What Factors Determine the Minimum Wage?
It is every worker’s passion to receive better pay. Currently, workers in most countries are paid based on the number of working hours per week or month. However, most countries have come up with the minimum wage concept that allows laborers to receive proper pay without any form of discrimination. Therefore, a minimum wage is the least pay per hour that an employee is entitled to. In fact, the minimum pay assists workers in avoiding being underpaid since they are aware of the set and acceptable amount (Neumark, Salas & Wascher, 2014). Besides, the concept aims to reduce the gap between low-income earners and ensure that workers can meet their needs. In essence, the discussion will examine the major factors determining the formation of minimum wage.
The Formation of Minimum Wage
It is worth noting that the minimum wage is influenced by the employer’s ability to pay. Indeed, the capacity of an organization and the industry to pay its workers affects how much workers earn per hour. Moreover, the willingness of an industry/employer to pay highly affects the wage rate. For instance, when a particular industry makes regular losses, it becomes difficult for the businesses in this industry to pay higher wages. On the other hand, if employees run a very profitable business, it is easy for the firm to raise the minimum amount paid to the workers to attract better specialists (Bárány, 2016). Moreover, if any industry tends to pay more during a period of prosperity, then workers are more likely to receive higher wages. In fact, attractive funds serve as a way of sharing the profits made by employers with the laborers. Therefore, when a minimum wage is formed, one needs to consider the employer’s ability to pay since it can easily determine and influence the minimum amount spent for employing one worker, as illustrated above.
The general conditions of the labor market are very influential when determining the salary the employees should be paid. In fact, the forces of demand and supply in which an industry operates are more likely to determine the wage rate and the minimum wage paid to employees. For example, if the demand for a particular kind of skilled labor increases and the supply decreases, workers are more likely to earn more (Clemens, 2015). In other words, when formulating minimum wage, one should consider the prevailing market condition and the forces of demand and supply.
Thirdly, in the formation of the minimum wage, the general growth of the economy should be considered. If a country is experiencing economic progress, the least amount workers should earn is likely to increase. Consequently, economic growth means that firms are more apt to demand more labor and are very much willing to give better pay. However, if there is an economic recession, the minimum wage formed is likely to be less due to stagnant compensation growth. Additionally, when there is poor economic growth, then firms become more reluctant to factors of labor employment and increasing wages (Clemens, 2015). Therefore, when the minimum wage is formed, it is important for a country to consider its economic growth and development rate since it significantly impacts what employees are paid in the job market.
According to Neumark, Salas & Wascher (2014), it is imperative to consider whether firms exploit workers when formulating the minimum amount of money the employees should be paid. For instance, if a firm is a monopoly, then there are very high chances of paying wages below the equilibrium level. On the other hand, if the market structure comprises many firms that compete for qualified laborers in the market, then it is normal that the minimum wage paid can be higher (Neumark, Salas & Wascher, 2014). In essence, the fluctuation of payment is due to competition for workers; hence, firms are more likely to increase their wages to compete effectively and, more importantly, develop a competitive advantage over their rivals. Consequently, when formulating minimum wage, it is significant for the government to analyze the country’s labor market structure in-depth.
A country’s political system is also influential in formulating minimum wage. In fact, politics determines whether to have a minimum wage or practice a flexible payment system. Indeed, a country’s political system can either decide on a minimum wage through the labor code. For instance, the minimum wage can be part of the promise given by politicians during election campaigns. Therefore, if leaders view minimum wage as a good alternative to create an efficient lifestyle for workers, its formation becomes easy and mostly targets the common workers since they are potential voters, as asserted by Bárány (2016). For instance, a country like Singapore has a long history of not having a minimum wage. Nevertheless, the current political system has influenced its formation making the nation establish a progressive wage program as an alternative (Bárány, 2016). On the other hand, Germany has recently decided to have a minimum wage based on its efforts to promote a better lifestyle for workers.
However, it is important to consider unemployment before the formation of the minimum wage. It is important to note that most countries are more likely to consider the employment rate before establishing a minimum wage as either high or low. For instance, in a case of a high unemployment rate, the government should consider either reducing or increasing the minimum wage (Bárány, 2016). Therefore, this approach serves as a mechanism to increase the number of jobs that are expected to reduce unemployment in a country.
It is evident that during the formation of the minimum wage, the country must consider the ability of the economy to establish reasonable pay. Notably, economic competency is the key factor to consider in whether the budget can sustain a wage increase or the established one. Sometimes, a country’s economy cannot pay high wages; therefore, it becomes impossible to decide on higher salaries. Hence, workers in developing or poor economies are more likely to move to other countries to look for greener pastures. As a matter of fact, labor migration has significantly affected third-world countries that find it hard to connect their educated elites with available job opportunities. In addition, the labor movement has been evident among the well-attested brain drain from developing countries to the nations with peak economies that reciprocate minimum wage and inflation rates.
Another factor to consider is the needs of workers and their families when establishing a minimum wage rate. In fact, this aspect entails considering the features such as the poverty level in the country and offering employees a relatively better wage that can improve their living conditions. Additionally, considering the issues such as workers’ expenditure and the current wages paid to skilled and unskilled workers also becomes paramount in formulating the minimum wage in any country (Neumark, Salas & Wascher, 2014). In other words, the government should analyze all the workers’ needs, interests, and abilities. Essentially, it is imperative to consider the income distribution among wage-earner households to develop an adequate and efficient minimum wage.
According to Fakhrutdinova et al. (2013), age and geographical factors are more likely to affect the minimum age formation. For instance, countries like the UK have set the minimum age based on different age group. Therefore, the idea becomes critical in reflecting the equilibrium age rates that are more likely to occur at different ages (Fakhrutdinova et al., 2013). In essence, the aspect of age assists in coming up with a minimum wage that is favorable to the country’s economic environment.
As it is evident from the analysis, every state must determine a minimum wage policy that will assist in enhancing the general living conditions of the nation. In fact, a minimum wage policy helps both households and firms since underpayment and overpayment are highly reduced. In addition, the workers are more likely to get a reduced tax burden, and companies become more accountable in their budget formulations. However, minimum wage formation is only determined after analyzing the factors such as the country’s political system, unemployment rate, the needs and interests of workers, as well as the ability of the industry to pay the set amount. Finally, the general labor conditions also affect the formation of the minimum wage in any nation.
Barany, Z. L. (2016). The minimum wage and inequality: The Effects of Education and Technology. Journal of Labor Economics, 34(1), 237-274.
Clemens, J. (2015). The minimum wage and the great recession: Evidence from the current population survey (No. w21830). National Bureau of Economic Research.
Fakhrutdinova, E., Safina, L., Shigapova, D. & Yagudin, R. (2013). Legislative provision of the quality of working life in Russia. World Applied Sciences Journal, 27(13), 92-96.
Hirsch, B. T., Kaufman, B. E. & Zelenska, T. (2015). Minimum wage channels of adjustment. Industrial Relations: A Journal of Economy and Society, 54(2), 199-239.
Neumark, D., Salas, J. I. & Wascher, W. (2014). Revisiting the minimum wage—employment debate: Throwing out the baby with the bathwater? Industrial & Labor Relations Review, 67(3): 608-648.