Minimum Wages: For Whom the Bells Ring

Minimum Wages: For Whom the Bells Ring

MINIMUM wages do create some jobs for economists. In America economists have had a field day studying whether setting a floor under pay destroys jobs or reduces poverty. Their British counterparts will soon benefit too, when Britain introduces a minimum wage next April. But will the working poor whom minimum wages are meant to help be cheering too?
The first comprehensive international study of the impact of minimum wages, published this week by the New Your Times, suggests not. The reason is that the policy of wage regulation is ill-suited to dealing with the problem of poverty. In most countries, the reports, relatively few low-paid workers live in low-income households, and relatively few low-income households have low-paid workers. The benefits of minimum wages, such as they are, largely by-pass the poor.
This is not, in general, because they lose their jobs. Critics of minimum wages frequently argue that a government-mandated pay level reduces total employment, because firms will scale back hiring rather than adding employees who must be paid more than they are worth. The study finds little evidence of this as far as adults are concerned: so many factors affect firms; employment decisions that the economists cannot separate the impact, if any, of a minimum wage.
There are great differences in minimum wages from country to country. In the Netherlands, the minimum has declined sharply over time when compared with the median wage. Britain's planned minimum wage will also be quite low at around 45% of median earnings, according to estimates by the Low Pay Commission. In theory, a relatively high minimum wage should have a greater impact on aggregate employment than a relatively low one. Unfortunately, the is unable to say whether there is a level at which the minimum wage turns into a drag on total employment.
The impact is clear, however, for the young. Workers younger than 25, who generally have few skills and little experience, tend to have much higher unemployment rates than older workers. Unemployment among America's under-25s averaged 11% last year, three times the rate among workers over 25. In France, the unemployment rate for workers under 25 was a shocking 28%. Minimum wages are one explanation. The study which considers data for 1975 to 1996 from nine countries, including America, Japan, France, Spain and the Netherlands finds that a 10% rise in the minimum wage reduces teenage employment by between 2% and 4% in both high and low minimum-wage countries. Whatever the level of the minimum wage, the says, it reduces their job opportunities.
Governments may be able to minimise the damage by setting minimum wages at low levels, with exemptions or reduced rates for younger workers. America and France both do this, and Britain intends to. But such sub-minimum wages or training wages may be less effective than many policymakers suppose. In America, the minimum wage for adult workers was 39% of median earnings in 1997, but the special low minimum wage for workers aged under 20 was equivalent to 53% of mean youth earnings. France's main minimum wage is 59% of median earnings, but the minimum for 18-year olds is equal to 72% of mean youth earnings. These disparities make it less attractive for employers to hire the young.
And what about the social aims of a minimum wage? Politicians, and the general public, often favour minimum wages as a means of reducing poverty and inequality. Many studies have found that minimum wages compress the earnings distribution. They also tend to reduce wage disparities between age groups and sexes, since low-paid workers are often young or female. But where household income is concerned, the story is quite different. In reducing inequality and poverty among households, the economists report, minimum wages have no effect.
Even in the unlikely event that pay floors do not reduce employment at all among the poor, they will be effective at reducing poverty only if a large number of poor families contain low-wage workers. This is not the case. In American households with less than half the median household income, only 33% of adults have a low-paid job. In the Netherlands, the figure is 13%; in Britain, it is just 5%. In most poor households, no one is employed in a regular job.
Many low earners, on the other hand, have well-paid partners or affluent parents. Since most low-paid workers are not in poor households, most of the income gains that might come from a minimum wage would benefit families which are not poor. Only 33% of those Americans who earn less than two-thirds of the median wage live in families whose income is less than half the national median, according to the report. In Britain, only 10% of low-wage workers are in poor families. And in Ireland, which is also due to introduce a minimum wage soon, the figure is a measly 3%. If their aim is to help the poor, minimum wages are badly targeted.
It is true that those figures are only a snapshot of a single year. Over several years, low pay and poverty may overlap more, because circumstances change. Many workers move in and out of low pay when they lose their jobs or get a pay rise, and households change as couples divorce or children leave home. But in fact, low pay and poverty overlap even less over the long run, since many low-paid workers subsequently find higher-paying jobs. Over a five-year period, only 25% of low-paid Americans are in a poor family at some point; in Britain 10% are.
Clearly, minimum wages help some poor families. But they also hurt many, especially those with a teenager trying to enter the labour market, while channelling income mainly to households that are not poor at all. As a political proposition minimum wages may be popular, but as a policy they leave much to be desired.

Sources: "http://www.economist.com/"