The Minimum Wage: Making it Pay

By John Martin and Herwig Immervoll

Minimum wages are hotly debated as ways of improving equity and boosting the wages of lower skilled workers. All OECD countries apply some kind of wage floor. Do they achieve their goals?

When an employment search website was launched in Germany a few years ago, it caused a stir, not least because of its provocative title: Jobdumping.de. The idea was crudely simple, too. An employer posts a vacancy and the wage they are ready to pay. Job seekers make their bid, and the employer either hires the cheapest worker or bids up the wage to get the worker they want. The idea took off. Jobs were advertised and snapped up at low pay rates, including some, such as cleaning jobs, at well below the German average. This promoted exploitation at a time of high unemployment, some blogs cried, and broke strict labour agreements, others remarked.

Did it? Germany's labour market is well-regulated, though it is one of nine OECD countries with no nationally applicable minimum wage. This group of countries, which also includes Austria, Italy and the Scandinavian countries, has traditionally relied on collective bargaining agreements to set wage floors, covering sectors and occupations which account for a very high proportion of the workforce. However, some workers are not covered by these collectively-negotiated wage minima and legislation has sometimes intervened. For example, it was partly to prevent unfair wage dumping from contractors using cheap labour, often from abroad, that Germany adopted a wage floor for the construction sector in 1997. Then in March 2007, lawmakers agreed to set a minimum wage floor for 850,000 cleaners, too.

Minimum wages are a long-standing tradition in many other OECD countries. A minimum wage was first introduced in New Zealand in 1894, and followed a few years later by Australia. The US federal minimum wage was passed into law in 1938. Japan and Korea now have minimum wages, while in Europe, so do France, Greece, Portugal, Spain, the Benelux countries and many countries in central and eastern Europe. Ireland and the UK (not for the first time) introduced national minimum wage systems in the 1990s.

Today 21 of the OECD's 30 member countries have statutory minimum wages, and in just over half of these countries minimum wages have risen slightly faster than average wage levels in recent years. Only in the US have the real earnings of workers on the minimum wage dropped sharply in recent years, and there is strong pressure to raise them again.

OECD Observer; May 2007