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The impact of minimum wage laws Tai, Janet Yung Yung

Abstract

In Great Britain and m the United States, legal minimum wage regulation has, by and large, been devoted to the purpose of raising the wages of the lowest-paid workers. One would expect, therefore that the immediate impact of minimum wage laws would be a source of wage advantage for the lowest-paid industries, thereby narrowing the relative wage differential between low-wage and high-wage industries. Have the British and the American minimum wage laws achieved this purpose? This is the principal question which this study attempts to give some answer. Available evidence has indicated that the initial (immediate) impact of minimum wage legislation has been to reduce the interindustry wage dispersion. However, over a longer period of time, after the initial wage advantage in favour of the low-wage industries, high-wage industries have tended to grant larger than average percentage increases in wages, as a result, low-wage industries lagged behind. This tendency was observed in the British Wages Council industries during the 1948-1950 period; and in the American low-wage industries throughout the duration of the 1950 75 cents minimum, 19'50-1955. Existing explanations have leaned towards the view that minimum wage regulation itself has been causing, directly or indirectly, widening of the wage structure. What we have termed the Bowlby type hypothesis, suggest that in fact minimum wage legislation instead of being a source of wage advantage for low-wage industries they are intended to help, causes a widening of the wage structure. Such explanations of wage lags are inadequate since they fail to isolate minimum wage legislation from other possible causes of wage changes. Wage structure studies have indicated some of the more important of these wage determinants that make for interindustry wage variations. The need to relate the two areas of wage study more closely minimum wage theory and wage structure theory -- seems obvious. Our contribution in this study is an attempt at a partial synthesis of the two types of wage studies, and to suggest an alternative wage-lag hypothesis to interpret wage lags in terms of wage structure variables. No attempt is made to subject the alternative wage-lag hypothesis to rigorous testing. Rather the attempt has been to provide some supporting evidence that factors other than a legal minimum have been causing the wage lag m the periods 1948-1956 m the United Kingdom, and the 1950-1955 period in the United States. Instead of using correlation and regression analysis, the standard tools of wage structure studies, we employ a two sector model -- a high-wage sector and a low-wage sector. A comparison is then made between the high-wage and low-wage sectors with respect to differences m wage movements, m output, productivity, and employment trends, concentration, profits, and unionism, to ascertain whether these variables have, on balance, worked to the advantage of the high-wage industries and to the detriment of the low-wage sector, thus accounting for the divergencies in wage movements. The main finding with respect to wage movements in both countries is that the high-wage sectors have tended to "lead" industry wage movements, and the low-wage sectors to lag behind general wage increases. The other significant finding is that the leading high-wage sectors were m general, more highly concentrated, more profitable, and more strongly unionized than the low-wage sectors. Subject to the limitations of data and method, our findings do indicate that under "facilitating environmental circumstances," the high-wage sectors have been able to make greater than average wage increases, while the low-wage sectors, because of their unfavourable combination of low-concentration, low-profits, and low-degree of unionization, have lagged behind. These conclusions therefore tend to refute the Bowlby wage-lag hypothesis and its variants -- that minimum wage legislation has caused the widening of the wage structure -- and to lend considerable weight to our alternative wage-lag hypothesis. The alternative wage-lag hypothesis leads to its collorary hypothesis: that in the absence of minimum wage laws which set a floor under wages, wages in low-wage non-regulated industries would experience greater wage lags than if there are such limits to wage declines. The collorary hypothesis suggests, that even if minimum wage laws have not been able to reduce wage dispersion over a longer period of time, they at least achieve the limited purpose of preventing a further widening of the wage structure. From a policy standpoint, the alternative wage-lag hypothesis and its collorary thus suggest, that minimum wage laws in Great Britain and the United States, have been a source of improved standards for low-wage industries.

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