OECD Observer_ The minimum wage_ Making it pay.pdf

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The minimum wage: Making it pay
By
John Martin,
Director, and
Herwig Immervoll,
OECD Directorate for Employment, Labour and Social Affairs
Minimum wages are hotly debated as ways of improving equity and boosting the wages of lower skilled workers. All
OECD countries apply some kind of wage floor. Do they achieve their goals?
When an employment search website was launc hed in Germany a few years ago, it c aused a stir, not least bec ause of its provoc ative
title: Jobdumping.de. The idea was c rudely simple, too. An employer posts a vac anc y and the wage they are ready to pay. Job seekers
make their bid, and the employer either hires the c heapest worker or bids up the wage to get the worker they want. The idea took off. Jobs
were advertised and snapped up at low pay rates, including some, suc h as c leaning jobs, at well below the German average. This
Click here for bigger graph
promoted exploitation at a time of high unemployment, some blogs cried, and broke strict labour agreements, others remarked.Did it?
©OECD
Germany’s labour market is well-regulated, though it is one of nine OECD c ountries with no nationally applic able minimum wage. This
group of countries, which also includes Austria, Italy and the Sc andinavian countries, has traditionally relied on c ollec tive bargaining agreements to set wage floors,
c overing sectors and occupations which ac count for a very high proportion of the workforce. However, some workers are not c overed by these c ollec tively-negotiated
wage minima and legislation has sometimes intervened. For example, it was partly to prevent unfair wage dumping from c ontrac tors using c heap labour, often from
abroad, that Germany adopted a wage floor for the c onstruc tion sector in 1997. Then in March 2007, lawmakers agreed to set a minimum wage floor for 850,000
c leaners, too.Minimum wages are a long-standing tradition in many other OECD c ountries. A minimum wage was first introduc ed in New Zealand in 1894, and followed
a few years later by Australia. The US federal minimum wage was passed into law in 1938. Japan and Korea now have minimum wages, while in Europe, so do Franc e,
Greece, Portugal, Spain, the Benelux c ountries and many c ountries in central and eastern Europe. Ireland and the UK (not for the first time) introduc ed national
minimum wage systems in the 1990s.Today 21 of the OECD’s 30 member countries have statutory minimum wages, and in just over half of these c ountries minimum
wages have risen slightly faster than average wage levels in recent years. Only in the US have the real earnings of workers on the minimum wage dropped sharply in
recent years, and there is strong pressure to raise them again.What are the pros and c ons of having a minimum wage? Wage floors dissuade employers from poc keting tax
c onc essions aimed at improving take-home pay of low-wage workers or passing on any payroll taxes by lowering wages. They c an improve equity by lifting the inc omes of
lower paid workers and encourage those on the edge of the labour market, such as the low-skilled, to hunt for a job. If set too low, they lose this usefulness. However, if set
too high, minimum wages will stop employers from hiring lower skilled workers, and may end up protec ting the “insiders” with the jobs.For some firms, the c ost of taking on
extra staff, even at the minimum wage, can be a hurdle. In fac t, social contributions and other payroll taxes add, on average, around 18% to the c ost of employing
minimum-wage workers. Most countries charge similar rates for minimum-wage labour and higher-earning employees, but preferential rates are found in Belgium,
France, Hungary, Ireland and the UK.If several countries with legal minimum wages have low unemployment rates, it is largely bec ause the level is deliberately set so as
not to constrain job growth. In the UK, a special commission has been quite effec tive to date in ensuring that the minimum wage keeps up with living c osts and growth,
while not rising too high.On balance, the evidence shows that an appropriately-set minimum wage need not have large negative effec ts on job prospec ts, espec ially if
wage floors are properly differentiated (e.g. lower rates for young workers) and non-wage labour costs are kept in c hec k. But what about the goal of boosting inc omes
among lower paid workers? Do wage floors “make work pay”? Consider gross earnings first. On average ac ross 21 OECD c ountries, the gross earnings of a full-time
minimum-wage earner came to nearly 38% of average wages, ranging from roughly 25% of the average in Korea and Mexic o to more than 45% in Australia, Franc e,
Ireland, the Netherlands and New Zealand. Moreover, sinc e 2000, gross minimum wages have grown by approximately 8.5% in real terms on average ac ross the 21
c ountries.How much of these inc reases go towards improving people’s net wages? A higher gross minimum wage may boost gross inc ome, but what really matters is net
take-home pay. This is the amount workers ac tually get into their pockets, and it depends on how tax and benefits apply to low-wage earners. Minimum-wage workers are
paid the lowest wages but they still pay taxes. Add in soc ial c ontributions and the overall burden on minimum-wage earners remains c onsiderable, at between 15% and
28% in half of the c ountries. On average across the 21 c ountries, income taxes and social contributions reduc e the take-home pay of full-time minimum-wage earners by
just under 15%.After adjusting for differences in pric es ac ross c ountries using purchasing power parities for 2006, this leaves a net inc ome of about $4.50 per hour in the
US and Japan. A full-time minimum-wage job pays most in some west European c ountries and in Australia, at a PPP equivalent of around $7.50 per hour.The after-tax
value of hourly minimum wages ranges from 27% of the net average wage in Korea, up to 60% in Ireland. In seven c ountries it is above 50%, and in another six below
40%, including in the US and Japan (see chart).Some 10 c ountries have eased tax burdens on low inc omes in rec ent years. Over the 2000-2006 period, the sharpest tax
reductions for minimum-wage workers have been in Belgium, Franc e, Ireland, the Netherlands and, in spite of a large inc rease in minimum-wage levels, in Hungary.
Also, tax burdens of average wage earners have fallen less strongly than for minimum-wage earners.In other words, raising minimum wages might lift labour c osts, but not
nec essarily boost net incomes as muc h as they should. Policymakers may ac hieve more impac t by improving disposable earnings via c hanges in the tax and benefit
system. By blending such measures with appropriately-set minimum wages, work can be made to pay.
References
OECD (2007),
Taxing Wages 2005/2006,
spec ial feature, “The Tax Treatment of Minimum Wages”, Paris.
OECD (2006),
OECD Employment Outlook 2006: Boosting Jobs and Incomes,
Paris.
See
www.oec d.org/employment
OECD (2003),
Employment Outlook 2003,
“Making Work Pay, Making Work Possible”, Paris.
St. Martin, Anne and Peter Whiteford (2003), “More jobs and better pay”,
OECD Observer
No. 239, September, OECD, Paris.
OECD Observer
No. 261 May 2007

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