Statutory Minimum Wage Controls: A Critical Review of their Effects on Labour Markets, Employment, and Incomes

An ISR Business & the political-legal environment study

“The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this is a plain violation of this most sacred property.”  (Adam Smith, The Wealth of Nations, 1776)

Around the world, minimum wage controls have excluded low cost competitors from labour markets, hampered firms in reducing wage costs during trade downturns, and caused various industrial-economic inefficiencies as well as unemployment, poverty, and price rises.

This study analyzes national minimum wage fixing as a special form of political-economic protectionism – the equivalent of tariff barriers to low cost imports. It sees such tariff barriers as evidently violating Treaty of Rome and other basic guarantees of free trade and markets in labour services in Europe.

Among other things, the study contains a detailed critique of the recently-established British national minimum wage fixing regime. As critics forecast at the time of its introduction, this regime has caused substantial youth unemployment, closure of small shops, pubs and other businesses, and transfer of manufacturing and service jobs abroad.

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1. Minimum Wage Controls and their Effects: an Overview

Aims and motives behind minimum wage controls* The case against* Unemployment effects* Official wage-fixing as a form of protectionist and discriminatory behaviour* The relationship between minimum wage controls, maximum wage controls or incomes policies, and other forms of price control* Income and welfare effects*

2. Minimum Wage Controls in Particular Countries

Comparative wage and labour market freedom in Britain* Trade union attitudes towards state minimum wage-fixing* Minimum wage controls and their effects in the US and European countries* The definition of “pay” and other technical issues*

3. Legal Aspects of Minimum Wage Control

Constitutional legal and rights issues* The scope for legal and illegal avoidance* Challenging official wage-fixing, employment barriers, and job losses in the courts*

4. Minimum Wage Control and Unemployment

Minimum wage and other causes of unemployment* International comparisons* Summary of recent research findings and forecasts*

5. The Effects on Employers and the Demand for Labour

Economics of labour demand* Firms and industries most affected by statutory wage rises* Employers’ responses: redundancies, out-sourcing, changes in working practices, hours, and payment systems (etc.)*

6. The Effects on Employees and the Supply of Labour

Economics of labour supply* Employees most affected by minimum wage controls: occupational, skill, age, race, sex, and regional (etc.) variables*

7. The Effects on Incomes and Welfare

The case against using government wage fixing for income redistribution purposes* The advantages of direct employment subsidies and tax credits and reliefs* The real industrial-economic causes of low and high wages* Summary and conclusions*


Print book

Second revised edition 2000. New impression 2012

ISBN 9780906321225

102 large pages


Price £74.95 including free postal delivery


E-book price £16.15 (British pounds 16.15)

E-book ISBN 9780906321669

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Sample passages

Many comparatively affluent workers will benefit from minimum wage increases aimed at boosting the incomes of poorer households. Meanwhile, though purporting to raise living standards, national minimum wage fixing will create real poverty on the part of persons it makes unemployed and unemployable.

Unemployment is the main cause of poverty. The earnings of even the lowest-paid industrial-commercial employees virtually always well exceed the dole money (if any) that the state pays to unemployed persons.

As said, across-the-board increases in wage costs not financed out of economic growth (higher profits, savings on labour and capital investments etc.) result in generally increased consumer prices. Such price rises reduce the real take-home value of artificial wage rises and increase the living costs of households generally.

Finally, government and the taxpayers will often pay a hefty price for national minimum wage fixing.

Government spending and taxation/borrowing will have to increase to finance higher unemployment – while the government is losing revenue from discontinued economic activities.

Even if people stay in their jobs after receiving large officially mandated pay rises, this will often only be because of government subsidies. On top of the fiscal and wider economic costs of existing formal unemployment, there may be substantial additional costs to the government of disguising and staving off substantive unemployment through employer payroll subsidies, grants for training and special job creation/workfare schemes, and in-work welfare benefits and tax credits to households… (pages 19-20)

Under the UK regime, employees must get the main official minimum rate of pay during all periods when allocating their time to their employer – including when they are receiving on-the-job training, waiting at their place of work to receive assignments, or travelling between assignments. However, hourly time-paid employees working for a set period do not have to receive the national minimum wage when they are taking rest and meal breaks, away on holiday, or absent because of sickness.

In the case of salaried-hours employees who work for a set basic number of hours each year in return for a monthly or weekly salary, periods of long-term absence are the only hours that do not count for the purposes of calculating average hourly pay. Thus, for example, employees might get little or no pay during periods of prolonged sickness, sabbaticals, or strikes.

Where there is remuneration of employees on a piecework or commission rather than a time basis, employers and employees have to agree in writing beforehand a fair estimate of the number of hours likely to be worked over a given period in order to achieve a particular level of production/sales and thus of remuneration. This ensures payment of the statutory minimum wage to such output workers. If an employee’s actual output falls below the fair estimate level and is insufficient to achieve the national minimum wage over (say) a week, then the employer will have to make up the pay shortfall. The alternative would be to pay the national minimum wage for every hour such employees worked.

There is also special provision for employees doing unmeasured work (i.e., those employed to perform a number of specific tasks, but who do not have any set hours of work). Examples of such employees are those looking after hostels or shops, domestic staff, and others who living on premises or are on call at home around the clock. To ensure that weekly (etc.) paid wages come up to the statutory minimum hourly rate, employers and employees have to reach a realistic agreement in writing beforehand on the average number of hours that the worker is likely to spend each day on the assigned tasks. Alternatively, employees will have to receive the statutory minimum for every hour of work claimed. Only workers who are on-call at home do not have to receive the statutory minimum wage for this time. … (page 34)

Non-compliance with minimum wage laws is comparatively high on the part of unskilled, lower productivity employees and those generally most dependent on competitive wages to get and keep jobs. It is also comparatively high amongst employers and employees in very cost/price competitive industries, and in low-profit businesses generally.

There is particularly widespread non-compliance in the hotel, pubs and restaurants sector, the rag trade, and amongst delivery and courier firms, builders, security firms, florists, hairdressers, cleaning companies, and furniture removal businesses. Cash-in-hand payments to staff are commonplace in these industries.

Many businesses both take substantial unrecorded cash payments from customers and make substantial unrecorded wage payments to employees. Trades people often offer customers significant price discounts for cash deals that help to reduce their declared turnover levels, avoid VAT, and reduce other business tax/regulatory burdens. Accounts, wages books, time sheets, and other records are frequently lost in fires, thefts, and accidents of various kinds. Firms may create false staff names, payrolls, and suppliers to deceive officialdom.

Employees often collaborate with employers to bust minimum wage rates, manipulate records, and avoid regulatory and fiscal burdens generally. Workers as well as businesses have an interest in keeping costs down to secure their livelihoods. There is concern across most enterprises to win orders, grow, and maintain employment. The members of close-knit immigrant, ethnic minority, and family businesses are especially likely to collaborate and present united fronts against overbearing officialdom.

In extreme cases, non-compliance takes the form of placing the whole business underground. Shadow economy enterprises are a threat to established above-board firms with high wage bills, other costs, and tax/regulatory burdens in many industries – just as legitimate self-employed persons, independent small businesses, and companies located abroad are. Informal, cash in hand working tends to be high where minimum wage tariff barriers to labour market entry and employment are high – and where price competition is intense and cash payments/discounting are commonplace. Thus, maintaining and enforcing official minimum wage controls tends to be especially difficult in small-scale building and plumbing, cleaning, catering, the rag trade, car repairing, personal and domestic services, and similar trades… (page 43)

Three major general causes of unemployment are:

  • obstructions to labour market entry and employment;
  • developments in technology and other changes in firms and industries that make jobs redundant; and
  • contractions in business-economic activity levels that reduce the demand for labour.

Minimum wage tariff barriers fall into the first of these broad causal categories.

As said, protectionist wage tariffs especially price youths and comparatively low productivity adult employees out of labour markets and employment. In Britain, the introduction of statutory minimum wage fixing in 1999 triggered substantial increases in youth unemployment and outsourcing of adult manufacturing and service jobs abroad. However, high official minimum wages are a major cause of unemployment in general around the world.

High costs of labour – in absolute terms and in comparison with other factors of production – simply discourage firms from taking on labour. Meanwhile, high wage-cost indigenous firms will have difficulties in competing in international markets (especially if they are producing labour intensive products) and so have to lay off staff…(page 46)

In economies, low wages generally correlate with low business earnings. Both low wages and low profits tend to result from low overall industrial-commercial growth, the supply of low-priced/low-tech/low value-added goods and services, and intense market pressures on margins from competitors and customers.

Even in fast-growing and profitable firms, wage freezes/reductions are sometimes necessary to cope with temporary trade downturns and avoid labour redundancies.

Some firms have to pay low wages to compensate for geographical remoteness from customers and suppliers. Others are under special pressure to keep their labour costs down because of intense price competition and highly mobile, price-sensitive customers.

Companies may have to cut their wage bills to compete with freelancers and small family businesses. Western manufacturers of many items are constantly seeking ways of keeping their labour costs down to compete with East Asian and other producers.

In Britain, business responses to official wage hikes in particular industries have included:

  • pub management, hotels, and leisure:

i. job losses;

ii. the classification of some new employees as trainees who can then be paid at a lower minimum rate for the first six months or so; and

iii. the reduction or elimination of paid breaks to help cover the costs… (pages 73-74);

To reduce such costs, some national minimum wage control regimes exempt young people altogether. The exclusion of traditional apprentices or young people on officially recognized training schemes from standard controls can substantially mitigate the negative effects.   Special lower official minimum wage rates for young persons may mean employers hiring them in preference to more-expensive adults.

Employers might be able to avoid paying any wages at all by engaging young people as interns or volunteers. Youths may even pay their employers for work experience or on-the-job training.

Young trainees or apprentices have traditionally received low levels of remuneration. Their pay in work has often been no higher than the amount they would receive in the form of unemployment benefits or student loans/grants. However, they have benefited from work experience and learning trades and skills that have increased their general productivity.

In Europe and elsewhere, high statutory minimum wages that price young people out of work often have the effect of prolonging tertiary schooling for its own sake. Many people spend a lot of time in academic education/formal training simply because they cannot find jobs. That artificial prolonging of formal education and training is economically wasteful.

Government subsidized job creation schemes that take people off the unemployment register but do not address the real causes of unemployment – which includes government minimum wage fixing – are also economically wasteful.

Higher crime rates often result from minimum wage tariff barriers to labour market entry, high unemployment, and chronic long-term poverty. Crime reduction is one of the major social benefits of abolishing protectionism, unnecessary laws, and dysfunctional regulations generally in countries… (page 83)

Thus, governments that are serious about reducing poverty will abolish minimum wage tariff barriers to labour market entry and employment.

Creating the best possible political-legal conditions for real economic growth and job creation will automatically secure higher earnings all around. Simply being in work gets people out of poverty and keeps them out. Once people are in work, business-economic expansion, increased productivity, and rising demand for labour in generally buoyant markets will secure higher real incomes per capita and in total.

There is currently considerable public concern about the high costs to taxpayers of the welfare state and unemployment. To some politicians, official minimum wage fixing has seemed a useful device for shifting some of the costs of funding welfare onto private firms and/or encouraging voluntarily unemployed persons to get back into paid employment.

However, industrial-commercial enterprises are economic organizations not welfare agencies or charities. Minimum wage tariff barriers destroy jobs, boost state welfare bills, and keep people in real poverty.

Governments can take various steps to induce unemployed persons on benefits to take paid work – including introducing time limits on benefits receipts and workfare-type schemes. They can also cut their welfare bills by targeting benefits at low-income households on universalistic, means-determined rather than ascribed status bases.

Finally, governments can cut unnecessary official imposts that reduce real household incomes and increase state welfare bills. Amongst other things, they can remove regressive taxes, abolish restrictions on cheap foreign imports, and scrap dysfunctional environmental policies that artificially inflate household fuel, energy, and housing costs… (page 99)