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«THE THEORETICAL DEBATE ABOUT MINIMUM WAGES HANSJÖRG HERR MILKA KAZANDZISKA SILKE MAHNKOPF-PRAPROTNIK ISSN 1866-0541 ...»

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In such a constellation minimum wages become extremely important. If minimum wages affect a sufficient number of employees and if they increase according to the trend productivity plus the target inflation rate of the central bank, they become a vital instrument that supports the nominal wage anchor and prevents deflationary developments.

Second: In a theoretically extreme case any increase in nominal minimum wages can change the nominal wage level without changing the wage structure. If in this case minimum wage increases are higher than the increase in trend productivity plus the target inflation rate, an unduly high inflation would result, although income distribution would not change. We have no knowledge of a country where an increase in minimum wages led to inflation. In the general case increases in minimum wages compress the wage structure, benefit low-wage earners and lead to a change in income distribution first of all within wage earners. How the wage structure should look is a political question. If unions are strong the wage bargaining mechanism can guarantee a desirable level of low wages.20 However, in most of the countries of the world statutory minimum wages exist.

The existence of minimum wages is not sufficient to guarantee positive effects.

According to our analysis minimum wage policy should be in line with the

following principles:

a. Minimum wages must affect a sufficient number of employees – they must be “in touch” with the existing wage structure in a country.

b. They should be adjusted frequently, usually annually.

c. They should increase at least according to trend productivity growth plus the target inflation rate of the central bank. Otherwise they cannot help to establish a wage anchor against deflation efficiently.

d. They should increase at least in line with average wages because this is the only possibility to prevent an increase in the wage gap. As long as low wages are considered to be too low in comparison to average wages, minimum wages should increase faster than average wages.

Minimum wages can only fix nominal wages. However, a debate about “living wages”, a discussion about the level of real wages needed to guarantee a decent life for low-wage earners has ensued. This debate is not in contradiction with our analysis. The debate about living wages is an important contribution to the In Scandinavian countries there are no minimum wages. In these countries unions’ wage bargaining is sufficient to prevent very low minimum wages. In Germany, for example, unions and labour market institutions have become so weak that a low-wage sector with very low wages has developed. There were no minimum wages in place which could have prevented wages in some professions and some industries from dropping.

GLU | The Theoretical Debate about Minimum Wages

debate about how the wage structure should be. There is no optimal theoretically determined desirable wage structure. Different unions and different groups in society may have fundamentally different interests and opinions about the preferable wage structure. Only a political process can answer the question as to which wages are acceptable for low-wage earners.

In a Keynesian perspective no relevant positive or negative employment effects resulting from changes in minimum wages can be expected. Employment in the Keynesian paradigm is not driven by processes in the labour market. Aggregate demand is important for employment which, among many other factors, depends on the expectations of firms and households, on monetary and fiscal policy and also on the distribution of income. As far as higher minimum wages lead to a more equal income distribution, a positive demand effect can be expected as low-income households consume more out of their income. Changes in the wage structure will lead to changes in the price structure and to a myriad of substitution processes including new technology choices. It is simply not possible to find a theoretically clear answer on the employment effects of changes in minimum wages. Macroeconomic analyses of changes in minimum wages may be able to draw some light on employment effects. However, the processes of change in minimum wages are very complex and the net employment effects difficult to pinpoint. We would like to emphasise here that the vast majority of empirical analyses has found only insignificant employment effects and usually no negative ones of increases in minimum wages.

GLU | The Theoretical Debate about Minimum Wages

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GLU | The Theoretical Debate about Minimum Wages Dolado, J. J., Kramarz, F., Machin, S., Manning, A., Margolis, D. and Teulings C.

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Evidence from Spain, In: Bazen, S., et al, Low Wage Employment in Europe, Edward Elgar.

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GLU | The Theoretical Debate about Minimum Wages

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Machin, S. and Manning, A. (1994): The Effects of Minimum Wages on Wage Dispersion and Employment: Evidence from the U.K. Wage Councils, Industrial and Labor Relations Review, pp. 319-329.

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A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, American Economic Review Vol. 90, No. 5, pp. 1362-1396.

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