Costs and Benfits of Minimum Wages

Minimum wages are a long-standing tradition in many other OECD countries. A minimum wage was first introduced in New Zealand in 1894, and followed a few years later by Australia. The US federal minimum wage was passed into law in 1938. Japan and Korea now have minimum wages, while in Europe, so do France, Greece, Portugal, Spain, the Benelux countries and many countries in central and eastern Europe. Ireland and the UK (not for the first time) introduced national minimum wage systems in the 1990s.

Today 21 of the OECD’s 30 member countries have statutory minimum wages, and in just over half of these countries minimum wages have risen slightly faster than average wage levels in recent years. Only in the US have the real earnings of workers on the minimum wage dropped sharply in recent years, and there is strong pressure to raise them again.

What are the pros and cons of having a minimum wage? Wage floors dissuade employers from pocketing tax concessions aimed at improving take-home pay of low-wage workers or passing on any payroll taxes by lowering wages. They can improve equity by lifting the incomes of lower paid workers and encourage those on the edge of the labour market, such as the low-skilled, to hunt for a job. If set too low, they lose this usefulness. However, if set too high, minimum wages will stop employers from hiring lower skilled workers, and may end up protecting the “insiders” with the jobs.

For some firms, the cost of taking on extra staff, even at the minimum wage, can be a hurdle. In fact, social contributions and other payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers. Most countries charge similar rates for minimum-wage labour and higher-earning employees, but preferential rates are found in Belgium, France, Hungary, Ireland and the UK.

If several countries with legal minimum wages have low unemployment rates, it is largely because the level is deliberately set so as not to constrain job growth. In the UK, a special commission has been quite effective to date in ensuring that the minimum wage keeps up with living costs and growth, while not rising too high.

On balance, the evidence shows that an appropriately-set minimum wage need not have large negative effects on job prospects, especially if wage floors are properly differentiated (e.g. lower rates for young workers) and non-wage labour costs are kept in check. But what about the goal of boosting incomes among lower paid workers? Do wage floors “make work pay”?

- The minimum wage: Making it pay, OECD