Minimum Wage Determination

Nearly all developed countries have a form of minimum wage that is applicable throughout their economies. The purpose of a minimum wage is to protect the lowest-paid workers, since poverty is not limited to people without work but can seriously affect the ‘working poor’ – those people who are in employment, even full-time employment, but who nevertheless cannot afford to pay for basic goods and services. Reasons for protecting the working poor are not just to do with philanthropy or equity, although these are very powerful reasons, but also because poverty increases public service costs, i.e. the government must provide education, food coupons, health services and the like or else the suffering that people face will drive some to crime and the possibility of civil unrest increases.

There seems to be no magic formula (or advanced scientifically determined algorithm) for the way to calculate an appropriate level of a minimum wage, although governments will usually be aware of World Bank estimates of the poverty line (i.e. US$2 per day). Instead, technical advisors will determine what is the level of income that is required to survive in a particular economy given such issues as purchasing power parity (the cost of living) and the median income (how much other people are earning). This is usually presented in a band of income figures, from lowest to highest. Negotiations then determine at which end of the band the actual figure is actually used.

Generally, countries now operate a tripartite system for minimum wage determination. This consists of some variation of a committee on which will sit government officials, representatives of employers and representatives of the workers (trade or labour unionists if these are legally permitted). Employers generally wish to minimize labour costs while workers wish to maximize incomes. Consequently, these two generally disagree with each other and the actual decision is taken by the government officials. It will be evident that the nature of the government and its position with relation to the democratic process will have a strong impact on the decisions that will be made. In recent decades, for example, the power of corporations has increased dramatically and the amount of lobbying on their behalf that takes place in developed and developing countries means their interests are most commonly followed by government, whether it means suppressing minimum wage levels or removing regulations preventing corporations from poisoning the environment and their customers (which is presented as ‘cutting red tape’ or ‘efficiency savings’).

Throughout history, there have been only brief periods when workers’ interests are properly represented at governmental level. These periods generally coincide with eras of high economic growth and social cohesion.