Author:

        Cail Lin ---- China Institute for Income Distribution

 1. Introduction

The minimum wage has been a core element of public policy for more than a century.Originating in the 1890s in New Zealand and Australia, minimum wages spread to the U.K. in1909 and to nearly one-third of U.S. states during the next twenty years (Neumark and Wascher2009). In 1938, the U.S. Congress passed a federal minimum wage law as part of the Fair LaborStandards Act (FLSA). Since that time, minimum wages have been introduced in some form oranother in numerous other industrialized countries, as well as in some developing countries. As aresult, by the 1990s, minimum wages existed in over on hundred countries from all parts of theworld, and the International Labour Organization (ILO) has designed the minimum wage as aninternational labor standard (International Labour Organization 2006).

Despite that the goals1 associated with the minimum wage are widely accepted as right andproper, however, there is much less agreement about whether the minimum wage is effective atattaining these goals. Although overwhelmingly popular with the public in the United States, theminimum wage has, from the time of its introduction, been highly controversial in the politicalarena. In addition, minimum wages have typically received less support from economists, whofrom the very beginning of the minimum wage debate pointed to the potential loss of jobsstemming from a wage floor. Despite decades of economic research, policy debates about thecosts and benefits of minimum wages continue to the present day.

Based on their comprehensive reading of the evidence, Neumark and Wascher (2009) arguethat minimum wages do not achieve the main goals set forth by their supporters. Here are themain findings in the literature:

First, minimum wages reduce employment opportunities for less-skilled workers, especiallythose who are most directly affected by the minimum wage. Second, although minimum wagescompress the wage distribution, because of employment and hours declines among those whosewages are most affected by minimum wage increase, a higher minimum wage tends to reducerather than to increase the earnings of the lowest-skilled individuals. Third, minimum wages donot, on net, reduce poverty or otherwise help low-income families, but primarily redistributeincome among low-income families and my increase poverty. Fourth, minimum wages appear tohave adverse loner-run effects on wages and earnings, in part because they hinder the acquisitionof human capital. Fifth, in comparison with the vast literature on the effects of the minimumwage on employment and wages, research on the influence of minimum wages on firm profitshas been relatively little.

Note that these findings come largely from U.S. evidence; correspondingly, theseconclusions apply most strongly to the evaluation of minimum wage policies in the United States.Compared to the abundant minimum wage research in the literature, studies on minimum wagesin China are relatively sparse. Therefore, this gives us a great opportunity to think about: InChina, what minimum wages questions can we study? What the effects of minimum wages willbe? Do the effects similar to those in the literature, and why? And most important of all, what arethe implications to policymakers?

This document summarizes the findings of minimum wages from many aspects in theeconomics literature and we hope it can provide a good starting point for researchers who areinterested in the minimum wage study in China.