Minimum Wage

Wages are the central stimulating factor of working activity of the employees. In the present days, working activity is crucial for the economy of any country. Judging by the list of goods and services included in the calculation of the minimum subsistence level, this term serves not as a minimum requirement, but as something that bears different value in many countries (Rani, Belser, Oelz, & Ranjbar, 2013). It is no longer a living wage in its original interpretation of something determining the poverty line, but a level or type of income that reflects the minimum norms of consumption of an employee in a given period, taking into account the state of development of the country’s economy (MaCurdy, 2015). When analyzing minimum wage, the subsistence minimum serves as a social indicator of national importance. It is not intended for the use by employers as it is not found in labor and tax legislation (MaCurdy, 2015). There is no indication in the legislative framework of how to determine the minimum wage by knowing the approximate cost of living. When resolving the questions of establishing subsistence and wages minimum, one should orient oneself toward norms and experience of other countries only after an in-depth analysis of all the circumstances present.

The Essence of the Minimum Wage

Wages tend to represent a reward for an employee for the work performed, taking into account its complexity and conditions, the professional and business qualities of the performer, the results of their work, and its influence on the economic activities of the enterprise. Wages for workers are mainly established by tariff rates and discharge factors and by applying the rates of official salaries to them — furthermore, they are stipulated by the legislation surcharges, allowances, guarantees, and compensation payments (Bhorat, Kanbur, & Stanwix, 2014). In addition, these rates include the production premiums and other incentive payments (awards for work results for the year, compensation and payment for exceeding the specified standards, and special systems).

It is possible to assume that the minimum wage has a tendency to constitute a part of the labor market institution. In other words, it is possible to state that the minimum wage is to be referred to as an allowable price for the employee’s work. In addition to this, the matter of the minimum wage serves to prevent income and finance discrimination among workers. There are those who are generally referred to as low-skilled workers since their work is assessed as the one requiring few skills in the labor market, as well as workers who are characterized by the low-productivity level. The apparatus of establishing the minimum wage fluctuates, and consequently, it is dependent on the location and level of human life. It means that there are countries in which there is one national minimum wage established (David, Manning, & Smith, 2016). The climatic, monetary, and other circumstances of the regions determine if the countries have the right to fix their particular minimum wages (Bhorat, Kanbur, & Stanwix, 2014). There are also nations that have no single nationwide minimum wage, and it is established unconnectedly in each region.

In the strong connection with the country and its particularities, the governmental or the executive authority can establish the minimum wage. As a rule, it is done with involvement of professional associations, trade unions, and expert councils. The minimum wage may be equal to the subsistence minimum, exceeding it or not reaching it (David, Manning, & Smith, 2016). The essential glitch of labor market lies in the fact that the minimum wage does not affect the sustenance level (Rani, Belser, Oelz, & Ranjbar, 2013). Therefore, in general, labor market is characterized by a category of workers, such as the working poor (Bhorat, Kanbur, & Stanwix, 2014). It includes people of working age who have jobs and housing, yet are still poor since their wages are low and do not allow them to provide themselves with a decent level of life.

There is a tendency for the employers’ costs to increase with the growth of minimum remuneration due to the fact that they have to spend more money on paying the employees’ salaries. Within the framework of the neoclassical theory, if this value exceeds the equipoise price established on the market, the value of the labor stock intensifies, increases equilibrium, and exceeds the demand (Rani, Belser, Oelz, & Ranjbar, 2013). Consequently, there is an overabundance of labor supply, meaning that the rates of unemployment are growing (David, Manning, & Smith, 2016). The establishment of the minimum wage is fraught with unpredictable salaries that the employers need to pay (Bhorat, Kanbur, & Stanwix, 2014). This approach tends to presuppose that it will be unbeneficial for a company to preserve many workers. Thus, they have to fire them, thereby dropping occupation levels and contributing to the trend of joblessness (Rani, Belser, Oelz, & Ranjbar, 2013). In addition, organizations that employ low-paid workforces risk being squeezed out of the market.

Minimum Wage and Income Inequality

Inequality in wages continues to increase at the global level. Since 2008, the difference between the maximum and minimum wage has increased in more than two thirds of all countries for which data are available. If the developed countries are taken under close observation, then the fastest rates of increase of a rupture between the maximum and minimum wages are observed, for example, in Germany, Greece, and the USA (David, Manning, & Smith, 2016). In other regions of the world, this difference has also increased sharply, especially in the countries such as China, Argentina, and Thailand (Bhorat, Kanbur, & Stanwix, 2014). Those who have managed to reduce wage inequality include countries like France and Spain, as well as Brazil, Iran, Iraq, and Indonesia, although in the latter two countries, this inequality remains very significant (Bhorat, Kanbur, & Stanwix, 2014). There is still a significant difference in the remuneration of women and men, and it decreases very slowly. In addition, the ratio of women’s regular wages to men’s regular wages has augmented by approximately 80% in numerous countries (Bhorat, Kanbur, & Stanwix, 2014). However, the magnitude of such change is small, and in some cases, negligible.

In most countries, women’s wages constitute an average of 70-90% of the wages of men, but in other regions, especially in Korea, China, and Japan, the difference is often much smaller (Hirsch, Kaufman, & Zelenska, 2015). The issue of minimum wage has acquired social significance (Rani, Belser, Oelz, & Ranjbar, 2013). Its importance started to increase in the recent years due to the necessity of reducing social tension that arises from the growing inequality between middle- and low-income groups of workforce (Rani, Belser, Oelz, & Ranjbar, 2013). In the period from 2001 to 2007, in the world as a whole, the minimum wage was increasing by 5.4% per year in average (Hirsch, Kaufman, & Zelenska, 2015). This fact differs from the situation of the previous years, when the real size of the minimum wage was decreasing. Within the above-mentioned period, the actual increase in the minimum wage was significant enough in both developed and Western countries (+ 3.9%) and in the developing countries (+ 7.5%) (Rani, Belser, Oelz, & Ranjbar, 2013). Minimum wage has also increased, as well as the relative average wage — namely, from 39% in 2000-2004 up to 40% in 2005-2007 (Dube, Lester, & Reich, 2016). On the other hand, high wages in the developed countries stimulate enterprises to seek and find reserves to increase labor productivity (better-organized mechanized labor, etc.) (Rani, Belser, Oelz, & Ranjbar, 2013). It is known to give an opportunity for a new increase in wages (Dube, Lester, & Reich, 2016). In addition, due to the increase in wages, the state budget is replenished because of progressive income taxation (Hirsch, Kaufman, & Zelenska, 2015). Therefore, the developed economies are characterized by the desire to raise minimum wages and thereby achieve a general increase in them.

The state regulation of labor remuneration should be directed, first of all, toward creating conditions for constantly expanded reproduction of labor force of the required quality and toward stimulating high labor productivity of the hired workers. The state must ensure compliance with these and with economic laws and prevent distortions in the differentiation of wages by categories, groups, and professions of employees (Dube, Lester, & Reich, 2016). In addition to this, it has to identify the causes of undesirable trends and implement measures to localize and eliminate them.

The minimization of the role of wage regulation in ensuring conditions for expanded reproduction of labor force is one of the major reasons for demographic crisis, shortage of qualified personnel, labor migration, and other undesirable phenomena. The factor of labor productivity has lost its importance, and the economic law of the growth of labor outstripping the growth of wages has been forgotten (Bhorat, Kanbur, & Stanwix, 2014). The constant lag in the growth of labor productivity, further affected by the growth of this indicator in other countries of the world, largely predetermines the worst dynamics of the products’ cost and their low level of competitiveness (Hirsch, Kaufman, & Zelenska, 2015). It is essential to resume the practice of meeting the requirements of the law of anticipated growth in labor productivity and control provision, though this task is not simple.

The Effects of the Minimum Wage

There are inducements to change certain negative sectors of the economy with intensification in the level of minimum wage. They are not covered by the minimum wage, and labor lawmaking is not respected there. In addition, workforces not employed in the formal sector and discharged from it continue to be hired by the informal sector (Rani, Belser, Oelz, & Ranjbar, 2013). All this contributes to the development of informal employment (Basu, Dercon, Kanbur, & Svejnar, 2017). The proprietor raises wages not only for low-income workforces, but also for supplementary groups of employees since one of the purposes of the minimum wage is the equalization of profits dissimilarity. Otherwise, low- and middle-income groups will receive comparable salaries for different forms of labor productivity, meaning that labor incentive will fall and the rates of dissimilarity will progress (Rani, Belser, Oelz, & Ranjbar, 2013). This intensification in remunerations is called the overflow effect (Basu, Dercon, Kanbur, & Svejnar, 2017). Undoubtedly, minimum remuneration leaves only a positive impression on other features of the labor market at the first glance (Rani, Belser, Oelz, & Ranjbar, 2013). Nonetheless, the effect of raising it is quite contradictory (Basu, Dercon, Kanbur, & Svejnar, 2017). It depends on the labor market structure, labor legislation, the country’s economy development, and other factors (Rani, Belser, Oelz, & Ranjbar, 2013). In addition, minimum wage can also affect the scarcity level in the country, the discrepancy of regions of the country, and other influences.

The problems that are associated with state wage regulation, along with a wide range of other important issues, should be given serious attention. The scholars note that at the present stage, social development goes far beyond the market laws of the organization of economic life, and a part of public goods, along with their distribution, production, exchange, and consumption, cannot be regulated by purely market principles (Basu, Dercon, Kanbur, & Svejnar, 2017). Therefore, among key problems, there is the fundamentally important need to overcome the inefficient benefits offered by the employers, generated by the peculiarities of the process of privatization (Rani, Belser, Oelz, & Ranjbar, 2013). The problems also comprise the inefficient workforce since this issue is facilitated by artificial understating of labor costs, ineffective motivational mechanisms, and preservation (and even strengthening) of psycho-behavioral stereotypes of passive attitude to work (Rani, Belser, Oelz, & Ranjbar, 2013). The normative documents of the minimum wages all over the world also emphasize that the improvement of the payment system is one of the most urgent and acute problems at the present stage of socio-economic development (Rani, Belser, Oelz, & Ranjbar, 2013). The reason for it is a significant lag in terms of wages that have different standards in all developed countries and in most emerging markets (Rani, Belser, Oelz, & Ranjbar, 2013). This issue should be considered in conjunction with the shifts in the main macroeconomic indicators, in particular regarding GDP and labor productivity, which are noticeably behind the growth of the average monthly salary.

The Impact of Minimum Wages on Labor Markets

To analyze the impact of the minimum wage on the labor market, it is necessary to observe the situation in the Western and European countries and their labor market. The countries tend to differ in economic development, the structure of the labor market, labor legislation, socio-economic problems, and the age of the minimum wage institution (Rani, Belser, Oelz, & Ranjbar, 2013). Therefore, it is crucial to mention that in some countries, the minimum salary is equal to the established maintenance minimum or even surpasses it (Rani, Belser, Oelz, & Ranjbar, 2013). In general, in such countries, minimum wage guarantees the minimum provision of all needs.

Establishing minimum wage as the bottom border of the price of labor services simultaneously solves two problems. The main one among them is raising the standard of living of those workers whose labor market productivity is estimated as being low. Another task that the minimum wage implements involves reducing the differentiation of the employees’ incomes. Thus, this institution of labor market performs a social function primarily (Rani, Belser, Oelz, & Ranjbar, 2013). In addition, the employees, especially low-paid ones, are interested not only in the budgetary sphere, but also in the private sector of the economy. These groups perceive minimum wage as an instrument capable of improving their living standards and as a testimony of state guarantees.

In the European states, a differentiated approach to the calculation of minimum wage was initially applied. Regulation of its magnitude was carried out through regional agreements. Accordingly, there were statutory minimum rates established for the workers in various spheres. The need to regulate the size of the minimum wage is based on the fact that the agreements on establishing wages between the parties of labor relations are not always achieved, and the negotiation process can be delayed. The objective reason for government intervention is the vulnerable position of the employee in comparison with that of the employer. The given quantitative values ​​of minimum wage and the legislative peculiarities of its establishment proved the existence of contradictions between the real situation and the documented provisions (Garnero, Kampelmann, & Rycx, 2015). As the result, it has led to the need for a deeper study of this issue in order to further develop recommendations and basic provisions for regulating the situation in labor market through the institution of minimum wages.

These days, there are two influential methods for addressing the issue of minimum wage. One of them is based on the sustenance minimum, while the other one is focused on the ratio with the average remuneration. If the first method, which allows to establish and provide the minimum required standards of material security, is applied in the conditions of low economic opportunities of the country, then the second method is most widespread in economically developed countries (Addison, Blackburn, & Cotti, 2013). It is necessary to use both methods in order to see the situation more objectively and formulate measures to smooth out the differentiation of wages (Garnero, Kampelmann, & Rycx, 2015). Regarding the issues of establishment and regulation of minimum wage, these processes cannot be of a natural, random nature and depend only on the capabilities of the budget (Cadena, 2014). The establishment of minimum wage requires a special approach that avoids the strong influence of political and economic factors (Addison, Blackburn, & Cotti, 2013). Primarily, it is necessary to raise the minimum wage to the real value of the subsistence minimum, taking into account the socio-economic situation in the country and in the region.

First, it is necessary to carefully analyze and check the actual data on principles and methods of calculation of the previously unused and poorly studied indicators. It starts from the establishment of the list of items of expenditure included in the relevant calculations, as well as the unification of tariffs, the cost of services, and the methods for determining them (Cadena, 2014). It is needed for considering regional differences (Addison, Blackburn, & Cotti, 2013). The analysis of information received and of the development of specific proposals based on it will increase the level of people’s well-being and their wages, ensuring a normal process of reproduction of labor and interest of people in the results of their work (Addison, Blackburn, & Cotti, 2013). The growth of wages should occur only with the growth of labor productivity on the basis of global modernization, the all-round increase in the technical level of production, and modern science-intensive technologies (Garnero, Kampelmann, & Rycx, 2015). It must be emphasized that the cost of labor is not an indicator of the wage being appointed or set — instead, it is the level of labor remuneration, which should be regarded as a measure of improving people’s well-being in all possible ways (Cadena, 2014). It is explained by all-round development of the economy, taxation, pricing, struggle against corruption, bribery, and embezzlement of states’ property, as well as the lack of additional payments to wage earners.

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