Factors Determining Minimum Wage


It is every worker’s passion to receive a better pay. Currently, workers in most countries are paid based on the number of working hours. However, most countries have come up with the minimum wage concept that allows workers to receive a proper pay without any form of discrimination. Therefore, a minimum wage is the least pay per hour an employee is entitled. In fact, the minimum pay assists workers to avoid being underpaid since they are aware of the set and acceptable amount (Neumark, Salas & Wascher, 2014). Besides, the concept aims at reducing the gap between the low-income earners and ensuring that workers can meet their needs. In essence, the discussion will examine the major factors that determine the formation of a minimum wage.

The Formation of Minimum Wage

It is worth noting that the minimum wage structure is influenced by the employer’s ability to pay. Indeed, the capacity of an organization and the industry to pay its workers affects how much workers are paid per hour. Moreover, the willingness of an industry/employer to pay highly affects the wage rate. For instance, when a particular industry is making regular losses, then it becomes difficult for the businesses in this industry to pay higher wages. On the other hand, if employees run a very profitable industry, it is easy for the firm to raise the minimum amount paid to the workers to attract the best workers (Bárány, 2016). Moreover, if any industry tends to pay more during a period of prosperity, then workers are more likely to be paid higher wages. In fact, attractive funds serve as a way of sharing the profits made by employers with the laborers. Therefore, when a minimum wage is formed, one needs to consider the employer’s ability to pay since it can be easy to determine and influence the minimum amount spent as illustrated above.

The general conditions of the labor market are very influential when determining the salary the employees should be paid.  In fact, the forces of demand and supply in which an industry operates are more likely to determine the wage rate as well as the minimum wage paid to employees. For example, if the demand for a particular kind of skilled labor increases and the supply decreases, then workers are more likely to be paid more; hence, the minimum wage formed will be more (Clemens, 2015). In other words, when formulating minimum wage, one should consider the prevailing market condition and the forces of demand and supply.

Thirdly, in the formation of the minimum wage, the general growth of the economy should be considered. If a country is experiencing economic progress, the least amount workers should earn is likely to increase.  Consequently, the economic growth means that firms are more apt to demand more labor and are very much willing to give a better pay. However, if there is an economic recession, the minimum wage formed is likely to be less due to a stagnant growth of compensation. Additionally, when there is poor economic growth, then firms become more reluctant on factors of labor employment and increasing the wages (Clemens, 2015).  Therefore, when the minimum wage is formed, it is important for a country to consider its rate of economic growth and development since it has a significant impact on what employees are paid in the job market.

According to Neumark, Salas & Wascher (2014), it is imperative to consider whether firms are exploiting workers when formulating the minimum amount of money the workers should be paid. For instance, if a firm is a monopoly, then there are very high chances that it will pay wages below the equilibrium level. On the other hand, if the market structure comprises many firms that compete for labor in the market, then it is normal that the minimum wage paid can be higher (Neumark, Salas & Wascher, 2014). In essence, the fluctuation of payment is due to competition for workers; hence, firms are more likely to increase their wages to compete effectively and more importantly develop a competitive advantage. Consequently, when formulating minimum wage, it is significant for the government to analyze the country’s labor market structure effectively.

A country’s political system is also influential when it becomes to minimum wage formation. In fact, politics is a determinant factor on whether to have a minimum wage or not. Indeed, a country’s political system can either decide on a minimum wage through the leadership that is in place. For instance, the minimum wage can be part of the promise given by politicians during the election campaigns. Therefore, if leaders view minimum wage as a good alternative to creating an efficient lifestyle for workers, its formation becomes easy and mostly it higher to favor the workers since they are potential voters targeted as asserted by Bárány (2016). For instance, a country like Singapore has a long history of not having a minimum wage. Nevertheless, the current political system has influenced its formation making the nation establish a progressive wage program as an alternative (Bárány, 2016). On the other hand, Germany has recently decided to have a minimum wage based on its efforts to promote a better lifestyle for the workers.

However, it is important to consider unemployment before the formation of the minimum wage. It is important to note that most countries are more likely to consider the rate of employment before establishing a minimum wage as either to be high or low. For instance, in a case of a high unemployment rate, a government is more likely to consider reducing or increasing the minimum (Bárány, 2016). Therefore, this serves as a mechanism to increase the number of jobs that are expected to reduce unemployment in a country.

It is evident that during the formation of the minimum wage, the country must consider the ability of the economy to pay it. Notably, economic competency is the key factor to consider whether the budget can sustain a wage increase or the established one. Sometimes, a country’s economy cannot pay high wages; therefore, it becomes impossible to decide on higher wages. Hence, in an economy like this, workers are more likely to move to other countries to look for greener pastures. As a matter of fact, this has significantly affected third world countries that find it hard to connect their educated elites within the available job opportunities. In addition, the movement has been evident from the well-attested brain drain from the developing countries to the nations with peak economies that reciprocate minimum wage and inflation rates.

Another factor to consider is the needs of workers and their families when establishing a minimum wage rate. In fact, the aspect entails considering features such as the poverty level for the workers and offering employees a relatively better wage that can promote their living conditions. Additionally, considering issues such as workers expenditure and the current wages paid to both skilled and unskilled workers also becomes paramount in formulating the minimum wage in any country (Neumark, Salas & Wascher, 2014). In other words, the government should take into consideration all the needs, interests, and abilities of the workers. Essentially, it is imperative to consider the distribution of income among the wage earner households to come up with an adequate and efficient minimum wage.

According to Fakhrutdinova et al. (2013), age and geographical factors are more likely to affect the minimum age formation. For instance, countries like the UK are setting the minimum age based on different age group. Therefore, the idea becomes critical in reflecting the equilibrium age rates that are more likely to occur at different ages (Fakhrutdinova et al., 2013). In essence, the aspect of age assists in coming up with a minimum wage that is favorable to the economic environment.


As it is evident from the analysis, every state must come up with a minimum wage policy that will assist in enhancing the general living conditions. In fact, a minimum wage policy assists both the households and firms since underpayment and overpayment are highly reduced. In addition, the workers are more likely to get a reduced tax burden and companies become more accountable in their budget formulations. However, minimum wage formation is determined by factors such as the country’s political system, unemployment, the needs and interests of workers, as well as the ability of the industry to pay the set amount. Finally, the general labor conditions also affect the formation of the minimum wage in any nation.

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