A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Because minimum wages increase the cost of labor, companies often try to avoid minimum wage laws by using gig workers, by moving labor to locations with lower or nonexistent minimum wages, or by automating job functions. Minimum wage policies can vary significantly between countries or even within a country, with different regions, sectors, or age groups having their own minimum wage rates. These variations are often influenced by the cost of living, regional economic conditions, and industry-specific factors.
The movement for minimum wages was initially motivated by a desire 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 and prescribing minimum wages for members were first passed in New Zealand in 1894. Although minimum wage laws are now in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. Additionally, minimum wage policies can be implemented in various ways, such as directly legislating specific wage rates, setting a formula to adjust the minimum wage based on economic indicators, or establishing wage boards that determine minimum wages in consultation with representatives of employers, employees, and the government.
Because it acts as a price floor on labor, standard supply and demand models predict that minimum wages will lead to a surplus of labor (unemployment), particularly among low-skilled workers. However, they can increase labor market efficiency and employment in monopsony scenarios, where individual employers have some wage-setting power over the market as a whole. Supporters of the minimum wage say it increases the standard of living of workers, reduces poverty, reduces inequality, and boosts morale. In contrast, opponents of the minimum wage say it increases poverty and unemployment because some low-wage workers "will be unable to find work ... [and] will be pushed into the ranks of the unemployed".
History
Amongst the earliest minimum wages were introduced in Mesopotamia during the reign of Hammurabi,Wage Administration Plans, Practices, and Principles By Charles W. Brennan, Publisher: Hassell Street Press, 1963, P.8 while in Ancient Egypt many workers received minimum wages in the form of rations. In addition, measures aimed at ensuring fair wages were carried out during the days of the Byzantine EmpireThe Economic History of Byzantium From the Seventh Through the Fifteenth Century Volume 1 By Angeliki E. Laiou, Publisher: Dumbarton Oaks Research Library and Collection, 2002, P.1134 and in early Islamic societies.Islamic Jurisprudence on Labor Laws: Principles, Practices, and Contemporary Applications by Dr. Ghulam Mustafa and Dr. Zia Ur Rehman, published in Al-Manhal Research Journal (Vol.4, Issue 3, 2024: July-September), P.6-7
In medieval England, the Ordinance of Labourers (1349), a decree by King Edward III, set a maximum wage for laborers in medieval England. Edward, who was a wealthy landowner, was dependent, like his lords, on serfs to work the land. In the autumn of 1348, the Black Plague reached England and decimated the population. The severe shortage of labor caused wages to soar and encouraged King Edward III to set a wage ceiling. Subsequent amendments to the ordinance, such as the Statute of Labourers (1351), increased the penalties for paying a wage above the set rates.
While the laws governing wages initially set a ceiling on compensation, they were eventually used to set a living wage. An amendment to the Statute of Labourers in 1389 effectively fixed wages to the price of food. As time passed, the Justice of the Peace, who was charged with setting the maximum wage, also began to set formal minimum wages. The practice was eventually formalized with the passage of the Act Fixing a Minimum Wage in 1604 by King James I for workers in the textile industry.
By the early 19th century, the Statutes of Labourers were repealed as the increasingly capitalistic United Kingdom embraced laissez-faire policies that disfavored wage regulation (whether upper or lower limits). 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.
It was not until the 1890s that the first modern legislative attempts to regulate minimum wages appeared in New Zealand and Australia. In 1896, the Australian state of Victoria introduced a Factory Act that established boards for setting minimum wages for people employed in industries known for sweating, such as meat, bread-making, furniture, and clothing.MANNING CLARK'S HISTORY OF AUSTRALIA ABRIDGED FROM THE SIX-VOLUME CLASSIC BY MICHAEL CATHCART, Penguin Books Australia Ltd, 1996 edition, P.471-472 In Germany, a guaranteed minimum wage was introduced during the chancellorship of Leo von Caprivi.Geoffrey Jones, Deeply Responsible Business A Global History of Values-Driven Leadership, Harvard University Press, 2023, P.74. The movement for a minimum wage was initially focused on stopping sweatshop labor and curbing the proliferation of sweatshops in manufacturing industries. The sweatshops employed large numbers of women and young workers, paying them what were considered to be substandard wages. The sweatshop owners were thought to have unfair bargaining power over their employees, and a minimum wage was proposed to ensure fair pay. Over time, the focus changed to helping people, especially families, become more self-sufficient.
In the United States, the late 19th-century ideas for favoring a minimum wage also coincided with the eugenics movement. As a consequence, some economists at the time, including Royal Meeker and Henry Rogers Seager, argued for the adoption of a minimum wage not only to support the worker, but to support their desired semi- and skilled laborers while forcing the undesired workers (including the idle, immigrants, women, racial minorities, and the disabled) out of the labor market. The result, over the longer term, would be to limit the nondesired workers' ability to earn money and have families, and thereby, remove them from the economists' ideal society.Thomas C. Leonard, Illiberal Reformers: Race, Eugenics & American Economics in the Progressive Era, (Princeton: Princeton University Press, 2016): 158–167.
Minimum wage laws
The first modern national minimum wages were enacted by the government recognition of unions which in turn established minimum wage policy among their members, as in New Zealand in 1894, followed by Australia in 1896 and the United Kingdom in 1909. In the United States, statutory minimum wages were first introduced nationally in 1938, and they were reintroduced and expanded in the United Kingdom in 1998. There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries. In the European Union, 21 out of 27 member states currently have national minimum wages. Other countries, such as Sweden, Finland, Denmark, Switzerland, Austria, and Italy, have no minimum wage laws, but rely on employer groups and trade unions to set minimum earnings through collective bargaining.Ehrenberg, Ronald G. Labor Markets and Integrating National Economies, Brookings Institution Press (1994), p. 41
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), $16.28 per hour in the U.S. state of Washington, or £11.44 (for those aged 21+) in the United Kingdom—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, though most states have a higher minimum wage. However, some states do not have a minimum wage law, such as Louisiana and Tennessee, and others have minimum wages below the federal minimum, such as Georgia and Wyoming, although the federal minimum wage is enforced in those states. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage levels. India was one of the first developing countries to introduce minimum wage policy in its law in 1948. However, it is rarely implemented, even by contractors of government agencies. In Mumbai, as of 2017, the minimum wage was Rs. 348/day. India also has one of the most complicated systems with more than 1,200 minimum wage rates depending on the geographical region.
Informal minimum wages Customs, tight labor markets, and extra-legal pressures from governments or labor unions can each produce a de facto minimum wage. So can international public opinion, by pressuring multinational companies to pay Third World workers wages usually found in more industrialized countries. The latter situation in Southeast Asia and Latin America was publicized in the 2000s, but it existed with companies in West Africa in the middle of the 20th century.
Setting minimum wage Among the indicators that might be used to establish an initial minimum wage rate are ones that minimize the loss of jobs while preserving international competitiveness. Among these are general economic conditions as measured by real and nominal gross domestic product; inflation; labor supply and demand; wage levels, distribution and differentials; employment terms; productivity growth; labor costs; business operating costs; the number and trend of bankruptcies; economic freedom rankings; standards of living and the prevailing average wage rate.
In the business sector, concerns include the expected increased cost of doing business, threats to profitability, rising levels of unemployment (and 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.Setting the Initial Statutory Minimum Wage Rate, submission to government by the Hong Kong General Chamber of Commerce. Other concerns include purchasing power, inflation indexing and standardized working hours.
Impact of minimum wage on income inequality and poverty Minimum wage policies have been debated for their impact on income inequality and poverty levels. Proponents argue that raising the minimum wage can help reduce income disparities, enabling low-income workers to afford necessities and contribute to the overall economy. Higher minimum wages may also have a ripple effect, pushing up wages for those earning slightly above the minimum wage.
However, opponents contend that minimum wage increases can lead to job losses, particularly for low-skilled and entry-level workers, as businesses may be unable to afford higher labor costs and may respond by cutting jobs or hours. They also argue that minimum wage increases may not effectively target those living in poverty, as many minimum wage earners are secondary earners in households with higher incomes. Some studies suggest that targeted income support programs, such as the Earned Income Tax Credit (EITC) in the United States, may be more effective in addressing poverty.