David answered on
Nov 30 2019
17 | Page REPORT
1. What do we write about in this report?
This report is a group assignment. It has been written by a team consisting two students. Consider me and my teammate to be economic advisors to an Australian Parliament Member (MP). The PMs are expected to have a good understanding of a wide range of economics policies - their desirability, implementation in various countries, how they cu
ently work in Australia and if and how they could be improved upon. Of course, the role of MP is a very busy one involving meetings, debates, writing draft laws, etc., and may leave not enough time for economic research.
Our job as economic advisors in this assignment was to write a short report which would inform an MP about key aspects of a particular labour market policy. The policy that is being taken up here is the Minimum Wages Policy.
Our report aims to address the following points, where possible:
1. How prevalent is the policy in various countries of the world? What are the similarities and differences in implementation of this policy across the world?
2. Discussion on the theoretical effects of this policy on labour market using graphs and equations where appropriate.
3. Summary of the key empirical findings about the effects of the policy on labour market outcomes internationally
4. Why does this policy exist? Who benefits from this policy?
5. In what form is this policy implemented in Australia? Summary of the key details of implementation of this policy in Australia. How does Australia compare to the countries discussed in point 1?
6. What is the state of the cu
ent public debate regarding this policy in Australia and are there any changes planned or proposed?
7. Do we think that the Australian implementation of this policy can be improved upon? If yes, proposal and motivation of the probable improvements. If no, explanation as to why.
2. What should we read before attempting the report?
The key reading for the reports is the relevant chapter from the Tito Boeri and Jan can Ours book “The Economics of Imperfect Labour markets”. The chapters in this book are structured in a similar way that is expected of our reports, they are just longer and have more information. There are sections in the Ehrenberg and Smith textbook “Modern Labour Economics: Theory and Public Policy” that are also quite useful. These two sources were sufficient for addressing points 1 through 4 for most policies. For information about Australian implementation of the policy chosen, some academic and newspaper articles were refe
ed too where ever they were relevant.
Minimum Wages: A Backdrop
Theoretical Effects of the Minimum Wage Policy - a Market Perspective
A Competitive Labour Market
A Non-Competitive Labour Market
A Dual Labour Market
Minimum Wage Policy: Empirical Effectiveness
Studies Based on Firm-Level Data
Studies Based on Natural Experiments
Studies Based on Workers’ Histories
The Need for this Policy and its Beneficiaries
Implementation in Australia
Public Debate Regarding This Policy in Australia
1. Minimum Wages: A Backdrop
We all are aware of the labour supply and labour demand models of traditional Labour Economics. Labour has its own market where the forces of labour demand and labour supply interact to determine the equili
ium wage rate of labour and the equili
ium number of Work Hours to be supplied by each worker at that determined wage rate.
However, this framework acts smoothly in a competitive structure. In reality, competitive labour markets are hard to find. There are always several distortions in practice in all kinds of labour markets across the globe. These distortions may be institutional, structural or, intentionally created to move the market away from the competitive nature. As a non-competitive market structure always tries to benefit a particular section of the market population, be it the buyers or the sellers, as one community gets better off the other may get worse off, creating a pareto efficient structure artificially, where it is not possible to make one better off without making the other individual worse off.
One of the most widely practised institutional distortions created in an otherwise competitive market structure is the adoption of the ‘Minimum Wage Policy’. As the booms and bursts of the business cycle are considered by one school of anti-capitalism economic thought, to be too ruthless for the common masses, who themselves are not the owners of capital but are mere workers who earn wages by working for the ‘Capitalists’, these economists who support such a school of thought, have
ought forward a social aspect to the labour market policies, by encouraging the establishment of social and administrative institutions, especially in the form of a Government, whose objective would be to monitor the social aspect of a labour market and how it does affect the masses. The adoption of the Minimum Wage Policy involves setting a wage floor, i.e. a lower bound to the wage paid to individual workers. This is done to protect them to some extent from the ruthless bites of the business cycles.
The first minimum wage was introduced in the United States in 1938 and paid 25 cents per hour. In 2007 the federal minimum wage was $5.85, in nominal terms 23 times larger, but, in real terms, only 1.4 times larger than 70 years ago. Although most countries in the world have some form of minimum wage, the scale, eligibility, and operational details change from country to country, so providing a cross-country-comparable definition and measure of the minimum wage is not an easy task.
The most commonly used measure to summarize the relevance of the minimum wage in affecting the distribution of earnings in different countries include the ratio of the minimum wage to the average wage.
2. Cross-Country Comparisons
A large body of theoretical and empirical research examines the effects of the minimum age. While, theory offers clear-cut predictions only in the case of a competitive labour market, empirical results point in both directions—positive and negative effects of the minimum wage on employment—which is possible in a labour market where individual firms face upward-sloping labour supply curves.
While Minimum Wage determination can be done either by the Govt. of the country, or, through collective bargaining done by the Trade Unions representing the working class or, by the owners of capital (or other working resources) themselves, this imposition of a Minimum Wages has different impacts on different economies across the globe.
Here, we try to compare minimum wages across countries by measuring their value relative to some central measure (mean or median) of the wage distribution. In this relative measure, we have taken as the denominator the wage of the average production worker (APW) for purposes of international comparison.
The detailed statistics and figures are displayed in Table (2.1) in the next page.
Table 2.1 Minimum Wages in OECD Countries (2005)
Minimum Wage to Average Wage Ratio (%)
Minimum Wage (€ Per Hour)
Minimum Wage (€ Per Hour) PPP
Sources: OECD, LFS Database; ILO Minimum Wage Database.
Notes: 1 Minimum wage as percentage of the wage of an average production worker (APW).
3 Real hourly minimum wage in Purchasing Power Parity times monthly number of hours.
4 Indicates whether wage floors are set by statutory rules defined by law or by collective negotiation and the levels of this agreement. CB = collective bargaining; L = set by law; P = provincial; F = federal; N = national.
5 Coverage is equal to 100 if the minimum wage is set by law, or where the coverage of collective agreements is
extended to all workers; otherwise it measures the fraction of workers covered by the collective agreements
defining contractual minima.
As shown in the table: -
· There are a wide range of values of the index, which goes from a low of 27 % in Korea to a high of 52 % in Ireland and Portugal.
· Minimum wages are lower in the developed countries like Japan, the United States, and Canada as compared to many developed European countries.
· These cu
ent cross-country asymmetries are the by-products of diverging historical developments. As indicated by figure 2.1, the minimum wage in the United States has been falling since the end of the 1960s relative to the average wage, just when it started steadily increasing in France.
· The New Member States of the European Union (Hungary, Czech Republic, and Poland) are at the low end of the European distribution of minimum wages,...