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Posted on June 20th, 2012, by

The minimum wage is an important social norm, which is an instrument of social policy, established in many countries.  With it the state seeks to provide a living minimum to low-wage categories of employees, and thus to reduce poverty.  That is why minimum wage is one of the most important indicators of living standards.

The standard of living is a level of consumption of material and spiritual wealth and power needs of these benefits at this stage in the development of social production.  (Bray, 2009) The standard of living is the degree of satisfaction of the material, social and cultural needs of the population. It reflects the well-being of the population and is characterized by a system of quantitative and qualitative indicators. Indicator of living standards depends on the level of people’s needs for goods, and can be determined with the help of different qualitative and quantitative indicators, which allow analysis of the real standard of living of different groups and the population as a whole. To get understanding of these concepts it is necessary to consider how the government establishes these social norms. (International labor office 2008)

In general, the function of wages is to provide  opportunities for the reproduction of labor power socially  normal level of consumption, ie in determining that the absolute wage, which allows for normal life of employees. And the minimum wage, in essence, defines the lower limit of wages, which is necessary to meet basic living needs.

Therefore, the minimum wage is linked to concept of a “cost of living”, which is a social minimum of resources needed to ensure the normal functioning of any person.  That is why with the help of establishing the minimum wages and cost of living the government seeks to guarantee each citizen a normal standard of living, and in that way to achieve social justice. (Euraud & Saget, 2005)

When we talk about the ILO, we are talking about meeting the most minimal human needs, and it is demanded by social protection. In this case we estimate the minimum necessary  needs for a person to survive. But probably it is wrong to reduce the goal of life for employees only to living in the level of simple survival. Accordingly, the wage should provide much more needs: first of all, the demand for housing, purchasing food and non-food products, and their nomenclature and the cost are likely to be much higher than of the minimum consumer basket.

Another important item of expenditure should be meeting the educational and cultural needs.

Each country sets its own level of minimum wage, taking into account economic development, the mentality of the nation. But it is important that the Convention of the ILO (1951) identifies basic factors of the minimum wage:

– the needs of workers and their families: general level of wages in the country, the cost of living, social security benefits;

– economic considerations, including requirements of economic development, labor productivity, possibilities to maintain adequate standards of living. (Abbott, 2000)

The mechanism of the establishment and management of this social standard is different. In some countries, the government determines the size of the minimum wage (Slovenia, Croatia, Netherlands, New Zealand, Ireland, Greece). Often this is preceded by consultations between the government, employers and employee representatives (Latvia, Lithuania, Poland, Bulgaria, Slovakia, Hungary, Great Britain, Czech Republic). In the U.S. the minimum wage is set at the federal and regional levels, while in Japan and Canada – only on the regional. In addition, in Finland, Norway, Italy, Germany, Denmark, Austria, Sweden, there are no laws on minimum wages, as there is a tradition of collective agreements between the parties. (Euraud  & Saget, 2005)

In some countries the regulation of minimum wages is not carried out by the government, while wages are regulated by collective agreements between employers and unions. So the minimum wage can be established by law and informally, for example, by signing an agreement between the trade union and consolidated by the employer (collective agreement). (Euraud  & Saget, 2005)

Today the minimum wage affects mainly the lowest-paid employees, and in this regard, the minimum wage is one way to fight poverty. It is connected with the idea that the market is not able to establish “fair” price of labor. Consequently, the only way to solve this problem is to set it administratively.

Although the goals of the minimum wages establishment are to fight poverty and increase living conditions of citizens, there are many arguments about the ability of the minimum wage to achieve them. And during the 20th century there were many arguments about the costs and benefits of the minimum wage, which are still discussed nowadays. (Euraud & Saget, 2005) There are many opinions and debates on the effectiveness and necessity of establishing the minimum wage. Supporters and opponents of the minimum wage suggest different effects. Among the negative effects we can call the following:

1) Minimum wage reduces competition in the labor market and prevents companies cut costs during economic downturns, which leads to economic inefficiency, unemployment, poverty, rising prices, etc.

2) Causes damage to small businesses rather than large.

3) Reduces the demand for labor, either by reducing the working day or by the job cuts.

4) It demotivates poor citizens, for example, from obtaining additional education, training, etc.

5) Encourages some workers at the expense of the poorest and least productive.

6) The minimum wage is less effective in fighting poverty and causes more damage to the business than the other methods (Abbott 2000).

Thus there are some compelling reasons why many states still set the minimum wage. Among the positive effects that it should bring to the population can be called:

1) It is called to increase the standard of living for the poorest and most vulnerable populations and increase the average level of life.

2) It motivates and inspires employers to work hard (as opposed to social programs and other similar payments).

3) Stimulates consumption by increasing the money supply in the hands of the poor.

4) Reduce the social costs of the state due to an increase in income of the poorest segments of the population. (Abbott, 2000)

Thus, still there is no common opinion on this issue, as the problem of the minimum wage is one of the most talked about in the economic policies of many countries. The dispute about the minimum wage effect is going on for decades.

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