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National Minimum Wage - Essay Example

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The theoretical prediction that minimum wages reduce employment is a simple and general one arising from a presumption that the minimum wage is set above the market clearing level that would be determined in a competitive labour market.
Until April 1999 the UK never had a legally enforceable minimum wage…
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National Minimum Wage Essay
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National Minimum Wage

Download file to see previous pages... Denmark, Germany and Italy have different, negotiated minimum wages for different sectors of the economy covering virtually all workers in those sectors. In Japan minimum wages are negotiated at the regionallevel whereas in the USA and Canada there are both national and regional minimums.
Prior to the introduction of a national minimum wage, the UK provided wage protection for around 12 per cent of the workforce through Wages Councils, which had been established in 1909, composed of employer and employee representatives. In 1986 Wages Councils, which recommended minimum wages for young workers (under 21) were abolished, with all Wages Councils removed by the end of 1993. These Councils had no statutory power and it is doubtful that they ever had any disincentive effect on employment. In a study of the Agricultural Wages Boards for England, Wales, Scotland and Northern Ireland, Dickens et al. (1994b) found that they did raise wages and increase income equality for agricultural workers. However, the study concludes that there is 'no evidence that minimum wages have significantly lowered employment in any country', indeed they might have even preserved agricultural employment (p. 20). For the USA, Kennan (1995) demonstrates that the 17 increases in the US federal minimum wage between 1939 and 1991 have averaged 12 per cent. Yet even with the per hour federal minimum wage rising from the gap between the minimum wage in real terms and average hourly earnings is greater than in any previous period except perhaps the late 1980s (Kennan (1995 p. 1955). A further two 45 cents increases took the federal minimum wage up to $5.15 by September 1st 1997. Overall the correlation between minimum wages and employment in the USA is low, insignificant and sensitive to the sample period.
On 1 April 1992 the state of New Jersey increased its minimum wage to $5.05 per hour, while Pennsylvania kept to the federal minimum of $4.25. Contrary to the standard prediction, fast-food restaurant employment actually increased in New Jersey and fell in Pennsylvania. Card (1992) examined what happened when in July 1988 the minimum wage in California rose from $3.35 to $4.25 per hour. The employment rate for California teenagers rose relative to states with no increase in minimum wages between 1987 and 1989. Card and Krueger (1995) conclude their re-analysis of US studies by stating that 'the bulk of the empirical evidence on the employment effects of the minimum wage...suggest that increases in the minimum wage have had, if anything, a small, positive effect on employment, rather than an adverse effect' (p. 236). Keil et al. (2001) dispute this by producing results that show that rises in the US minimum wage during 1977-95 tended to reduce total employment. They calculate total employment elasticity to the minimum wage to be -0.11 in the short term, with a greater responsiveness of -0.19 in the long term.
For the UK, Dicken et al. 's (1994a) study of the impact of Wages Councils finds that 'counter to the conventional economic model, increases in Wages Council minimum rates of pay were associated with improved employment in the 1978 to 1990 time period' (p. 25). Machin and Manning (1996) report that since the Wages Councils were abolished wages appear to have fallen yet there have been no employment gains (p. ...Download file to see next pagesRead More
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