MINIMUM WAGE

The minimum hourly rate of compensation for labor, as established by federal statute and required of employers engaged in businesses that affect interstate commerce. Most states also have similar statutes governing minimum wages.

Along with a requirement for overtime pay and restrictions on child labor, the minimum-wage law is one of the most significant, substantive obligations created more than 50 years ago by the fair labor standards act of 1938 (FLSA) (29 U.S.C.A. §§ 201 et seq.). The FLSA culminated a long struggle for state and federal protective legislation for workers that had begun during the nineteenth century.

The original campaign for minimum-wage legislation in the United States began at the state level and resulted from growing public concern about the prevalence of sweatshops—workhouses where recent immigrants, women, and young children were paid substandard wages. Proponents of minimum-wage legislation appealed to society's sense of obligation to act through its elected officials to ensure an adequate standard of living for all working citizens.

In 1912, Massachusetts, an industrial state, was the first state to enact minimum-wage legislation. The momentum continued, and by 1920 13 states, Puerto Rico, and the District of Columbia had enacted minimum-wage programs. The Great Depression moved even more states to enact protective minimum-wage legislation, and by 1938 25 states had some form of minimum-wage law. In creating minimum wage legislation, the states generally used three minimum wage models. The Massachusetts model established a wage commission that recommended voluntary minimum-wage rates based on what commission members determined was the best combination of a "living wage" for employees and the "financial condition" of the employer's business. The next model established a similar wage commission but disregarded the financial conditions of the employer, made the minimum wage compulsory, and established sanctions for non-compliance. The third law, the Utah model, established a flat rate of minimum compensation for all covered workers.

Despite the success of state legislatures in creating minimum-wage laws, state supreme courts and, ultimately, the U.S. Supreme Court rejected as unconstitutional any legislation that interfered with an employer's freedom to contract with employees over wages.

Under the leadership of President franklin d. roosevelt, Congress passed the national industrial recovery act of 1933 (NIRA) (June 16, 1933, ch. 90, 48 Stat. 195). NIRA granted the president authority to establish minimum-wage and maximum-hour standards for all private-industry workers. Its legal basis was the federal government's power to regulate interstate commerce. The U.S. Supreme Court, however, rejected the NIRA's legal basis as unconstitutional in ALA Schechter Poultry v. United States, 295 U.S. 495, 55 S. Ct. 837, 79 L. Ed. 1570 (1935). In fact, from 1923 in Adkins v. Children's Hospital, 261 U.S. 525, 43 S. Ct. 394, 67 L. Ed. 785, to 1937 in Morehead v. New York ex rel. Tipaldo, 298 U.S. 587, 56 S. Ct. 918, 80 L. Ed. 1347, the Court consistently ruled against the constitutionality of all minimum-wage legislation.

During his second administration, President Roosevelt worked with members of Congress to create a modified version of the labor provisions of the NIRA, and in 1937 the FLSA was introduced. Although national business lobbies and agricultural interests vigorously fought the proposed legislation—even organized labor did not support it—Congress passed the FLSA, and it was signed into law on June 25, 1938. Referring to the FLSA the night before signing the bill into law, President Roosevelt declared, "Except perhaps for the social security act, it is the most far-reaching, the most far-sighted program for the benefit of workers ever adopted." In a landmark decision in 1941 (United States v. Darby, 312 U.S. 100, 61 S. Ct. 451, 85 L. Ed. 609), the U.S. Supreme Court found the FLSA constitutional:

[I]t is no longer open to question that the fixing of a minimum wage is within the legislative power and the bare fact of its exercise is not a denial of due process under the Fifth more than under the Fourteenth Amendment.

The minimum-wage law has evolved significantly since the Court declared it constitutionally sound in United States v. Darby. The federal minimum wage remains the same until Congress passes a bill to raise it and the president signs the bill into law. The minimum wage started at 25¢ per hour, and Congress has increased it 18 times. Since the law was enacted, increases to the minimum wage have been signed into law by Presidents harry s. truman, dwight d. eisenhower, john f. kennedy, lyndon b. johnson, richard m. nixon, jimmy carter, george h. w. bush, and bill clinton. The increases in the minimum wage have been sporadic. For example, the wage rose five times in the inflationary 1970s but was unchanged for the last nine years of the 1980s. In 1989, the FLSA was amended to raise the minimum wage in two steps: from $3.35 to $3.80 per hour on April 1, 1990, and from $3.80 to $4.25 per hour on April 1, 1991.

Every time Congress considers legislation to increase the minimum wage, it must ponder what constitutes a living wage—a wage that is sufficient to provide a worker with food, clothing, and shelter. Along those lines, the congressional research service estimated that the minimum wage would have to rise to $6.75 per hour in 1996 to equal the purchasing power that it represented in 1978.

Congress most recently amended the minimum-wage law with the Minimum Wage Increase Act of 1996 (Pub. L. No. 104-188, sec. 2104(a), 110 Stat. 1228 [amends sec. 206]). Congress increased the minimum wage to $4.75 per hour effective October 1, 1996 and increased it to $5.15 per hour effective September 1, 1997.

The minimum wage is the most direct and definitive measure to guarantee workers a living wage, but the FLSA (and thus its minimum-wage provisions) does not protect all employees. In 1988, of the approximately 110 million wage and salary earners in the United States, the FLSA did not cover about eight million workers because of coverage limits, nor another 28 million workers because of exemptions.

The minimum-wage law can be enforced by employees themselves, by the secretary of labor, or by the attorney general. Under section 216(b) of the FLSA, employees can file suit in federal or state court to enforce their rights to minimum wages and overtime compensation. Employees also can seek redress if employers retaliate against them for trying to enforce their rights under the FLSA. The secretary of labor can enforce the act on behalf of employees under sections 216(c) and 217 by either filing a wage suit on behalf of the employees or by seeking an injunction.

If a suit by either the employees or the secretary of labor is successful, the FLSA authorizes recovery of any unpaid minimum wages and/or overtime compensation; with some exceptions, the injured party may be able to recover an equal amount in liquidated damages, as well. In addition, employees who win FLSA suits may be awarded attorneys' fees. For repeated or willful violations of the minimum-wage provisions, the secretary is authorized to assess civil penalties, subject to administrative review, of up to $1,000 per violation (29 U.S.C.A. § 217(e)).

Finally, the attorney general has the authority to file criminal actions for FLSA violations, although this authority has rarely been used.

Although the FLSA is the most significant federal wage statute, a number of other laws impose minimum-wage obligations on entities that perform work for the federal government. For example, the davis-bacon act (40 U.S.C.A. §§ 276a–276a–5) applies to contracts in excess of $2,000 to work on federal buildings or other

public works; the Walsh-Healey Act (41 U.S.C.A. §§ 35–45) applies to employers that provide materials, supplies, and equipment to the United States under contracts exceeding $10,000; and the Ser vice Contract Act (41 U.S.C.A. §§ 351–358) applies to contracts in excess of $2,500 to provide services to the federal government. These statutes all require contracting entities to pay workers the prevailing wage in the locality.

As of 2003, the federal minimum wage has remained at $5.15 per hour for non-exempt employees. However, in 11 states, particularly those in northwestern and northeastern parts of the United States, the state minimum wage is higher than that of the federal government. Under the FLSA, if a state's minimum wage is higher, then that rate applies to employees working in that state.

The following 11 states provide a higher minimum wage than the federal standard (with the applicable hourly rate in parentheses), according to information from the U.S. labor department: California ($6.75); Oregon ($6.90); Washington ($7.01); Maine ($6.25); Vermont ($6.25); Massachusetts ($6.75); Delaware ($6.15); Connecticut ($7.10); Rhode Island ($6.15); Alaska ($7.15); and Hawaii ($6.25).

The law in a few states still provides a minimum wage that is lower than the federal rate, although the latter continues to apply. Rates in American Samoa are established by a special industry committee, which determines rates for particular industries, rather than all covered employees. Like the states, an employer in American Samoa may choose to set rates at a higher level than the standard set by the committee.

further readings

Levitan, Sar A., and Richard A. Belous. 1979. More Than Subsistence: Minimum Wages for the Working Poor. Baltimore: Johns Hopkins Univ. Press.

Linder, Marc. 1990. "The Minimum Wage as Industrial Policy: A Forgotten Role." Journal of Legislation 16.

Norlund, Willis J. 1988. "A Brief History of the Fair Labor Standards Act." Labor Law Journal 39.

Quigley, William P. 1996. "'A Fair Day's Pay for a Fair Day's Work': Time to Raise and Index the Minimum Wage." St. Mary's Law Journal. 27.

Waltman, Jerold L. 2000. The Politics of the Minimum Wage. Urbana: University of Illinois Press.

Wright, Russell O. 2003. Chronology of Labor in the United States. Jefferson, N.C.: McFarland & Company, Inc.

cross-references

Child Labor Laws; Employment Law; Labor Law; National Recovery Administration; New Deal.

Minimum Wage

BIBLIOGRAPHY

Historically, the idea of a minimum wage was to allow a full-time worker to earn enough to buy the basic necessities of life. Following the Great Depression of the 1930s and World War II, watershed legislation established minimum wages around the world, most notably the Fair Labor Standards Act (FALSA) of 1938 in the United States and the Wage Council Act of 1945 in the United Kingdom. FALSA, for instance, established a minimum wage of 25 cents per hour when it was formed; that became $5.85 in 2007, and will increase to $7.25 by 2009. The value of this minimum, however, declines over time due to inflation or productivity growth. The problem with the minimum wage is its interference with the labor-market mechanism, creating ambiguous influences on employers, workers, and teenagers (and even more so on nonwhite teenagers) for whom the market-clearing wage is lower than the minimum wage. In the case of extreme poverty, the argument that policy authorities should pass a legal minimum wage through legislation is not in dispute, but disagreement over a minimum wage abounds in the areas of efficient allocation of resources, full employment, effect on income, and alternative ways to combat poverty (Stigler 1946).

Economists study the effect of minimum wages relative to the market equilibrium wages. If the demand for labor, N_d , is not equal to the supply of labor, N_s , then wages change. At equilibrium, the change in the wage rates, w, over time, t, is dw /dt = f (N_d –N_s ) = 0. One implication of the equilibrium is that a laborer is paid a wage, w, equal to the marginal product of labor (MPL). If a minimum wage is binding, such as for the unskilled, young, less educated, and part-time workers, then the minimum wage would exceed the equilibrium wage, creating unemployment. The unemployed may transfer to industries that are not covered by the minimum wage, thus decreasing wage and productivity there. One possibility is that employers may then substitute more automation, or skilled labor for low-skilled labor as wages increase. Another factor is that competition between the covered and the uncovered sectors of the labor market tends to equilibrate the wages between the two sectors. Thus, the MPL of workers still employed in the covered industry will tend to rise to where w = MPL (Hicks 1948, p. 179). As Martin Bronfenbrenner asserts: “If they were better fed and clothed and housed, and better cheered as well, by higher wages, their physical efficiency might rise in the same proportion as the wage rate” (Bronfenbrenner 1943, p. 82).

Economists emphasize empirical work to assess the net possible effect of minimum wages. Several studies by David Card and Alan Krueger held that minimum wages increase the employment in fast-food firms such as Burger King, KFC, Roy Rogers, and Wendy’s. At the firm level, Card and Krueger (1994) studied the increase in minimum wages in New Jersey, the highest minimum wage in the nation as of April 1, 1992, against no change in the minimum wage in Pennsylvania. They found that employment increased in New Jersey by 0.6 workers, and declined in Pennsylvania by 2.1 workers, a difference-indifferences of 2.7 workers. Similar findings were made for firm-level data in Texas, and for state data in California (Card and Krueger 1995). An attempt by David Neumark and William Wascher (2000) to replicate the Card and Krueger finding used employment data reported by establishments rather than survey data. They found that the job gain in New Jersey could be zero or slightly negative. The technology of the fast-food firms suggests that employers may need a fixed number of employees per grill or cash register, and therefore will not reduce employment when minimum wages increase, but that they may be discouraged from opening new franchises, thus lowering potential employment.

The analysis of the amount of the unemployment can be stated in elasticity of demand terms. If the elasticity is less than one, increase in wages will increase payroll, enhancing benefits to workers. The elasticity of–1 is the standard labor market assumption, which leads to the expectation that unemployment will fall in equal proportion to wage increases. Earlier empirical studies by Charles Brown, Curtis Gilroy, and Andrew Kohen (1982; 1983) indicated that the effect of minimum wages on employment was slightly negative or insignificant, indicating an elasticity of demand close to zero.

In the Keynesian world, “the customary treatment of involuntary unemployment and unemployment equilibrium frequently is based upon rigidity of money wage rate” (Darity and Horn 1983, p. 725). The post-Keynesians are well known for defending the wage-rigidity assumption. John Maynard Keynes’s (1973, p. 54) correspondence with the classical economist Arthur Cecil Pigou revealed a rigid labor supply curve, indicating rigid wages for some level of employment. Keynes, however, eased up on the wage-rigidity assumption in chapter 19 of his General Theory of Employment, Interest, and Money (1936). According to Axel Leijonhufvud (1968, p. 37) the assumption of a minimum wage is maintained by Keynesians, who assume competitive conditions make wage rigidity into a special case for this model. Don Patinkin (1948, p. 545) argued that rigidity in the Keynesian system is possible under static modeling of Keynesian economics, but rigidity is not an essential Keynesian element in a more dynamic setting.

Modern macroeconomic discussion involves models dealing with wage-setting, where wages are set as a markup on expected price, and with price-setting, where prices are set as a markup on expected wages. Unemployment then depends on the solution of the joint equations Price Setter: p –w^e = β ₀–β ₁u, (β ₁ ≥ 0), and Wage Setter: w^e –p = γ ₀–γ ₁u, (γ ₁ > 0), where w is money wage, u is unemployment, p is price, e is expected, and the Greek letters are parameters to be estimated (Layard, Neckell, and Jackman 1994, pp. 19–20). When price and wage expectations materialize, real wages can be analyzed against employment. Any factors that contribute to wage push, γ ₀, such as the minimum wage, raise the unemployment rate.

SEE ALSO Economics, Labor; Expectations; Markup Pricing; Poverty; Sticky Wages; Unemployment; Unemployment Rate; Wages

BIBLIOGRAPHY

Bronfenbrenner, Martin. 1943. Minimum Wages, Unemployability, and Relief: A Theoretical Note. Southern Economic Journal 10 (July): 52–59.

Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1982. The Effect of the Minimum Wage on Employment and Unemployment. Journal of Economic Literature 20 (June): 487–529.

Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1983. Time-Series Evidence on the Effect of the Minimum Wage on Youth Employment and Unemployment. Journal of Human Resources 18 (Winter): 3–31.

Card, David, and Alan B. Krueger. 1994. Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review 84 (September): 772–793.

Card, David, and Alan B. Krueger. 1997. Myth and Measurement: The New Economics of the Minimum Wage. Princeton, NJ: Princeton University Press.

Darity, William A., and Bobbie L. Horn. 1983. Involuntary Unemployment Reconsidered. Southern Economic Journal 49, no. 3 (January): 717–733.

Hicks, John. [1932] 1948. The Theory of Wages. New York: Peter Smith.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money. London: Macmillan.

Keynes, John Maynard. [1973] 1987. The General Theory and After, Part II: Defence and Development, ed. Donald Moggridge. London: Macmillan.

Layard, Richard, Stephen Nickell, and Richard Jackman. 1994. The Unemployment Crisis. Oxford: Oxford University Press.

Leijonhufvud, Axel. 1968. On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory. Oxford: Oxford University Press.

Modigliani, Franco. 1980. Collected Papers of Franco Modigliani. Vol. 1, ed. Andrew Abel. Cambridge, MA: MIT Press.

Neumark, David, and William Wascher. 2000. Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, Comment. American Economic Review 90 (December): 1362–1269.

Patinkin, Don. 1948. Price Flexibility and Full Employment. American Economic Review 38 (September): 543–564.

Stigler, George J. 1946. Economics of Minimum Wage Legislation. American Economic Review 36, no. 3. (June): 358–365.

Lall Ramrattan

Michael Szenberg

minimum wage lowest wage legally permitted in an industry or in a government or other organization. The goal in establishing minimum wages has been to assure wage earners a standard of living above the lowest permitted by health and decency. The minimum has been set by labor unions through collective bargaining, by arbitration, by board action, and, finally, by legislation. Introduced (1894) in New Zealand through compulsory arbitration, it has become part of the social legislation of almost all countries. Although federal minimum-wage laws were at first held unconstitutional in the United States, a strong fight by organized labor for enactment culminated in the passage (1938) of the Fair Labor Standards Act , which set minimum wages at $.25 per hour for workers engaged in interstate commerce (with some exceptions); the act also set up industry committees to recommend rates for every industry. In 1950 the minimum wage was raised to $.75 per hour. Thereafter, it was raised several times (for example, in 1956 to $1.00, in 1963 to $1.25, and in 1968 to $1.60). In 1974, Congress passed a bill providing for a gradual increase from the prevailing $1.60 per hour to $2.30 per hour by 1976. The bill also extended minimum-wage rules to some 8 million workers not previously covered, including state and local government employees, most domestic workers, and some employees of chain stores. Additional increases raised the minimum wage to $3.10 per hour (1980), $4.25 (1991), and $5.15 (1997). Legislation passed in 2007 raised the minimum wage, in three stages, to $7.25 in 2009. Since 1989 businesses earning less than $500,000 annually have not been subject to minimum-wage rules. A number of states have minimun wages that are higher than the federal minimum wage. See also wages .

Bibliography: See S. Richardson, The Minimum Wage (1927); G. F. Starr, Minimum Wage Fixing: An International Review of Practices and Problems (1981); S. Rottenberg, The Economics of Legal Minimum Wages (1982).

min·i·mum wage • n. the lowest wage permitted by law or by a special agreement (such as one with a labor union).