Minimum legal wage is defined as the lowest amount of pay a worker must take home for performing work. It is not legal to pay a worker less than minimum legal wage after this minimum legal wage is set by contract or government legislation. The minimum legal wage laws of the United States were introduced during the 1930s, in response to the Great Depression of 1929, when economic activity was slow. There is no fixed standard or method for the calculation of the United States minimum legal wage. It is simply set by legislation for the state and federal level rather than being based on federal poverty guidelines, which changes in correlation to the number of members in a household. The current minimum legal wage in the United States is set at $7.25 per hour, or $15,080 annually if an employee works 40 hours per week throughout the year.
The minimum legal wage laws are important for an economy because they offer employees some security against exploitation, while giving these employees the means to afford the basic necessities of life. Although giving an employee the means necessary for subsistence, there also exist strong criticisms in literature against the existence of a minimum legal wage. This is because, when adjusted for inflation, the current minimum legal wage of the United States is now lower in 2011 than it was in 1967, according to the Economic Policy Institute. Another argument against a minimum legal wage is that it discourages the pursuit of higher education among the poorer section of the society by enticing people to join the labor market early.
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"The Influence of Minimum legal wage on Teenage Unemployment in the United States".
Additionally, the minimum legal wage creates a price floor that introduces inefficiency into an economy (where price floor is defined as the government imposed limit on how low a price can be taken for a good). An established price floor due to a minimum legal wage establishes dead weight, or loss, in the economy because it gives organizations an incentive to hire fewer laborers (thus increasing unemployment). The unemployment rate represents the proportion of the labor force that is actively looking for a job. It is calculated by dividing the number of people who are actively looking for a job by the labor force. Currently 12.3 million people are in United States work force and the amount of the unemployed in the United States has changed little since September 2012. The current unemployment rate of the country is 7.9 percent according to the household survey data of the Bureau of Labor Statistics.
Minimum legal wage can be binding or non-binding. Only a binding minimum legal wage influences the employment and unemployment rate of the economy. Minimum legal wage impact is dependent upon the skill of the employee. It has been found by many economists and researchers that minimum legal wage has its largest effect on the teenage labor market. The market minimum legal wage for teenage employees is binding because the equilibrium wage of teenagers is low in comparison to other workers in the economy. This is because teenagers are among the least experienced and lowest skilled components of the labor force. Economists have researched how the minimum legal wage laws affect teenage employment and unemployment.
These researchers have compared the alterations in minimum legal wage by time verses the alterations in teenage employment. For example, a typical study by Mincer (1976) and Ragan (1977) found that a 10 percent boost in the minimum legal wage results in a one to three percent reduction in the employment of United States teenagers. It is important to note that while interpreting this data, a 10 percent boost in the minimum legal wage doesn’t result in an 10 percent boost of the mean wage received by a teenage employee. The resulting deduction is that a change of the minimum legal wage doesn’t directly impact teenagers previously paid above the minimum legal wage but it does have significance for the resulting one to three percent who lose employment.
Studies have also found that a higher minimum legal wage influences which teenagers are employed; this is because, by also changing the quantity of labor needed, the minimum legal wage also influences the quantity of labor supplied because it raises the minimum compensation that will be paid above that attainable by teenagers. Therefore, it boosts the proportion of teenagers looking for jobs in the labor market because some teenagers attending high school dropout in order to gain employment. These newly dropped out students compete with other more skilled teenagers who are already finished with their schooling. The effect of minimum legal wages on teenage employment, unemployment, and participation in the labor force was computed by Mincer (1976) and Ragan (1977). They estimated separate equations (based on pooled cross section time series data) and indirectly calculated the impact on unemployment from the employment and labor force participation equations. There result was in consensus with the general literature, on the point that an increase in the minimum compensation paid for a work reduces employment. These results also concluded that people leave the labor force because there are fewer employment opportunities; therefore a fall in labor force participation is caused by an increase in minimum legal wage.
Almost all of the United States’ early studies (1950s, 1960s and 1970s) found a consensus, based mainly on time series that found an inverse relationship between minimum legal wages and employment. Almost all of these studies also found the relationship to be statistically significant. However the more recent studies, usually covering the 1980s and 1990s (which combine aggregate cross section data across states and time series), tend to find very different results. Although these results are sometimes within the former consensus range (Neumark and Wascher 1992, 1994, Williams 1993, Williams and Mills 1998) others show even larger negative effects than the earlier consensus range (Burkhauser, Couch and Wittenburg 2000, Deere, Murphy and Welch 1995, Kim and Taylor 1995) . Future studies should provide very interesting results as recent decades show a change of the United States wage structure (due to credit being increasingly used towards college premiums), a change of the gender gap, and the change to an increasingly continuous and transitory residual wage dispersion.
- Mincer, J. “Unemployment Effects of Minimum legal wages,” Journal of Political Economy 84 (1976) pp. S87-S104.
- Ragan, J. “Minimum legal wages and the Youth Labor Market,” Review of Economics and Statistics 59 (1977) pp. 129-136.
- Brown, Charles. C. Gilroy and A. Kohel (1982) ‘The effect of the minimum legal wage on employment and unemployment,” Journal of Economic Literature (June): 487-528
