What is Minimum Wage?

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Unskilled labor is the section of society that possesses limited knowledge and lacks a specific skill set. Minimum wage limits are generally fixed on an hourly basis for a day’s job of unskilled labor. To keep up with inflation and the cost of living, governments revise the lower limit on wages on a regular basis.

Key Takeaways

  • The minimum wage limit refers to the basic compensation mandated by federal law. Employers cannot pay less than the mandated limit.Every country tries to support unskilled labor. Ensuring basic pay is fundamental to it. In the US, a worker cannot be paid less than $7.25 per hour.The obvious advantages of wage limits are—better working conditions, reduction of poverty, and employee motivation. The disadvantages, though, are often overlooked. Not all firms are able to pay above the fixed income limit. When forced, some businesses go bankrupt.

Minimum Wage Explained

Every government sets a minimum wage limit—pertaining to the basic salary and compensation paid to a worker. This law is mandatory; it is illegal for a business to pay below this limit.

The law primarily affects unskilled labor and non-exempted labor. Workers who lack a specific skill set are categorized as unskilled labor. Unskilled laborers are employed at construction sites, factories, and households. Thus, the minimum income limit serves as the floor rate, mostly paid on an hourly basis.

The application of the law differs from nation to nation. In addition to the government, many countries have separate state laws. So, a worker could be subject to both laws simultaneously. Based on prevailing conditions, governments review and revise the minimum limit from time to time. With time, inflation and the cost of living alter, and the laws have to keep up with those rates.

It is important to note that this law affects a section of society that does not have an emergency fund, to begin with. For some minimum wage workers, it is literally a hand-to-mouth existence. So, any failure to draft or enforce the minimum income limit can drastically affect workers.

The advantages of such safeguards are obvious—better working conditions, quality, reduction of poverty, and employee motivation. The disadvantages, though, are often overlooked. In a free market, businesses face stiff competition. Not all firms are able to pay above fixed income limits. When forced, a business may lose to competition and shut down. In certain scenarios, the unemployment caused by bankrupt businesses can be worse than extremely low wages.

History

The minimum limit on remuneration is a primitive concept. In the US, the American Association for Labor Legislation advocated for these laws. The National Consumers’ League was a group of women that introduced a minimum wage limit for women in 1909. Later this limit became a part of state laws.

In 1923, the United States Supreme Court declared minimum limits on salaries unconstitutional. But in 1938, President Roosevelt brought a federal wage limit—The Fair Labor Standards Act. The law was passed this time in 1941 and wage limits became part of the constitution.

Post-WWII, many other countries encouraged the idea of minimum limit—India in 1948— Pakistan in 1961. In contrast, many nations, like France, followed the sectoral wage board traditions. A Wage Board is a tripartite body—representatives of management, labor, and government. The Board fixes various standards for wages pertaining to the particular sector.

Eventually, many countries started mandating a general minimum limit for workers’ compensation—the Netherlands in 1969, France in 1970, and Spain in 1980. Some nations adopted it late, China in 1994 and South Africa in 1997. In 2013 Malaysia adopted this law, and in 2016 Macau also started imposing wage limits.

Since 1990, eight Economic Co-operation and Development (OECD) members have adopted wage limits along with nations like the Czech Republic, Germany, Ireland, Estonia, Israel, Poland, and the Slovak Republic. As for the other OECD nations, there is a collective pact in Norway, Finland, Switzerland, and Denmark. All European countries now have a minimum wage limit policy.

Minimum Wage by Country

Let us look at examples of minimum wage limits imposed by specific countries.

#1 – United States

The office of the Department of Labor and Wage and Hour Division regulates minimum wage law in the US. It exercises the Fair Labor Standards Act (FLSA). The federal minimum limit in the US for covered nonexempt employees is $7.25 per hour. 

But within the US, states have their own wage limit laws. So, when a worker or employee is hired, they are subject to federal and state laws for compensation. The FLSA has no wage payment or collection process, but in some states, fringe benefits are included for employees and workers. For example, the minimum wage in California is $15.00 per hour.

#2 Russia

The Russian economy declined drastically between 2014 to 2017—around 14% of citizens are suffering from poverty. The workers living in the capital city and other big cities are protected by a higher limit on minimum pay.

But, rural Russia and smaller towns have very low wage limits. Therefore, the working conditions are poor, and wages are low.

In Russia, the minimum limit is reviewed every six months; the last three reviews hiked pay considerably. The general idea of the minimum limit is based on a 40-hour work week—workers are paid not less than 70.50p. per hour.

The lowest wages are found in Southern Russia—Caucasus, and South Siberia. Russian workers enjoy generous holidays and overtime wages. According to the Russian Federation’s Labor Code, the employer can not employ workers for more than 40 hours a week.

#3 – Canada

In Canada, the first province to impose a lower limit on wages was Manitoba. This limit was imposed in 1918. Within two years, five others passed similar legislation.

Initially, these limits were customized depending on gender. But gender-based limits were abolished in 1974. Canada is one of the few countries with multiple wage limits based on niche.

Within Canada, the highest minimum wage is found in the province of Nunavut ($16 per hour). In contrast, the lowest is witnessed in Saskatchewan ($11.81). Ontario is the second largest Canadian province with a minimum wage limit of $15.50 per hour.

#4 – UK

In the United Kingdom, the minimum limit differs based on age. There is a national wage limit offered to all workers in the UK. This is applicable for part-time workers, casual workers, and anyone providing work under the borders of the UK.

The actual figure is negotiated. The government negotiates with trade unions and labor unions. Based on the final decision, the Low Pay Commission (LPC) prescribes regular changes. Volunteers and self-employed individuals are not covered by the minimum limit law.

Due to the increase in internships and apprenticeships post-covid, lower age brackets have witnessed hikes in minimum pay limits:

  • 16-17 age (£4.81, a 4.1% increase).18-20 age (£6.83, a 4.1% increase).21-22 age (£9.18, a 9.8% increase).

Minimum Wage vs. Inflation vs. Cost of Living

Now let us compare related terms, to understand the distinctions clearly.

This has been a guide to what is Minimum Wage. We define the Federal Minimum Wage using examples from the US, Canada, UK, California, Ontario & other countries. You can learn more about it from the following articles –

When the minimum limit for unskilled workers’ compensation is raised, it ensures economic growth in society and induces better living conditions for the workers. It not only elevates consumer spending but plays a critical role in reducing income inequality.

The calculative comparison may be complex, but as of 2022, the top three countries that have the highest minimum limits are Australia, Luxembourg, and New Zealand at $14.54, $13.67, and $13.18, respectively. Within the US, Washington topped with a limit of $14.49.

In the US, the authorized minimum limit established by the federal system is $7.25. North Carolina also allows a $7.25 per hour limit. Globally, Cuba has the lowest minimum limit—$9 monthly.

  • Living WageWage-Price SpiralLiving Wage vs Minimum Wage