Economics theories teach us that the cost of labor, like any other product, is determined by the supply and the demand within the market. Some quite serious economists go even further and argue that any restrictions on working conditions are harmful, and if an employee is not satisfied with his workplace, then, in the free market, he can always change his employer and conditions.
Almost all developed countries highly regulate their labor market: the minimum hourly rate, the working hours, the unemployment benefits and other measures have been implemented through all Europe and North America over the past 100 years, continuing to expand today.
Germany has become one of the last EU countries to adopt the law on minimum wages - since 2015, a worked hour costs at least € 8.50, and in 2017 it has been raised to € 8.84.
Some of the less wealthy emerging economies are moving in the same direction. For example, since July 2017, the minimal monthly salary in Argentina is set at 8860 pesos, and every six months it is indexed by inflation: from January 2018 - 9,500 pesos, from July 2018 - 10,000 pesos.
In 1970, the Convention of the International Labor Organization at the UN No. 131 “On Minimal Wages” was adopted, intending to develop a set of rules in those countries where the state alone could not come to the establishment of a minimal wage system.
Only six EU countries haven’t adopted any legislation on minimum wages: Sweden, Finland, Denmark, Austria, Italy and Cyprus. But in these countries, low wages are excluded by another mechanism - a collective agreement between the employer and the employee.
In the United States, where market freedoms have always been more stable than in Europe, there is a federal minimum hourly wage of $ 7.25/hour. In some states, the minimum hourly wage exceeds $ 10 and increases each year to reach $ 15/hour.
What are the reasons for such restrictions on wages imposed, contrary to the well known notions of supply and demand?
Reason # 1. Unskilled low-paid labor
The simplest example is the situation when there are more applicants than available jobs, and the employer dictates its conditions to the applicants. In economic theory, such a skew of the market is called monopsony. Sometimes this is a natural situation, as in single-industry towns built around one enterprise. Other times - it is artificial, when employers create a shortage of jobs to lower wages.
Reason #2. Labor productivity growth does not automatically lead to higher wages
One of the main sources of economic growth is the increase in labor productivity due to scientific and technological progress. The introduction of new technologies increases the amount produced by the employee per hour. Such an upgrade should impose a wage increase: more productivity = more money, but in fact, this doesn’t always work like that.
Reason # 3. Full time employment does not guarantee big income
In the modern world, if you work full time, this does not mean that you will not be poor. The phenomenon is not unique and does not only happen in countries with weak economies. In the UK, for example, half of the underprivileged citizens whose income is below 60% belong to working families.
Reason # 4. State subsidizes low-wage employers
In many countries, working citizens with low incomes receive material assistance from the state in the form of allowances and benefits. It turns out that the state pays extra money for employers so that low-paid workers can cope with the necessary expenses and not suffer from hunger. Sometimes these amounts are very significant.
Reason # 5. Minimum wages fight economic inequality
Low salaries are the ones that grow very slowly, while those of managers increase at a fantastic rate. This disease of developed and developing economies is known as economic inequality. The main tool to combat economic inequality is the redistribution of income, which is also carried out through the establishment and indexation of minimum wages.
Reason # 6. Minimum wages fight social inequality
In the absence of a minimum level of remuneration, employers can easily save by hiring those who are usually paid less for the same labor. Lower wages are one of the measures to combat discrimination: the less the employer has the ability to manipulate the salary, the less ways to earn on social prejudices.
We hope that these six arguments have convinced you that minimum wages are just what every country needs in order to conduct a normal and equal economic activity!
