Wage Standards: Overview

Introduction

Labor is a fundamental issue for every society. The tension between workers and those who own the means of production has historically been acute in capitalist societies. Owners and management are traditionally focused on maintaining competitiveness and increasing production and profits, whereas working hours, the right to organize, labor safety, fringe benefits, and wage standards are among the major concerns of workers. In some countries, including the United States, the federal government sets wage standards in order to protect workers from exploitation while aiming to ensure a high level of production.

Arguments for a federally mandated minimum wage are based on the historical failures of owners to keep the best interests of their workers in mind. If owners are not obliged to pay employees a minimum wage, they may attempt to exploit the labor market by keeping wages low in order to maximize profits. Though the minimum wage has increased over the last decades, it has failed to keep pace with inflation and the rising cost of living, and thus there is a movement to raise wage standards to reflect these increases. Supporters of a higher minimum wage note the stark difference between the minimum wage and a living wage, or the wage necessary to provide the basic necessities of life, such as food, shelter, clothing, and transportation.

Some economists and business owners argue that wage standards are at odds with fundamental market principles and have numerous implications that can adversely affect the larger economy. They contend higher wages contribute to the rising cost of living because products become more expensive and can also contribute to job losses on the domestic front because many businesses search for cheaper labor in developing countries, where fewer labor restrictions exist and wage standards are comparatively low. By moving production overseas and hiring cheaper workers, companies can often continue to maximize profits and compete on the global market. Finally, it has been argued, a guaranteed minimum wage does not always encourage efficiency in the labor force because workers do not have to strive to earn a higher wage.

In an ideal system of labor, workers and owners exist in a mutually beneficial relationship, where workers strive to improve production and owners esteem workers and their welfare as an essential component of their profitability. In an expanding global economy, this balance has become increasingly difficult and costly to achieve.

Understanding the Discussion

Exploitation: In the context of wage standards, the abuse of employees by owners taking unfair advantage of their labor.

Living wage: A wage that would enable an employee and his or her dependents to afford a basic standard of living.

Minimum wage: The lowest wage that an employer can pay an employee as mandated by law.

Working poor: A term used to describe workers who are employed but still unable to afford the cost of living.

History

The idea of wage standards is part of a much broader labor movement that began to gather force in the United States in the nineteenth century and grew to greater prominence in the early twentieth century. Workers, generally in the form of trade unions, organized to lobby for a wide range of rights and protections, including the rights of women and children in the workplace, the length of the work week, safety standards, and wage standards. Employers were forced to make concessions, and numerous laws protecting these gains were eventually enacted.

The first minimum wage was initiated by the National Industrial Recovery Act of 1933 (NIRA), part of President Franklin D. Roosevelt’s New Deal program, which was designed to help the US economy recover from the Great Depression. The NIRA established the National Recovery Administration (NRA) to develop codes to regulate labor and fair competition. One section of these codes provided for minimum wages and the right of workers to have access to collective bargaining. Two years later, in Schechter Poultry Corp. v. United States (1935), the Supreme Court decided that the NIRA was unconstitutional because it allowed the federal government to interfere with state jurisdiction and the creation of the NRA was based on an impermissible extension of federal legislative powers under the commerce clause.

In 1936, the federal government enacted the Walsh-Healy Public Contracts Act, which established a minimum prevailing wage for employees of government contractors in cases where they received contracts worth more than $10,000. In 1938, the US Congress passed the Wages and Hours Act, which established federal minimum wage and maximum hour requirements for workers engaged in commerce, which included most forms of business, and prohibited child labor. The act, also known as the Fair Labor Standards Act (FLSA), remains a major milestone in labor and US economic history and has affected most American workers.

At the time the legislation was created, the minimum wage was set according to the cost of living in order to bring wages above the subsistence level. The act also left open the possibility that workers could engage in collective bargaining to achieve further increases in wages and benefits.

The FLSA was subject to several amendments and adjustments over the course of the next decades. It was supplemented by the Equal Pay Act of 1963, which amended the FLSA by outlawing wage differences between equally skilled men and women doing equal work. In 1985, the FLSA was amended again to permit state and local government employers to provide employees with paid time away from work, also known as compensatory time or “comp time,” instead of the overtime pay rate required by the act. Prior to 1985, state and local governments had not been subject to the FLSA. In addition, the FLSA was amended numerous times to increase the minimum wage.

Although the American economy has become increasingly complex through globalization, many aspects of the debate over the federal minimum wage remain the same. Both sides of the debate have extensive arguments for why the minimum wage should or should not exist and why it should or should not be raised.

Supporters of the minimum wage often voice an inherent distrust of business owners’ interest in keeping wages in line with cost-of-living increases and argue that the minimum wage is vital for protecting workers against exploitation. The federal government has the power to oblige businesses to provide a minimal level of pay to workers who may not have sufficient resources to collectively bargain for wage increases.

Supporters of raising the minimum wage base their argument on several points. First is the discrepancy between the minimum wage and a living wage. Economists have stated that the value of the minimum wage was at its highest in the 1960s; since then, it has been outpaced by the cost of living, leading to a serious decline in wage value. The minimum wage must then be raised in order to help the working poor maintain a basic standard of living. Doing so would also benefit businesses, in that workers would be encouraged to perform better. In wider terms, supporters of the raise argue that it would stimulate the economy because workers would be able to purchase more as well.

Opponents of the minimum wage attack it from several angles. First, they do not believe that the government should interfere in the flow of commerce and the marketplace by impeding the growth of businesses through bureaucratic measures. They argue that economies have their own logic and that market forces, not an artificial wage standard, should determine the value of a job. If a wage is too low, workers will not accept the job, and thus employers will be forced to raise the wage in order to fill the position.

Some business owners and economists also argue that wage standards do not have the intended effects. First, they can cause businesses to reduce their number of employees in order to compensate workers according to federal standards. Second, rather than encouraging workers to perform, minimum wage can give employees a sense of entitlement to pay based solely on the number of hours they work, rather than the amount of work they perform, and can also encourage employees to enter the job force earlier and with less education in order to earn an income. Opponents of wage standards argue that there are strategies that the government can use to help alleviate poverty other than requiring businesses to pay a set wage. Finally, money spent on artificially high wages would be better spent on training so that workers could earn more with their skills.

Wage Standards Today

Some two hundred governments around the world set wage standards for their country’s workers, though in countries such as Austria and Denmark, wages are set through negotiations between labor unions or trade associations and employers. Other countries, including many throughout South America and Africa, set wages by industry or sector. In the United States, the federal minimum wage was raised to $6.55 per hour in July 2008 and raised again to $7.25 in 2009.

In the global economy, those countries that offer living wages to workers often face a quandary over the loss of jobs to foreign markets where labor costs are significantly less. While some economists and business owners argue that wage standards are partially responsible for the predicament, others argue that the problem rests elsewhere. Governments of countries with cheap labor should be encouraged to raise their overall standards in order to restore balance in the labor market.

In the United States, in January 2019, twenty-nine states plus the District of Columbia, Guam, and the Virgin Islands had minimum wage rates higher than the federal minimum of $7.25 per hour; sixteen states plus Puerto Rico had an equal minimum wage; the Mariana Islands had a minimum wage lower than the federal; and five states had no set minimum wage, making the federal minimum the default. Four states had split rates with a lower hourly amount for businesses with lower gross earnings, and Nevada's split rate was based on the provision of healthcare benefits. The District of Columbia had the highest minimum wage at $13.25, and Georgia and Wyoming the lowest, at $5.15. More than a dozen states had indexed ongoing minimum-wage increases to the cost of living or based on inflation, either through ballot measures, constitutional amendments, or more rarely, legislation.

In addition, some major US cities have also passed minimum-wage legislation, including Santa Fe, San Francisco, Seattle, and Chicago. Both San Francisco and Seattle planned to institute a minimum wage of $15.00, the former by 2018 and the latter in phases between 2015 and 2021. The effect of such increases on the economies of their respective cities may well set a precedent for future increases to minimum wages across the country.

Starting in 2012, a Fight for $15 campaign has aimed to raise the minimum wage across the country to $15 per hour, an effort that gained greater traction after becoming a campaign promise of Democratic hopeful Bernie Sanders in the 2016 presidential election. Some major corporations, such as Amazon, also voluntarily adopted that wage standard. Democratic members of Congress also introduced legislation to raise the federal minimum wage in 2015, 2017, and 2019; Republicans remained opposed, arguing that states should instead determine their own minimums given the wide disparities in the costs of living across the country.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

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