The Minimum Wage
Why is it that polticians support the minimum wage. Almost all economists are united against it (and those who don’t tend to have political or personal reasons to support it). It has been shown, in theory and practice, to lead to job losses amongst the poorest.
If it did work, why not just increase it to £100 an hour? Or £1000?
Of course the unions support it because it raises the cost of hiring less productive labour - that is non-union members - whilst allowing them to look good.
The wage floor isn’t raised, the hurdle to work is raised. It penalises the least educated, the most vulnerable, those it is meant to help. It is quite simply wrong, yet it is supported by most politicians now, especially those who want to appear ‘nice’.
Surely if it did work and people did not lose their jobs then the effect would be inflationary anyway. It would raise the prices of goods and not help the poorest because the goods they wish to buy are the same price relative to their wages.
It is in the same league as protectionism. A practice dressed up in terms of doing good which harms people. A product of economic illiteracy which makes people poorer instead of its vaunted aim of helping people. It is the worst sort of policy.
You may not like it, but it is the truth. You cannot change the nature of the world just because you don’t like it.
There are other ways of helping the poor, we could start by not taxing them. We could encourage development of more accommodation through less strict planning laws and possibly a Land Value Tax. A graduated negative income tax for the poorest is a possibility which would not discourage work.
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May 13th, 2007 at 1:14 am
Yes, I agree with just about all of that.
One of the greatest absurdities of this Labour government has been instituting a minimum wage for employees - and then forcing those employees to give up a portion of that wage through the tax system!
I’m a firm believer that “no tax on a living wage” should be the motto of all true Liberals - and in this day and age, that means anything up to around £12,000, not the derisory £4,000-or-so allowance we have at present.
The minimum wage, our labyrinthine tax code and our nightmarish benefits system are all key components of the poverty trap, despite their good intentions. The sooner we scrap them and start again from scratch the better!
May 13th, 2007 at 1:43 pm
All good points, Tristan, but you’ve not answered your own question: “Why is it that polticians support the minimum wage?”
Might I suggest that it is similar to my (or rather, Arnold Kling’s) point about international aid? There is a foucs on intention rather than outcome. Partly this is genuine: politicians want to do something, and the minimum wage is something that they can do, so they are predisposed to believe it. And partly this is cynical, in that there are few votes in saying things are best left to sort themselves out (more’s the pity for liberals).
People want solutions - even if they are illusory - and will vote for the politican that promises the most.
Joe,
I entirely agree. I have been advocating a personal allowance of £10,000, which is roughly the equivalent of minimum wage x 37.5 hours a week x 52 weeks a year. I would remove the minimum wage to promote job creation, but I’d raise the tax threshold to allieviate poverty.
May 13th, 2007 at 8:04 pm
There is some danger of oversimplifying here. Yes, there is an economic downside to the minimum wage, which will be large if the level is set too high. I don’t imagine that a MW of £1 per hour would have any noticeable downside - so it is fair to ask at what level is it reasonable to object.
But beware of the consequences of dismantling only some state interventions. We have, for example, a system where people on benefits are not permitted to refuse work. Maintain that rule - as, I suppose, we must - without any minimum wage, and there is a real potential for near-slavery.
Ideally, Citizen’s Income and all that, yes I know. Ideal, but much too expensive.
Better than the MW would be negative income tax for the lowest paid. This is hard for some politicians to stomach because low wages are “Evil”, and should therefore be banned, not subsidised. They’re wrong.
May 14th, 2007 at 10:13 am
Hi Tristan.
I regard the return of the minimum wage as one of the best actions of the Blair government.
I’m not an economist, but it seems to me that the cries of doom when it was reintroduced weren’t fulfilled.
I do have many years of experience as an employee, and I think the mimimum wage promotes fairness and social cohesion. And to state the bloomin’ obvious , it some cases it give people on low incomes more money.
If it was a good policy for Churchill, it’s good enough for me!
May 14th, 2007 at 1:32 pm
Chris:
The problem is it does not work like that.
Wonder why youth unemployment is up? One of the main reasons will be that the minimum wage is above the value of their labour. Young people are less productive, so their labour produces less. Since wages tend to the extra value employing you adds, if you place the minimum wage above this level then it is not worth hiring people whose productivity gives lower value. If you did hire them then you’d pretty soon go out of business.
Quite how fairness (in any definition) is created by pricing people out of the labour market I don’t know. Nor how increased unemployment adds to social cohesion.
Or how denying people low paid work when they start out in the workplace will help them gain the skills necessary to raise their productivity to gain higher wages.
The minimum wage is unjust and penalises the poorest and least skilled.
May 14th, 2007 at 1:48 pm
Joe Otten:
I agree that we must dismantle all the other aspects of the state which contribute to the poverty trap.
I disagree that there is a level at which the minimum wage becomes bad however. Somebody will always be priced out of the job market no matter what the level.
With a low minimum wage you price out the mentally handicapped, for whom low paid work is of great theraputic value. Charity does not work nearly so well, they realise that they’re not doing enough to justify their pay if they’re overpaid or why deny them what they can earn if its voluntary?
May 14th, 2007 at 2:20 pm
Tristan,
Forgive me if I don’t see a lot of point in almost worthless work. Yes, work can be therapeutic but being babysat is not. You don’t get the therapeutic benefit by calling make-work work.
Maybe it fits nicely into a simple model of the ideal society if everybody works for exactly what they’re worth in the labour market. But that’s not good enough a reason.
You agree we must dismantle other aspects of the poverty trap - but actually you’re not agreeing with me. I didn’t say we must do that, I said it would be too expensive. In the real world we are stuck with a welfare state, and, given that, it isn’t so absurd to have a minimum wage of some sort.
Now maybe the MW should be half what it is, I don’t know, show me the maths. And if the numbers supported cutting it, they would also support abolishing it.
May 14th, 2007 at 3:19 pm
Joe:
The point is it is work in the absense of the minimum wage. With the minimum wage it is not possible. This is why there’s an exception in the US minimum wage.
People don’t work for exactly what they’re worth because we don’t have perfect knowledge. What does happen is people’s wages tend towards what they’re worth.
What never happens is people working for more than what they’re worth.
I’m sad that you think that we are stuck with the current model of welfare state. Thankfully we don’t all think so. If Thatcher had listened to her critics in the Tory party who thought that we were stuck with the socialist model we’d be immensely poorer.
As an example of the poverty of your view- imagine if you were to suggest that we are stuck with environmental policies which cause immense damage. People would rightly decry your pessimism.
The fact that there is a minimum wage means that it will rise, it will not be cut. The only action worth anything is to abolish it (and if we lower it so it doesn’t cut many people out of the labour market what’s the point of having it?)
May 14th, 2007 at 6:27 pm
Tristan, I didn’t mean to make you sad, but, seriously, if you have an alternative to welfare, let’s hear it, and how you propose it might be paid for.
May 14th, 2007 at 8:54 pm
There are some brilliant quotes, here:
1) “In the real world we are stuck with a welfare state” is a very fatalistic attitude. If we believe an aspect of it is harmful we should do everything in our power to dismantle it.
2) “If it was a good policy for Churchill, it’s good enough for me!” - I take it you will be advocating the carpet bombing of Dresden, then!
On a general point, the minimum wage did not undermine much job creation at first, because it was set at a low level, so people were happier to stay on benefits.
The point about not being able to refuse a job is spurious: plenty of people remain on welfare for years; it’s not too hard to avoid getting offered a job you don’t want.
It has been rising FAR faster than inflation, however, and is beginning to impact upon the labour market. Meanwhile it has spawned the “Living wage” campaign that is calling for a minimum wage of between £7 and £8. How many jobs will that eradicate?
May 15th, 2007 at 8:24 am
Tom,
I expect one day society will be rich enough to afford Citizen’s Income and negative income tax and the poverty trap will be in the dustbin of history. Today it isn’t. It is rich enough to move a little way towards them, which is what our policy should be. If this is fatalism, then guilty as charged. Perhaps you and Tristan are guilty of trying to base policy on wishful thinking.
May 15th, 2007 at 12:28 pm
In short as a Lib Dem TU activist you’ll not be surprised that I support the minimum wage. Furthermore, many have benefited from such, especially here in the Westcountry, one of party’s strongholds.
In terms of pragmatic politics alone to oppose the MW would be a huge vote loser not only amongst our voters but also the ‘tactical’ soft Labour vote we rely on in order to keep the Tories out.
However, as many here have alluded to, the tax system could be used to alleviate poverty by raising personal thresholds for the least well off. The last ‘great tax cutting budget’(sic) of Gordon Brown which took away the reduced starting rate for the lowest paid does the reverse of what ALL contributors to this debate hope to achieve.
I have always been interested in the idea of a Citizen’s Income, but am not sure if the figures could stack up and be politically acceptable. What was right / wrong with the Greens’ version of CI Joe ?
May 15th, 2007 at 2:19 pm
The problem with CI is that it is massively expensive. The idea is great, but the numbers - well you can forget about everything else you might want to do as a government, and you will still have some heavy tax rises.
We can set course - less means testing, lower clawbacks on benefits for people in work, and so on. But it is politically hard - the costs are up front and the benefits are down the road. The temptation is to do the opposite as Brown did in the last budget - higher taxes on the low paid to pay for more means-tested benefits.