Definition and purpose of minimum wage

Summary

A minimum wage is the lowest remuneration employers may legally pay employees, acting as a price floor on labor. Its purpose is to prevent worker exploitation—especially in “sweated trades” and sweatshops—by limiting how low wages can go when workers have weak bargaining power. Over time, minimum wage policy has also been used as a tool to support lower-income families and improve living standards. Minimum wage laws differ across countries and sometimes within countries by region, sector, and age group. Governments may set minimum wages directly through legislation, adjust them using formulas tied to economic indicators, or use wage boards that determine rates with input from employers, employees, and the government. While standard supply-and-demand models predict that a binding minimum wage can reduce employment by pricing out less productive workers, other economic settings (such as monopsony, where employers have wage-setting power) can produce different outcomes, including possible employment effects when wages are not set too high.

Key Points

• 1

  Minimum wage sets a legal lower bound on wages, intended to curb exploitation and support workers’ living standards.

• 2

  Minimum wage policy can be implemented in different ways (fixed rates, indexation formulas, or wage boards) and varies widely by jurisdiction.

• 3

  Economic predictions about employment and poverty effects are contested: simple models suggest job losses, while other models and evidence suggest effects may be small or context-dependent.