Wednesday, January 08, 2014

Minimum Wage

It will probably come as a surprise to many people that there is a body of support welling up within the Conservative party for an increase in the minimum wage. But although this may seem counterintuitive, there is a Conservative case to be made for such a policty.

I was against the minimum wage when Blair introduced it, as were most Conservatives. In a pure free market the inevitable consequence of such a policy would be to increase unemployment by pricing some people out of work. In the rather different market which actually exists, I was afraid that the minimum wage would be set too high and have the same effect.

But in the intervening decade things have moved on. Probably because of concerns about this very issue by the people who set it, the minimum wage has never been hiked to a level which would have priced material numbers of people out of a job.

Pure "free market capitalist" economies and pure state run "command" economies have never existed in the real world at any time or place. And the British economy that we have now is nothing like either. And in present circumstances the minimum wage is absolutely not one of the main problems stopping people from getting the sort of jobs that it affects.

The first problem has been a shortage of jobs, though the steady rise in employment suggests that small and large businesses are creating more jobs and reducing this issue.

The second problem, and I don't mean this as a criticism of the people concerned, is that many feel they can't afford to take a job because it would make them worse off.

Even after the benefits cap, we still have a serious problem in that the incomes available to those in low wage jobs is insufficiently higher, and can even be lower, than those available to some of those on benefits.

I have no wish to bash or criticise those claiming benefits - they did not create this situation. Nor can I blame someone who wants to work, if the only jobs on offer would leave them working all the hours God sends while having less money available for their family, if  instead of taking such a job they keep looking for something which pays better.

However it is not in anyone's interests - not those of the low paid, not those of the country as a whole, and in the long term not even those of the people on welfare - to allow that situation to continue.

One arm of a strategy to deal with the problem has to be continuing to look hard at the welfare budget. But we may also be in the unusual situation - what an economist might call a "counterintuitive relationship" between the minimum wage and employment - that a modest rise in the minimum wage might actually increase employment by providing an incentive to work for people who are currently given a perverse incentive to stay at home.


Robert Boxer said...

I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here:

Chris Whiteside said...


In many, probably most, circumstances the arguments in your article would be applicable.

Your article is entitled "Have we learned nothing?" I learned the main arguments it presents when I was studying economics in school (I went on to take two degrees in the subject) and they are the reason I opposed the introduction of a minimum wage in the UK twenty years later which was about fifteen years ago.

I note that your article was a critique of a current proposal being put forward by Democrats in the USA for a 39% increase in the Federal minimum wage in that country from 2015, and to much higher state or city minimum wages, including one city which posted a 60% increase to $15 oer hour.

I don't pretend to have sufficiently detailed knowledge of the workings of the US welfare system to know whether the arguments that I was using and that people like Mark Reckless have been using are applicable on your side of the Atlantic. I suspect that they may not be, and that if I did have that knowledge of the current American situation I might well agree with you about the Obama proposal and almost certainly would agree about the local minimum wage in the city of SeaTac.

However, economists also operate a principle called the "theory of second best" which recognises that in special circumstances, especially where you have extensive government intervention in your economy as we have on this side of the pond, some of the normal rules of economics might not apply.

I am arguing that in certain specific circumstances, e.g. a welfare state which makes lower paid British workers worse off than some people on benefits, the normal economic impact of a minimum wage on demand for labour might be counterbalanced because the minimim wage counteracts the impact of that welfare state on the supply of labour.

It is entirely possible that the apparently contradictory arguments in our two articles are both right as regard the current specific circumstances in our own respective countries.

Jim said...

For what its worth, I tend to agree with around 90% of your post. Minimium wage laws do more harm than good, the 10% I would disagree with is that raising it is a good idea.

The first problem has been a shortage of jobs, though the steady rise in employment suggests that small and large businesses are creating more jobs and reducing this issue.

Yes there has been a shortage of jobs, the recession of course did not exactly help that either. There is also a slow and steady raise in employment, a lot of this is being caused by a slow and steady raise in the number of min wage positions available, but why could this be? Well something sticking in my mind is that although the min wage has risen a few times, it does not keep up with the government’s inflation tax. So we see after the inflation tax is taken into consideration (or as governments like to hide that bit and say “In real terms”) we see the minimum wage is slowly and steadily falling, as the value of the min wage slowly and steadily falls, the negative impacts it has are slowly and steadily reduced, meaning slowly and steadily employers are able to make use of the more skilled min wage workers, until of course the min wage (after inflation tax) falls again, so slightly less skilled min wage positions may be created.

in short the value of the min wage reducing is helping to create employment. Can you think of a possible outcome of a sudden raise in min wage?

The second problem, and I don't mean this as a criticism of the people concerned, is that many feel they can't afford to take a job because it would make them worse off.

yes this is a real problem, and I agree with you its not right to bash people for taking an option offered to them on a plate. So how could this incentive be reversed, without doing so much damage to the number of min wage positions? Well, rather than raise the min wage as such, why not just raise the tax threshold so a person working even up to 60 hours per week on min wage gets to keep it all. They pay no income tax or NI. See this does not increase the cost of employing the person to the employer, it increases the income of the employee, increasing his/her incentive to work. The lost money to government could be “funded” by welfare cuts in the short term, but as the incentive grows the number of workers on min wage increases as the incentive is there, so the welfare bill naturally falls and we see the revenue is not longer needed (its win/win/win this isn’t it)

a 3rd problem with the min wage here in the UK (one you did not pick up on) is that it is centrally managed.

You see in London a full time worker on min wage cant pay the rent and buy essentials, but a person doing the same job, for the same pay, here in Cumbria can. If we increase the min wage so a person in London can pay the rent and buy essentials then the cumbrian is actually in quite a well paid job for the area, thus the competition for the job is increased and now includes far higher skilled workers, so the low skilled person in Cumbria no longer stands a chance. So it’s the areas of lower employment that suffer most in the long run. If the min wage is simply left to continue to decline (due to inflation tax) then in every area it does less and less damage over time, now given time a person in London may earn more in £ per week than a person in Cumbria who does exactly the same job, but the two peoples lifestyles will be comparable, and no damage from an enforced fixed price (which is all a min wage is, a fixed price on labour) occurs in either area, so employment continues to increase in both areas.

a reduction in regulation is the answer, not an increase

Jim said...

of course the benefits cap was set at a level way too high, agian we have the regional problem, but if its reduced to the average wage in each county, and then left alone (i.e. the inflation tax eats it away year on year)
the incentive to leave welfare and work increases year on year.

it gets to the point (due to inflation tax) to keep employees they must offer more than min wage, but there is no real reason to increase the benefits cap.