Minimum wage

The minimum wage is based on a federal law that sets the lowest wage an employer can pay an employee. In the United States, the FAIR LABOR STANDARDS ACT (FLSA), passed in 1938 and amended many times since then, is a major labor-management law regulating wages. The act, which also contains directives regarding hours, child labor, equal pay, and overtime pay, entitles covered employees to a specified minimum wage and a time-and-a-half rate for work exceeding 40 hours per week. One of the critical and complicated aspects of the FLSA is the question of who is covered by the act. Generally employees paid by the hour for businesses engaged in interstate commerce or that produce goods and SERVICES for interstate commerce are covered by the act. Federal employees were added to coverage under the act in 1974, but most executive, administrative, and professional personnel are exempt from coverage. Whether or not an employee is covered is important in determining which workers can be expected to work beyond 40 hours per week without compensation and which employees must be compensated. When first legislated, the federal minimum wage was $.25 per hour; in 1998 it was raised to $5.15. The intent of the minimum-wage law was to help poor working people. Economists are in constant disagreement about whether minimum-wage laws achieve this objective. Generally, PRICE FLOORS (a minimum wage is a price floor in LABOR MARKETS) above the prevailing wage cause a surplus in labor markets. If a minimum-wage law raises the market price for labor, there will be less quantity demanded (employers hiring workers) and greater quantity supplied (people willing to work for the new, higher wage), resulting in a surplus. The idea that minimum wages result in more unemployed people assumes the prevailing market wage was lower than the new minimum wage. Even during the 1990s’ economic expansion in rural and higher-UNEMPLOYMENT areas, the prevailing wage was close to the minimum wage. In these labor markets, increasing the minimum wage reduced the number of workers hired, but those still working received a greater INCOME. Opponents of minimum-wage laws suggest that in this situation the government forced a transfer of income from those who lost their jobs to those who remained employed at the higher wage. If, instead, the prevailing wage is higher than the minimum wage, it will have no impact on the market for workers. Throughout most of the 1990s’ market expansion, most urban and suburban area employers had to pay more than $5.25 per hour to find workers. At upscale, labor-short Hilton Head Island, South Carolina, many fast-food chains closed early because they could not find workers, even at $8.00–$9.00 per hour. In any market where the price of labor is expensive, employers are encouraged to substitute alternative RESOURCES when possible. Fast-food companies purchase technology to reduce and replace workers. Some companies outsource lowskilled operations to other areas of the country and even other parts of the world where the cost of labor is less than in the United States. One of the issues associated with the minimum-wage debate is: “Who benefits from increasing the minimum wage?” Most full-time workers are paid more than the federal minimum wage. In the United States, it is primarily part-time working adults who are paid the minimum wage. This group includes second-income earners, retirees, and teenagers. Opponents of increasing the minimum wage argue that increases do not go to working poor people. University of Chicago economist George Stigler reportedly told the story of the farmer who thought sick pigs tended to have straight tails. The farmer tried to cure them by chopping off their tails. By analogy, Stigler suggested, raising the minimum wage addresses the symptom of low pay but not the cause. Generally employee pay is based on the value of the output produced by the worker, the worker’s marginal revenue product. Efforts to increase worker productivity would then be likely result in increased income. Nevertheless, social advocates argue that workers should be paid a living wage, pay that is high enough to provide a basic STANDARD OF LIVING and would vary depending on the cost of living in each community.