The debate between those in favour of a minimum wage and those who argue that government intervention in the labour market in this way merely increases unemployment and distorts labour markets, has highlighted sharp divisions.
In the UK the national minimum wage was introduced in 1999, somewhat later than those in New Zealand and Australia, which were introduced in the latter part of the 1800s. In 2018, 21 of the 27 EU countries had a minimum wage with Germany being one of the last to introduce legislation when its minimum wage came into force in January 2015.
The debate over the costs and benefits of a minimum wage have continued for over 100 years. The debate is more than simply the rate at which a minimum wage is set; it is a debate which reflects the state of economics as a discipline.
In this chapter we have outlined the theory of competitive labour markets. If this is the basis on which you believe labour markets work, then a minimum wage set above the equilibrium wage will lead to unemployment, the extent of which being dependent on the elasticity of demand and supply of labour. The theory of competitive labour markets has predictive powers, and one of the predictions is that a minimum wage set above the equilibrium market wage will lead to unemployment. Early opponents of minimum wages argued against it on this very basis.
Critics of the neo-classical model argued that the assumption that markets are highly competitive was inaccurate and that there are elements of monopsony power in most labour markets. Does this monopsony model of labour markets approximate to the way labour markets really work, and thus provide a more appropriate set of tools for analyzing the effects of a minimum wage, or does the perfectly competitive model reflect more closely what labour markets are like in reality? A study by Card and Krueger in 1995 in the United States suggested that in some contexts (their work focused on the fast food industry), a minimum wage might have a positive effect on employment. This outcome would not be predicted by the competitive model.
What this highlights is a fundamental methodological debate in economics. If the predictions of the competitive model of the labour market are inaccurate, then it brings into question whether such a model is of value. If the model is of limited value, then it raises the question whether it should be taught as the basis of the theory of the labour market to undergraduate students. Many economists align themselves with neo-classical principles, and if the fundamental assumptions on which they base their research and views was found to be wanting, then this brings into question their whole reason for being.
Economics is not simply about adherents to the neo-classical model and those opposing it. There are other schools of thought including the so-called ‘institutionalists’. Institutional economics places some emphasis on the role of institutions in shaping the goals, rules and social norms which influence economic activity. Institutions include the laws that governments pass, the customs that evolve over time and are accepted as norms in society, the codes of conduct that firms and households adopt, the way in which rules and norms are enforced, and the political power that rests with different social groups. Institutionalists might argue that the neo-classical theory of the labour market ignores where people and firms in society are in terms of their wealth (i.e. are people in an economy ‘rich’ or ‘poor’
on average) and are citizens essentially satisfied with their situation or very dissatisfied?
These are important considerations in the analysis of minimum wages, they argue, because if society as a whole believes that wages for the low paid are too low and that there is considerable unfairness in labour markets with the low paid having little power, then their behaviour in response to the imposition of a minimum wage may be very different from the self-interested, rational being who is free to negotiate the sale of their labour and move from job to job as assumed by the neo-classical model.
The debate over the appropriate level of the minimum wage and, indeed, whether there should be a minimum wage at all, will continue. It could be argued that the actual level of the minimum wage is almost irrelevant – what is at stake is the very basis of the underpinning philosophy and methodology in economics.

Critical Thinking Questions
1 To what extent do you think that the assumptions of the neo-classical model of the labour market allow predictions to be made about the minimum wage which are both negative and significant? Explain your reasoning.
2 Minimum wage laws are set with the intention of helping the low paid. In low-paid jobs, what powers might employers have which might imply some element of monopsony exists in this market?
3 How might the existence of laws, rules, customs and social norms affect the predictions of the neo-classical model of the labour market in response to minimum wages, which institutionalists would argue render the outcome inaccurate and unpredictable?
4 Why might a minimum wage in low-paid jobs such as the fast food industry actually increase employment?
5 In this chapter, we have looked at the Living Wage. Is the fact that, according to the Living Wage Foundation, ‘thousands of employers are signed up and proudly displaying the Living Wage Employer Mark’ testament to the fact that institutionalist explanations of the labour market are not without foundation?