challenges, and new cases confirming its results keep coming in.
In a 2008 book, David Neumark and William L. Wascher described their analysis of over 300 studies on the minimum wage. The studies were from several countries covering a period of over 50 years, primarily from the 1990s onward. According to the Neumark and Wascher, a large majority of the studies show negative effects for the minimum wage; those showing positive effects are few, questionable, and disproportionately discussed.
Based on the published studies they considered, Neumark and Wascher conclude that the minimum wage is not good social policy. They emphasize three especially salient conclusions: First, while acknowledging Card and Kreuger, they found that studies since the early 1990s have strongly pointed to a "reduction in employment opportunities for low-skilled and directly affected workers." Second, they found some evidence that the minimum wage is harmful to poverty-stricken families, and "virtually no evidence" that it helps them. Third, they found that the minimum wage lowers adult wages of young workers who encounter it, by reducing their ultimate level of education.
Several researchers have conducted statistical meta-analyses of the employment effects of the minimum wage. Card and Krueger analyzed 14 earlier time-series studies and concluded that there was clear evidence of publication bias because the 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 of about two, just above the level of statistical significance at the .05 level). Though a serious methodological indictment, opponents of the minimum wage virtually ignored this issue; as Thomas C. Leonard noted, "The silence is fairly deafening." More recently, T.D. Stanley has criticized Card and Krueger's methodology, suggesting that their results could signify either publication bias or the absence of an effect. Using a different methodology, however, he concludes that there is statistically significant 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 conduct 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."
Until the 1990s, economists generally agreed that raising the minimum wage reduced employment. This consensus was weakened when some well-publicized empirical studies showed the opposite, but others consistently confirmed the original view. Today's consensus, if one exists, is that increasing the minimum wage has, at worst, minor negative effects.
A 2000 survey by Dan Fuller and Doris Geide-Stevenson reports that of a sample of 308 American Economic Association economists, 45.6% fully agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers", 27.9% agreed with provisos, and 26.5% disagreed. The authors of this study also reweighted data from a 1990 sample to show that at that time 62.4% of academic economists agreed with the statement above, while 19.5% agreed with provisos and 17.5% disagreed. They state that the reduction on consensus on this question is "likely" due to the Card and Krueger research and subsequent debate.
A similar survey in 2006 by Robert Whaples polled PhD members of the American Economic Association. Whaples found that 37.7% of respondents supported an increase in the minimum wage, 14.3% wanted it kept at the current level, 1.3% wanted it decreased, and 46.8% wanted it completely eliminated.
Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution. Daniel B. Klein and Stewart Dompe conclude, on the basis of previous surveys, "the average level of support for the minimum wage is somewhat higher among labor economists than among AEA members."
In 2007, Klein and Dompe conducted a non-anonymous survey of supporters of the minimum wage who had signed the "Raise the Minimum Wage" statement published by the Economic Policy Institute. 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.
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.
A basic income (or negative income tax) is a system of social security, that periodically provides each citizen with a sum of money that is sufficient to live on. Except for citizenship, a basic income is entirely unconditional. There is no means test, and the richest as well as the poorest citizens would receive it. A basic income is often proposed in the form of a citizen's dividend (a transfer payment from the government). Proponents argue that a basic income that is based on a broad tax base, would be more economically efficient, as the minimum wage effectively imposes a high marginal tax on employers, causing losses in efficiency.
In 1968 James Tobin, Paul Samuelson, John Kenneth Galbraith and another 1,200 economists signed a document calling for the US Congress to introduce in that year a system of income guarantees and supplements. Both Tobin and Samuelson have also come out against the minimum wage. In the 1972 presidential campaign, Senator George McGovern called for a 'demogrant' that was very similar to a basic income.
Winners of the Nobel Prize in Economics that fully support a basic income include Herbert Simon, Friedrich Hayek, James Meade, Robert Solow, Milton Friedman, Jan Tinbergen and James Tobin.
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.
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 U.S., and working tax credits and child tax credits in the UK. Such a system is slightly different than a negative income tax, in that the refundable tax credit is usually only paid to households that have earned at least some income.
Sweden and Denmark are examples of developed nations where there is no minimum wage that is required by legislation. Instead, minimum wage standards in different sectors are set by collective bargaining.
The minimum wage is the least amount of money that employees of a business can be paid. Minimum wage is a relative term. Different countries have different minimum wages. Nunavut in Canada has a minimum wage of $8.50 per hour. Ontario, another place in Canada has a minimum wage of $10.25 per hour. Some people think the minimum wage should be raised, so poor people will have more money. Others think it is worse because the government will not have enough money to pay all the employees, so they will raise the taxes or raise the inflation. Some people think that the minimum wage is harmful to employees because companies only hire employees whose labor is worth the price they are required to pay. They think that if the minimum wage is raised employees who do nok work well will lose their job because companies cannot afford to pay them the raised minimum wage.