CONCEPT OF MINIMUM

WAGE
INTRODUCTION
 Minimum wages are essentially labour market interventions used by
governments either as instruments of political macroeconomics or as
social tools.
 Opponents argue that the minimum wage is too blunt an instrument to
be useful, can have detrimental effects on employment, growth, and
incentives to work, and can negatively impact opportunities for lower-
skilled workers and youth.
 Supporters of the minimum wage conversely argue that it is an effective
instrument in protecting the lower paid and in combatting poverty
 Minimum wages exist in more than 90 per cent of the International
Labour Organisation's (ILO) member States.
 The purpose of minimum wages is to protect workers against unduly
low pay.
 They help ensure a just and equitable share of the fruits of progress to
all, and a minimum living wage to all who are employed and in need of
such protection.
 Minimum wages can also be one element of a policy to overcome
poverty and reduce inequality, including those between men and
women.
MEANING
 Minimum wages have been defined as “the minimum
amount of remuneration that an employer is required
to pay wage earners for the work performed during a
given period, which cannot be reduced by collective
agreement or an individual contract”.
 This definition refers to the binding nature of
minimum wages, regardless of the method of fixing
them.
 Minimum wages can be set by statute, decision of a
competent authority, a wage board, a wage council,
or by industrial or labour courts or tribunals.
 Minimum wages can also be set by giving the force of
law to provisions of collective agreements.
 Minimum wages represent the lowest levels of pay,
established through a minimum wage fixing
system, to be paid to workers by virtue of a
contract of employment.
 Minimum wages have three aspects: a) the

remuneration for work performed by the worker, b)

the workers’ basic income (and source of
purchasing power), c) a production cost.
 Minimum wages can be set by statute, collective

bargaining agreements, decisions of national

boards, or arbitration awards.
 They can be diff erentiated by region, by sector, or

according to country-specifi c criteria.

 Other sectors/ regions may remain uncovered by

minimum wage legislation.

 The concept of the living wage has been developed
from the concept of the minimum wage, and refers
to the level of wages that allows workers to meet
their and their dependents’ basic needs
 The minimum wage is not to be confused with the

concept of “minimum income” which is a social

welfare policy guaranteeing a minimum standard
of living for individuals and their dependents when
they have no other means of financial support.
 It is important to emphasise that wages are not the

same as incomes.
 Incomes to the lower paid are a mix of wages from

the employer, the government’s approach to

taxation, social transfers and government services.
 Governments introducing minimum wage policies
basically aim to protect low-income workers
through the introduction of minimum wages based
on country specific factors such as the cost of
living, welfare policies, labour market conditions,
the inflation rate and other economic factors and
trends.
Purpose
 The purpose of minimum wages is to protect
workers against unduly low pay.
 They help ensure a just and equitable share of the
fruits of progress to all, and a minimum living wage
to all who are employed and in need of such
protection.
 Minimum wages can also be one element of a policy
to overcome poverty and reduce inequality, including
those between men and women, by promoting the
right to equal remuneration for work of equal value.
 The purpose of a minimum wage, which sets a floor,
should also be distinguished from collective
bargaining, which can be used to set wages above an
existing floor.
 The purpose of minimum wage laws is to stop
employers from exploiting desperate workers. 
 The minimum wage should provide enough income

to afford a living wage.

 That is the amount needed to provide enough

food, clothing, and shelter.

 Although the minimum wage protects workers

from exploitation, it hasn't kept pace with inflation.

 i. Fairness/ reducing inequalities Minimum wages

aim at decreasing wage inequalities between the

bottom and the middle of earnings distribution.
 The same idea of fairness is often incorporated

into social welfare, which governments seek to

maximize, also as a political strategy.
 Poverty alleviation Minimum wages are often
associated with poverty reduction, but in reality have
been acknowledged as ineffective in alleviating
poverty as they are not well targeted to the poor.
 Imbalance of power in the employment relationship
Minimum wages are said to mitigate the potential eff
ects that could arise from the power imbalance
between enterprises and workers, which might lead to
workers accepting lower wages to obtain employment.
 Incentives to work Minimum wages could be justifi ed
within the framework of incentives, by motivating
unemployed individuals to enter the workforce if the
minimum wage is greater than benefi ts received
through social support. Furthermore, minimum wages
can increase the eff ort made by workers, as the
rewards increase and the opportunity costs of losing
the job become higher
SHORT HISTORY
 Initially, minimum wages covered relatively few
categories of workers and sought to protect those
considered to be especially vulnerable.
 New Zealand was the first country to implement a

minimum wage in 1894, followed by the Australian

state of Victoria in 1896, and the United Kingdom
in 1909.
 Frequently, minimum wages were considered as a

temporary measure, to be phased out once wage

bargaining between social partners would be
established.
 Early forms of minimum wages sometimes targeted

their protection at homeworkers or women

 After the Second World War, the number of countries with
minimum wages expanded. Newly independent countries such
as India (1948) and Pakistan (1961) were among those adopting
minimum wages.
 Francophone African countries adopted the French model of a
general minimum wage (SMIG) with a lower rate for agriculture
(SMAG), while Anglophone African countries adopted the
tradition of sectoral wage boards
 The legal coverage of minimum wages was progressively
expanded as it was increasingly felt that all workers, as a matter
of right, should receive protection against unduly low wages.
 Nationally applied minimum wages appeared in the Netherlands
(1969), France (1970) and Spain (1980). In the United States,
coverage expanded from about 20 per cent of the workforce in
the early years to nearly 80 per cent in 19704.
 Coverage also expanded in countries with sectoral minimum
rates. States in India, for example, gradually expanded the
number of sectors and occupations “scheduled” for minimum
wage coverage
 The economic and intellectual contexts of the 1970s and
1980s brought this expansion to a halt in some countries.
 The United Kingdom dismantled its wage councils in the 1980s
 The return of minimum wages – the 1990s and beyond
 In recent years, minimum wage systems have been established
or strengthened in many countries to address working poverty
and inequality.
 The United Kingdom introduced a new statutory minimum
wage with national coverage in 1999.
 Since the early 1990s eight other members of the
Organisation for Economic Co-operation and Development
(OECD) have adopted a statutory minimum wage, including the
Czech Republic, the Slovak Republic, Poland, Estonia, Slovenia,
Ireland, Israel and most recently Germany.
 Most OECD countries without a statutory minimum wage have
legal floors set through collective agreements, such as in
Denmark, Finland, Norway or Switzerland.
 As a result, minimum wages exist in all European countries.
 Many developing and emerging economies also
established or strengthened minimum wages.
China adopted a minimum wage in 1994 and
strengthened it in 2004; South Africa established a
system of minimum wages after the end of
apartheid in 1997; Brazil re-activated its minimum
wage policy in 2005; the Russian Federation
complemented its national minimum wage with
regional floors in 2007; and Malaysia adopted a
national minimum wage in 2013, followed by
Myanmar and the Lao People’s Democratic
Republic in 2015, and by Macao (China) in 2016.
 In Africa, the most recent country to introduce a

national minimum wage was Cape Verde in 2014.

The main ILO conventions
 Minimum wages have been a subject at the ILO
since its creation in 1919.
 Based on the view that “universal and lasting peace
can be established only if it is based upon social
justice”, the 1919 ILO Constitution called in its
Preamble for an urgent improvement of conditions
of labour, including “the provision of an adequate
living wage”.
 In 1944, the ILO Declaration of Philadelphia
referred to the importance of “a minimum living
wage to all employed and in need of such
protection”. This was reiterated in the 2008 ILO
Declaration on Social Justice for a Fair
Globalization.
What is included in a minimum wage?
 The term “wage” is generally understood to be the
payment an employer makes to his or her
employees – including to employees with regular,
casual, short-term, intermittent or seasonal jobs,
as well as to apprentices and trainees.
 This broad definition of “wages” is spelled out in

Article 1 of the ILO Protection of Wages

Convention, 1949
 In this general sense, the term “wages” is often

synonymous with terms such as “earnings” or

“remuneration”.
 It does not include income from self-employment.
 The components of a wage
 In many cases, total wages or earnings include different components,
such as:
 basic pay
 annual bonuses tips
 in-kind benefits
 productivity and performance pay
 allowances and premiums for non-standard work hours or dangerous
work.
 The fact that total wages or earnings are made of different components
raises the question of which components should count towards
compliance with the minimum wage
 In some countries, only basic wages are taken into account for the
purpose of minimum wages.
 In other countries, most other wage components are also included. While
both options are possible, a problem arises in cases where the basic wage
constitutes only a very small part of total earnings (in which case a
minimum wage that applies only to the basic wage is not very meaningful)
or when the components of the minimum wage are left undefined.
 In some countries with no clear legal definition of what the minimum
wage should include, this question tends to end up in court
Specific difficulties to achieving the general
objectives of minimum wage policies
 Protection of low-income workers is not always ensured
through minimum wage fixing policies. the main
difficulties relate to:
 The concrete defi nition of fairness and its

measurement: how to properly estimate the trade-off

between wage inequality and other factors in any
welfare function?
 The inefficacy of minimum wage policies in a context of

poverty alleviation. Poverty and low pay are indeed only

weakly related. Research shows that in most countries
only around 10% of low-paid workers are in poor
households. Indeed statistical evidence demonstrates
that the poorest households are those where no one is
working, and therefore minimum wage policies
 could not directly contribute to their poverty
reduction.
 The competition among employers that leads

businesses to compete against each other to find

the best candidates able to respond to their needs
 The motivating eff ect of having attractive

minimum wages, which may cause side eff ects on

the employment market, such as unemployment
increase whenever employers are forced to
suspend their business due to their incapacity to
pay the minimum wage
Benefits and Drawbacks
 Drawbacks are diverse. Minimum wages are widely
seen as having a distortionary impact on the labour
market.
 They have resulted in higher unemployment rates;

higher labour costs for business; in some countries,

and increased employment in the informal economy.
 Some of the reasons for these negative impacts are the

following:
 a. Minimum wages that are set too high can lead to

unemployment among low-skilled workers. Indeed,

workers with higher skills/ higher productivity who are
not directly affected by minimum wage policies are
preferred by employers, given the cost versus value
added for labour, in comparison with lower-skilled
workers/workers with low productivity.
 Furthermore, as firms increase their productivity due
to wage increases, workers may be replaced in the
medium long term through automation. As a result
unemployment may increase.
 b. General application of minimum wages, covering

all sectors and categories of workers, in all regions of

the country do not necessary correspond to the
employers’ capacity to pay, nor take into account
disparities between regional costs of living and the
sectoral fluctuation of profits. This has led to some
sectors being obliged to suspend their investment in
certain regions.
 c. Failure to find employment due to minimum wages

being higher than the market-clearing level pushes

workers to seek employment in sectors not covered
by minimum wage legislation or in the informal
economy where wages are even lower.
 d. Although minimum wage legislation should be
applied to all workers, it is difficult to enforce in
the informal economy. The situation is more severe
in developing economies with large informal
sectors. The role of minimum wages in many
developing countries as a means of establishing a
social floor is therefore much more questionable.
 Minimum wages may have direct negative effects

on teenagers; ethnic groups; the unskilled (they

may also reduce motivation to pursue higher levels
of education); workers with low productivity (those
workers who could have been employed if no
minimum wage system had been in place are
excluded from employment).
 Demonstrated benefits of minimum wages include
improved worker efficiency and higher productivity.
 Broadly speaking, higher minimum wages could have
positive impacts on workers’ purchasing power, thus
increasing their consumption expenditure, and in turn
stimulating aggregate demand and economic growth.
 Also, firms may increase their investment in plant and
machinery to improve productivity to counter rising
labour costs (for instance labour costs directly related
to the increase in minimum wages)
 Most supporters of the minimum wage are worker
advocates. They list five advantages to the minimum
wage.
 Workers who can cover the cost of living have better
morale.
 They are more productive if they have a
decent standard of living.
 Second, it reduces income inequality while providing an
incentive to work.
 The incentive makes it better for society than welfare or
a universal basic income. 
 Third, a minimum wage spurs economic growth. It gives
workers more money to spend. This
increases demand and business revenue.
 Fourth, workers who have more time and money can
then invest in their education.
 This further increases their productivity. It improves the
attractiveness of the country's labor pool.
 A more educated workforce increases innovation and
the number of small businesses.
 Fifth, minimum wage laws benefit individual businesses.
 Workers are less likely to leave to find a higher-paying
job. This reduces turnover and expensive retraining
costs.
 https://
www.ioe-emp.org/index.php?eID=dumpFile&t=f&f
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www.government.nl/topics/minimum-wage/comp
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www.thebalance.com/us-minimum-wage-what-it-
is-history-and-who-must-comply-3306209
 https://www.india-briefing.com/news/india-mini
mum-wage-a-brief-explainer-15102.html
/
 https://www.ilo.org/global/topics/wages/minimu