There are some things which few people will thank you for saying, but still need to be said. There are some statements which will lose a politician more votes than they gain him, but still need to be said.
As Sean Gabb says in “Free Life Commentary”:
“A political leader, as opposed to a demagogue, has a duty to listen, but also to educate. This means on occasion resisting the will of the majority. It means the sort of patient explanation of truth that I last saw in the early 1980s, when several dozen Conservatives, in or out of office, went about the country telling often hostile audiences why the calls for reflation had to be resisted.”
One thing that needs to be explained is the badness of the minimum wage. Just as any price-fixing will cause a shortage or a surplus, the minimum wage causes unemployment (a surplus of labour). There are some people whose labour is simply not worth the minimum wage. With minimum wage laws, they will never get a job. To believe otherwise is to believe that government can legislate against the laws of economics. But governments can no more do that than they can legislate against the laws of physics.
Of course, if a minimum wage is brought in at £5/hour, not everyone previously earning less than £5/hour will suddenly lose their jobs. Like most political decisions, some people benefit from it, and some people lose out. But there are plenty of tasks which are simply not worth paying for at that cost. Various jobs are destroyed, and plenty of people do become unemployed. The government know this, of course, which is why there are different minimum wages in the UK for those aged 22 and above (£5.73), those aged between 18 and 21 (£4.77), and those younger than 18 (£3.53). Most under-18s are not skilled enough for their labour to be worth the adult minimum wage. Rather than see even more unemployment, the government created a tiered minimum wage. But it is not the case that the labour of everyone in any particular age band is worth the same. There are plenty of adults (currently unemployed) aged over 22 whose labour is worth less than £3.53/hour. Rather than differentiating by age, we should differentiate between each individual. But that would mean abolishing the minimum wage. This clearly demonstrates that the minimum wage was created for reasons of political popularity, despite the clear economic argument against it.
A good way to see why minimum wages are bad is to ponder why the minimum wage is currently £5.73.
In this clip from the BBC’s “Politics Show”, a woman says “I’ll vote Labour if they put the minimum wage up to £8″. Why isn’t it £8/hour? Or indeed £20/hour?
Perhaps this woman was on minimum wage. It’s hardly surprising that someone would turn to a politician for a pay rise when they couldn’t get it from their boss. However, raising the legal minimum wage to £8/hour would certainly have the unintended consequence of lowering this person’s actual wage to £0. Rather than increasing their income, they would become unemployed as a result of such a policy.
On Thursday 6th November 2008, in the annual “No Confidence” debate at the Union, Oliver Letwin was asked, “Why did you vote against the minimum wage?” It didn’t seem to have occurred to the questioner that there could be any good reason for opposing a minimum wage. Mr Letwin replied that he had been responsible for changing Conservative policy on the minimum wage “because we were wrong about it. It turned out not to price people out of jobs the way we thought it would. The reason we were sceptical about it is because we thought it would price people out of jobs… I hope, I trust, that it’s not going to rise to a level where it does that in a recession.”
Mr Letwin is wrong that the minimum wage has not priced people out of jobs. Indeed, now that we are in a recession, it is surely responsible for even more unemployment. The reason the minimum wage is not £8/hour is because that would cause more unemployment. So the choice for a politician when setting the level of the minimum wage is: How much unemployment do you want? Unemployment will never be minimised as long as minimum wage legislation remains in force.
Lowering or abolishing the minimum wage is of increased importance at the moment, because lowering wages is essential to ending recessions.
“It is common and indeed conventional knowledge that only World War II ended the Depression… What is less often acknowledged is that the New Deal as such thus failed to end to the Depression. Nor is it generally understood why the Depression did not return in 1946, after the military was demobilized and war production ended. By all rights, nothing should have been any different from 1939. But the Depression did not return. Despite demobilization and the end of war production, unemployment in 1946 was 3.9% and in 1947 3.9%…
So why didn’t the Depression return in 1946? Because wages were frozen even while the money supply was inflated with the war spending. This drove down real wages, the opposite of the consistent policy of Hoover and Roosevelt for a decade to drive up wages. In 1946, wages were low enough to clear the employment market. If employers could then hire workers at a market wage, and produce consumer goods, business could get back to normal. It did.”
However,
Dave Prentis, general secretary of Unison, will cut a special cake in the Commons to celebrate the anniversary, saying that the current £5.73 an hour rate should increase to £7.45 by October 2010.
The union also wants apprentices to be covered by the minimum wage, adding that the “development rate” for younger workers should be scrapped as it “discriminated” against young people.
As Tim Worstall puts it,
Are these people mad? A 30% pay rise in the middle of a recession? When people are shedding labour left, right and centre, you’re going to make labour more expensive?
The minimum wage is a blunt instrument. Prices are information, and setting prices (including wages) distorts the market, preventing it from solving the economic calculation problem and allocating resources efficiently. Just as we don’t set prices, we shouldn’t set wages.
The minimum wage is unfortunately popular amongst many people that it harms. If you want to redistribute wealth, which is what the minimum wage tries to do, a negative income tax would be a far more effective method.
Tags: economics, free markets, markets, minimum wage, socialism
Though, just to play the devil’s advocate, if the labour supply curve facing the individual firm has some slope to it, as opposed to being perfectly elastic at a given wage rate, the situation may be slightly different. With an upward-sloping labour supply curve, the enforcement of a minimum wage will alter the firm’s marginal cost curve, such that over a certain range of employment, even though the average cost is higher, the marginal cost of an additional worker will be lower. In other words, it is possible that a minimum wage will raise employment.
Why might the individual firm face a labour-supply curve with some positive slope? Well, to a certain extent, each firm is something like a monopsonist with respect to its employees. Imperfect information and imperfect labour mobility suggest that it is NOT the case that if a firm lowers its wage rate by even $0.01, all its workers will immediately quit.
However, even if labour markets are characterized by some degree of monopsony, they are probably only slightly so, in which case the range over which a minimum wage might raise employment would likely be exceedingly narrow (and thus hardly solid foundations upon which to justify blunt policy intervention).
By the way, you can estimate the pervasiveness of monopsony in the labour market by taking the difference between the marginal cost of labour and the market wage rate, and dividing by the market wage rate. Doing so for a cross-section of the labour market suggests a monopsonistic “rate of exploitation” of 1-3%. It varies, however, by market. For example, university professors face a monopsonistic rate of exploitation of 5-15%. Thus, while a minimum wage hike may not be a good idea for the labour market in general, a higher minimum wage for university professors would raise employment in that profession!!
I assert this with no vested interest. . .
Still people advocate “equalisation of the national minimum wage”, bringing pay for teenagers up to the same as adults.
http://www.labourlist.org/we_should_celebrate_the_anniversary_of_the_minimum_wage_by_build
Of course, this will increase unemployment amongst the young. Are the people who advocate this evil, or stupid?
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Raising the minimum wage is clearly counter productive. However abolishing it is foolish.
It is an INCENTIVE TO WORK. Though you may not like it there is an alternative in the welfare state. Do Conservatives not want to reward work?
Companies, in good times and bad, will reduce wages to whatever level they can get away with. This means poverty for those in work. Again entirely the wrong message. The social consequences of this also have a £ cost.
Hi Phil,
You are correct that it is an incentive to work. But if that was the whole story, raising the minimum wage would not be counter-productive. After all, why not raise it to £10/hour, and raise the incentive to work even more?
The answer is that you are seeing “what is seen”, but not what is not seen. You are looking at the demand side, but not the supply side.
The minimum wage is an incentive to work. But it is also a disincentive to hire. It raises the number of people who want to be hired, but so what? because it decreases the number of people who actually are hired. Therefore, it creates unemployment.
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It is true that we should not think about the labour market exactly like any other market, because of its social consequences.
After all, abolishing the minimum wage would reduce unemployment for two reasons. One, by increasing employment. Two, by causing some people to no longer want to work. If they aren’t looking for work, then they are “voluntarily” unemployed, and so don’t count as “unemployed”. The gap widens both ways.
This second reason is bad — whether “voluntarily” unemployed or not, without additional income they will likely end up in poverty. You are correct that companies will pay as little as they can get away with, and this will likely result in poverty for those in work too.
To stop poverty, we need to raise the incomes of the very poorest. But fixing wage prices is a really kludgy way to raise incomes. A negative income tax would be far better.
Hugo
Hugo,
Perhaps these ideas work with negative income tax. However the reason I am googling this topic is that it in the real policy realm. There is a vote on the 15th May in Westminister to allow employees to opt in or out. So I am considering it within that real world context.
In that context ‘voluntarily unemployed’ don’t exist in great numbers. The system is too easily manipulated for that. Reforming welfare is a necessary stick for the ‘voluntarily unempoyed’ and the minimum wage the carrot. Stick plus stick is not a policy with humans in mind. Beasts of burden perhaps.
I fully understand supply side. I see some job destruction as a price worth paying. Though I think you overstate this. I was working in a bar when the minimum wage came in. It was the difference between sinking into debt and a living wage. That difference was 25p. Again work should not equal debt. But it did for many Britons.
Regards
Phil
Christopher Chope’s “Employment Opportunities Bill”?
I’d probably vote against it.
(For the benefit of other readers, the bill proposes to allow employees to “opt out” of the minimum wage. Obviously opting out would quickly become a condition of employment, and employers would say to current employees “opt out or we’ll sack you”, and workers that didn’t want to opt out would be out-competed by those that did, so in practice everyone would opt out. (In its first reading, a Labour MP said that would be “unfair competition”, but there’s no such thing.)
In other words, the bill is to abolish the minimum wage. I notice, apart from that one interjection, no one spoke against it. Nevertheless, I’d probably vote against it.)
In the long run there should be a decent welfare system, and then we wouldn’t need the minimum wage. But I see no reason in the mean time to abolish the minimum wage and cause hardship.
(Of course, the reason the minimum wage was brought in is because, though it is a sub-optimal welfare system, its cost does not fall so much on the Treasury.)
But supporting the minimum wage in the short run should not make us lose sight of its fundamental badness. It might not be as bad as 70%-110% marginal tax rates, but it is bad. (“A man who is holding down a menial job and thereby supporting a wife and children is doing something authentically important with his life.”) These compromises mustn’t reduce the haste with which we should pursue the reduction of marginal tax rates for the poor to 0%-20%, through, say, a negative income tax. And ultimately the minimum wage should be abolished.
[...] idiots Geniuses over at Cambridge University Conservative Association (as if you’d expect them to understand the point of the minimum wage in the first place) say [...]
Well, I’ve been thinking about it a bit more. I posted a comment here, where I acknowledge that the amount of unemployment caused could be quite small. I still claim that some unemployment will be caused.
I now think that the minimum wage could possibly be justified, only in conjunction with another welfare system, if the increase in wellbeing of those remaining employed was sufficiently larger than the decrease in wellbeing of those who became unemployed. This would depend what proportion of people previously earning less than the minimum wage became unemployed, how much the incomes of those becoming unemployed decreased, and how much the incomes of those remaining employed increased. It would be a bit unfair on those who lost their jobs. It could even be the case, however, that the increase in income tax paid by those remaining employed could be redistributed to those who lost their jobs, increasing their net income as well. However, this is probably impossible: it would require means testing and therefore would likely increase the poverty trap, causing people remaining employed to choose not to work.
I consider all this very unlikely though. The minimum wage is almost certainly bad. I believe a negative income tax on its own is a far superior wealth redistribution tool.
“I see some job destruction as a price worth paying.”
Hmm. I doubt the people whose jobs were destroyed would agree.
[...] the unintended consequence of incentivising employers not to hire them in the first place. Like the minimum wage, they cause unemployment: they protect those with jobs, but stop plenty of people getting jobs at [...]