Don't Misread the US Minimum Wage System

Drawing lessons from foreign experience can not be incomplete, because by comparing the minimum wage standards between China and the United States, it is found that the minimum wage in the United States has not increased rapidly, the real minimum wage has not changed much, and the absolute value of the real minimum wage (not the growth rate) has fluctuated considerably. Therefore, we should dialectically look at the issue of the minimum wage standard that China urgently needs to raise.

On July 1 this year, 18 provinces and municipalities raised the minimum wage standard, with an increase of more than 20%. It is also reported that 27 provinces, autonomous regions and municipalities may raise the minimum wage this year. How to treat the minimum wage standard? Some people compare the experience of the United States. Beginning in 2009, the United States raised the federal minimum wage from $5.15 to $7.25 an hour, an increase of up to 40%. Moreover, the minimum wage in the United States has increased nearly 30 times in the past 71 years. But unfortunately, the above choice and interpretation of the American experience is not comprehensive.

First, the nominal minimum wage in the United States is not growing fast. The establishment of the minimum wage system in the United States began with the Fair Labor Standards Act, which came into effect in 1939. The minimum hourly wage started from 30 cents. In 2009, the minimum hourly wage was $7.25, and the minimum nominal wage was 24.2 times that of 71 years ago. According to this calculation, the average annual growth rate is less than 4.6%. I'm afraid this nominal growth rate is hard to say very fast.

Second, the real minimum wage in the United States, after deducting price factors, did not change much in 1971. In the past 71 years, the United States has experienced several serious inflation, which has led to a sharp decline in the purchasing power of the dollar. For example, the purchasing power of 30 cents in 1939 is equivalent to about $4.7 today (2010 current value, the same below), and $7.25 in 2009 is equivalent to $7.36 today. Therefore, the real purchasing power equivalent to the minimum wage has only increased by 57% in 71 years, which is still far from "doubling".

Third, the absolute value (not the growth rate) of the real minimum wage in the United States has fluctuated considerably. Between 1970 and 1981, inflation in the United States reached double digits for four years, during which the nominal minimum wage rose 10 times in line with inflation, and the real minimum hourly wage remained above $8. In the nine years from 1981 to 1990, the nominal minimum wage was not adjusted once, but the real minimum hourly wage was reduced to $6.33. Until 2008, the real minimum hourly wage in the United States did not return to more than $7.

Because the nominal minimum wage grew slowly in 1971 and the real minimum wage continued to decline by about 20% after the 1970s, the minimum wage standard in the United States today is close to the poverty threshold. This is because, according to American standards, there are 260 working days and 8 hours a day in a year. An employee who accepts the minimum hourly wage can earn 15080 dollars a year. Americans believe that this is not much more than US government's poverty threshold of $10830 for a one-person household, and about half the poverty threshold of $22050 for a four-person household. Such a low hourly wage has little effect on the U.S. labor market.

From the perspective of labor allocation efficiency, the minimum wage system is not perfect. Because the two characteristics of the labor market (often signing long-term contracts, unequal status of both sides of the negotiation) determine that wages are more sticky than other prices, and the sticky characteristics of wages limit the role of the market mechanism. For example, when wages need to rise but are constrained by stickiness, raising the minimum wage can offset stickiness and accelerate wage growth. However, it is easy for this role to be overdone, deterring employers from facing the labor market and employees from losing their jobs.

In view of this, we should dialectically look at and analyze China's current minimum wage standard.

First, at the current exchange rate, the US minimum hourly wage of $7.25 is equivalent to RMB 49. There is no national minimum wage standard in China, but the minimum hourly wage in some cities has exceeded 10 yuan. As a result, the difference in minimum wages between the United States and China is less than five times, but the difference in average wages between the two countries is greater than that multiple. According to the per capita gross national product data released by the International Monetary Fund in April 2010, the ratio between the United States and China is 12:6.

Second, the minimum wage in China is much higher than poverty threshold. Compared with the national poverty threshold of 1196 yuan per year, the minimum wage set by many provinces and municipalities is many times higher. Therefore, many people could have accepted jobs below the minimum wage standard to lift themselves out of poverty, but the minimum wage system may deprive them of opportunities.

In this regard, some special experiences of the United States are worth learning from China. In addition to lowering the de facto minimum wage, there are two scenarios that could further reduce the negative effects of the minimum wage system in the U.S. economy.

One is that the law exempts certain industries and companies from the obligation to comply with minimum wage laws. The most common situation is that companies with annual turnover of less than $500,000 are exempted from the minimum wage law, and there are many such companies. In addition, employees who receive tips, such as waiters, are not protected by minimum wage laws.

Second, the nominal minimum wage in the United States can also be lowered. For example, the nominal minimum hourly wage in the United States was $1 in 1967, down 20% from $1.25 in 1965. Because the minimum wage can also be lowered, the U.S. labor market is more flexible and the U.S. economy is more resilient to shocks.

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