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’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.

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

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

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.

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?