Political Economy of Minimum Wages

Abstract

This chapter summarizes the relatively small literature on the political economy of minimum wages. There is considerable variation across – and sometimes even within – countries in the level of the minimum wage relative to the average wage and in minimum wage-setting regimes. A simple interest group model predicts that minimum wages are higher in countries with stronger unions, which tend to benefit from higher minimum wages, and lower in countries with stronger employer associations. In places where the legislature sets the minimum wage, elected politicians may consider constituents’ preferences when voting on minimum wage increases. Alternatively, party affiliation and ideology may underlie politicians’ votes. Empirical evidence indicates a role for interest groups in some places, but economic conditions, constituent interests, and party affiliation and ideology also appear to affect the level of the minimum wage in many places. Countries with minimum wages set via collective bargaining tend to have higher minimum wages than countries with statutory minimum wages, highlighting the importance of the minimum wage-setting regime. The chapter also discusses key areas for future research.