In an attempt to foment equality, growth, and overall development, countries the world over have started instituting minimum wage laws. In principle, a minimum wage may be defined as the lowest legal wage that an employer may pay a worker. Conversely, it may also be defined as the lowest legal wage that a worker can accept when negotiating to sell his or her labor. Minimum wages are legal prices that disturb, or intervene, the market, thus preventing it from reaching a natural equilibrium (between the existing, ever-present forces of supply and demand). Ever since the first minimum wage was instituted in New Zealand (1896), widespread debate surrounding the benefits (and threats) associated with this form of legal price. The debate on whether or not minimum wage laws are contributing to society’s growth and development is nowhere near reaching its end. However, recent studies appear to hint that increasing minimum wages are in fact fomenting employment and efficiency, which is analogous to stating that minimum wages appear to have a positive effect on unemployment, poverty, and inequality.
In principle, the minimum wage was conceived as a means of maintaining (positive) equilibrium in the labor market. In other words, the idea behind minimum wage laws was to prevent businesses from developing monopsony power in the labor market, which would ultimately allow them to dictate low, inefficient wages (relative to the conditions dictated by a competitive market). Fundamentally, minimum wages have always strived to protect the interests of the lower segments of the labor market (unskilled, poorly educated workers); the International Labor Organization (ILO) oversees that governments design minimum wages that are consistent with “the needs of workers and their families, taking into account the general level of wages in the country, the cost of living, social security benefits, and the relative living standards of other social groups”. As well, minimum wage is deemed necessary because it is consistent with macroeconomic objectives, including levels of productivity, economic development requirements, and a significantly high level of employment. Based on this, it only naturally follows that minimum wages have a positive impact on the labor market.
Those who are against the minimum wage contend that they do nothing other than attempt against the standard of living of the least educated and skilled employees. In fact, “in standard models of competitive markets, anything that artificially raises the price of labor will curb demand for it, and the first to lose their jobs will be the least-skilled workers”. Another argument that has been generally given when defending minimum wage laws (and minimum wage increases) is that minimum wage is what allows for the workers’ salaries to retain a minimum level of purchasing power that allows them to maintain a decent standard of living. This may be the case, but those who oppose the existence of minimum wage laws argue that unless workers can deliver levels of competency and efficiency that justify the minimum wage level, they will find themselves unemployed. For example, “at a minimum wage of $4.25 an hour, workers whose productivity is worth $1.00 an hour will most likely be unemployed”. Based on this, workers that are lacking in terms of education and skill will not benefit from minimum wages in the slightest.
Finally, it is important to mention that recent studies have suggested that the problem lies not with the minimum wage, but with the level at which it is instituted. In other words, minimum wage laws need to focus on establishing a minimum wage that is neither too low nor too high. Ideally, the minimum wage should be set at a moderate level; “if the minimum wage is set at a moderate level then it does not cause significant employment losses, while keeping low-paid workers out of poverty”. On this note, it is important to mention that the arguments against minimum wages started to lose foundation in the early 1990s when studies conducted in the United States started to find that minimum wages could actually improve levels of employment. One such study, conducted by Card and Krueger (1994) in New Jersey and Pennsylvania’s fast-food industry; the study found that if anything, minimum wage increases contributed in increasing levels of employment.
Regardless of whether we compare stores in New Jersey that were affected by the $5.05 minimum to stores in eastern Pennsylvania (where the minimum wage was constant at $4.25 per hour) or to stores in New Jersey that were initially paying $5.00 per hour or more (and were largely unaffected by the new law), we find that the increase in the minimum wage increased employment.
There is still no consensus as to whether or not governments should decant in favor of minimum wage laws. However, it can be seen that minimum wages are far more beneficial than they were originally thought to be. The solution to the problem of unemployment and its underlying problems, namely poverty and social inequality, may not be solely found in minimum wages, but it undoubtedly is a good start. Minimum wages guarantee that a minimum (dignified) standard of living is maintained. Likewise, minimum wages make it possible for salary gaps to be diminished, and in some instances, there is even the potential for complete elimination of salary gaps (which are precisely what bring about social inequality). Granted, eliminating inequality is an exceedingly difficult endeavor, but through minimum wages lie the foundations for achieving it.