Factors Determining Minimum Wage


It is every worker’s passion to be given a better pay. Currently, workers in most countries are paid in relation to the number of working hours. However, most countries have come up with the minimum wage aspect. This is to allow workers to receive a proper pay without any form of discrimination. Therefore, minimum wage is minimum pay per hour an employee is entitled. Minimum wage therefore assists workers to avoid being underpaid since they can check if they are paid the right amount (Neumark, Salas & Wascher, 2014). This paper examines the major factors that determine the formation of minimum wage.

The Formation of Minimum Wage

Minimum wage formation is influenced by employer’s ability to pay. The ability of an employer and the industry in general to pay its workers normally affects how much workers are paid per an hour. Moreover, the ability of an industry/employer to pay highly affects the wage rate. A good example is when a particular industry is making regular losses; it becomes difficult for the employers in this industry to pay higher wages. On the other hand, if employees run a very profitable industry, it becomes very easy for them to raise the minimum amount they pay their workers to attract the best workers (Bárány, 2016). Moreover, if any industry tend to pay more during period of prosperity, then workers are more likely to be paid more. This serves as a way of sharing the profits made by employers with the labor. Therefore, when minimum wage is formed, one needs to consider the employer’s ability to pay since it can easily determine and influence the minimum amount paid as illustrated above.

The general conditions of the labor market are very influential when it becomes to how much employees should be paid. In other words, 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 of a specific kind of skilled labor increases and the supply decreases, then workers are more likely to be paid more, thus 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.

Third, in the formation of 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. This is because; economic growth means that firms are more likely 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 wage. Additionally, when there is poor economic growth, then firms becomes more reluctant when it becomes on labor employment (Clemens, 2015).  Therefore, when minimum wage is formed, it is important for a country to consider its rate of economic growth and development since it has a large impact on what employees are paid in the job market.

According to Neumark, Salas & Wascher (2014) it is important to consider whether firms are exploiting workers when formulating the minimum amount that 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 of many firms who compete for labor in the market, then it is normal that the minimum wage paid can be higher (Neumark, Salas & Wascher, 2014). This is due to competition for workers and firms are more likely to increase their wages to compete effectively and more importantly develop a competitive advantage. Therefore, when formulating minimum wage, it is important for the government to effectively analyze the country’s labor market structure.

A country’s political system is also more influential when it becomes to minimum wage formation. In fact, politics is determinant on whether to have a minimum wage or not. A country’s political system can either decide on a minimum wage through the leadership that is in place. For instance, minimum wage can be part of the promises given by politicians during the election campaigns. Therefore, if leaders view minimum wage as a good alternative of creating an effective 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 got a long history of not having a minimum wage, however the current political system has influenced its formation and the country has established a progressive wage program as an alternative (Bárány, 2016). Germany has recently decided to have a minimum wage, this is due to its efforts to promote a better lifestyle for the workers.

However, it is important to consider unemployment before one forms a minimum wage. Most countries are more likely to consider the rate of an employment before establishing a minimum wage as either to be high or low. For instance, in a case where there is a high unemployment rate, then a country’s government is more likely to consider reducing the minimum wage or not raising it (Bárány, 2016). This therefore serves as a mechanism to increase the number of jobs thus reducing unemployment in a county.

It is evident that during the formation of the minimum wage, one considers the ability of the economy to pay it. Economic ability is very important to consider whether the economy can sustain a wage increase or the one set. Sometimes, a country’s economy cannot pay high wages, therefore it becomes impossible to decide on higher wages. In an economy like this, workers are more likely to move to other countries to such for greener pastures. This has greatly affected third world countries that find it hard to collect their educated elites within the available job opportunities. The movement has been evident from the well attested brain drain from the developing countries to the countries with peak economies that reciprocate minimum wage and inflation rates.

It is also important to consider the needs of workers and their families when establishing a minimum wage rate. This is considering aspects such as the poverty level of the workers and offering workers a relatively better wage that can promote their living conditions. Additionally, considering aspects such as their expenditure and the current wages paid to both skilled and unskilled workers also becomes very important 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. It is also important to consider the distribution of income among the wage earner households, to come up with an efficient and effective minimum wage.

According to Fakhrutdinova, et al. (2013) age rates and geographical factors are more likely to affect minimum age formation. For instance there are those countries that sets a different minimum age for a different age group like the UK. This idea become very important in reflecting the equilibrium age rates that are more likely to occur in different ages (Fakhrutdinova, et al. 2013). This therefore assists to come up with a minimum wage that is favorable to the economic environment.


In conclusion, it is important for every state to come up with a minimum wage policy that will assist to higher the general living conditions. A minimum wage policy assists both the households and firms since underpayment and overpayment are highly reduced. Workers are more likely to get a reduced tax burden and firms are more likely to budget for their money easily. However, minimum wage formation is determined by factors such as the country’s political system, unemployment, the needs and interests of workers in addition to the ability of an industry to pay. Additionally, this are the same factors that affect the amount of wage to pay, either to increase wages or reduce them (Hirsch, Kaufman & Zelenska, 2015). The general labor conditions is also an important factor that determine the formation of minimum wage as discussed in this paper.

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