Thursday, November 23, 2006

Should the minimum wage be defended?

After Boris Johnson’s amusing article, I felt susceptible to Toynbee-baiting following the preposterous announcement that she would be a useful guru for the Tory party. What's more you have to ask how could she send her kids to a public school or own an Italian villa and really mean what she says about social integration?

Yet foraging for other ostensibly unrelated material on the minimum wage, the need arises to defend one of the poor woman’s views from Tim Worstall’s attack:

Higher minimum wage eh? We know that (at some point at least, for the doubters) this will mean fewer people have jobs and we're also certain that it will reduce the number of hours offered. How does this increase incomes? Note that while she calls for higher tax credits and benefits, she still can't quite bring herself to call for lower actual taxation of low wages.

Now, Worstall’s premises are clearly fine, a minimum wage will probably have a negative impact on employment, it will probably mean eventually that people are not employed to do certain jobs and that people are employed for fewer hours. Presumably though there will be more incentive for people to find work given that the wage they earn will be relatively liveable? In addition, shouldn’t the minimum wage lead to less inefficiency in the work place by employers firing unnecessary labour and not using people for hours for which they are unwilling to pay a reasonable wage and the other hidden costs of labour?

The straight answer to Worstall's question has to be that with the minimum wage incomes are increased for those in work and there is more incentive for those outside work to find employment. Maybe this is an ideological difference and simply involves too much state tinkering for Worstall’s happiness and there is clearly a good argument to raise the basic level of taxation instead. Yet given that governments are terrified of doing this, preferring redistribution, is it not better in the short term to have the minimum wage to aid redistribution to those in work so they can survive on a liveable wage?

If valid proof arises that the minimum wage will lead to an unbearable burden on the economy then it should be ditched but the proofs need to move beyond the insults traded between free market ideologues and mad left wingers. The electorate and those who are not professional economists need to know why both camps tear each other's throats out about an issue that could cut both ways.


Tim Worstall said...

A higher minimum wage will indeed, as you say, lead to people wishing to work longer hours and tempt some of those currently out of the labour force into it.

ªIt will also, as you say, reduce the demand for such labour.

So we get more people looking for ore work and fewer people offering it.

This is a good thing?

I'm also arguing that we should lower the level of taxation, not raise it. I think it absurd (vile even) that someone working less than 30 hours a week for that minimum wage is caught up in hte NI and income tax nets.

Tim Worstall said...

Saw your comment at my place.

This is a reasonable overview:

Toby Lewis said...

Thanks for the article I'll give it a read.

"So we get more people looking for ore work and fewer people offering it." - Couldn't it also be the case that this in the long term leads to more effective employment and more fluidity in the labour market? After a while people adapt to become employable, and the short term problems (which as far as I'm aware have been less than estimated) may need to be weathered for a fairer market at the end of the day.

As to your lowering or removing tax for those who are poorer, this just seems sensible but isn't this similar to providing a minimum wage?

AntiCitizenOne said...

Think of the minimum wage as the level of productivity someone needs to acheive before they can be employed i.e. a barrier.

Maybe you could look at concept such as the citizens dividend which come from Geonomics.

Chris said...

"Think of the minimum wage as the level of productivity someone needs to acheive before they can be employed i.e. a barrier."

But the productivity implied by the level of payment and the actual productivity aren't necessarily the same. The minimum wage is, on occasion, a forced overpayment of labour just not worth the minimum wage.

Sometimes offering fewer hours to compensate isn't an option. When I was younger, I worked as a glass collector in the bar of a local hotel. I earned about £3 an hour - and frankly it was a fair price for what I was doing. Had they had to pay the minimum wage, and bearing in mind I had to be there from opening until after closing so the option of fewer hours wasn't really available, it would have been quite an overpayment for the job.

To be honest, had that been the case they probably would've been better off not employing me at all. Then everybody loses: the other bar staff had to do other stuff on top of serving drinks at a busy bar and I would've been out of a job.

And when I "worked" in the Welsh Assembly, where I temped for six months, I was paid £7.11 an hour, which was another mammoth overpayment.

Toby Lewis said...

A very good article by Tim above and I especially recommend the Krugman link. As far more a moral philosopher than an economist I found his final quote interesting "it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away."

In recent political philosophy the conventional fault line between Socialist Liberals and hard-core Libertarians has been the rationale behind redistrubution. The former think they can override the Invisible Hand and redistribute to create a better society, the latter think this a quixotic quest or at least that the means the caring socialist thinks he has for redistribution actually do not lead to a better outcome for all.

Toby Lewis said...

Chris, I think for young people the minimum could be lower but also those under 16 should definitely be limited in the hours that they are allowed to work in order that they can take full advantage of an education.

Tim's example of the extra earnings (tips) that those in the service industry depend on is of interest. The idea is that waiters would be/are oversubsidised under the minimum wage thus making waiting jobs less available. Perhaps special contracts could be devised for the service industry but I imagine that would also be undesirable in terms of the additional bureaucracy created.

Toby Lewis said...

anticitizenone - The citizen's dividend seems an interesting concept. However, given there are limited funds available to the state redistributing to all is crazy. Tax Credits for example act as a kind of Citizen's Dividend but with a limit. Surely the rest get the welfare state. I.E. hospitals, education, benefits, the fire service, transport, order, defence and attempts to manage the economy? This is the rationale for them to have the state.

AntiCitizenOne said...


The state rewarding failure is something to be avoided. A Geonomics funded Citizens Dividend would return rather a lot of money to each person in the country.

Toby Lewis said...

Basically the Citizen's Dividend means giving money to everyone. This is what happens, for example, with the welfare state, child benefits or tax credits.

I'm not sure whether providing extra money for everyone on top of this would be worthwhile, firstly (from my limited understanding of economics) it would increase inflation, secondly it would presumably thereby lead to less redistribution.

Also the rationale behind having a certain degree of benefit is that people will be willing to take risks, leaving employment to find other work. Why would a medic or banker need that kind of state top-up when they are in work? It would be an insignificant amount to them but many would still gratefully receive it.

I can see you think the Citizen's dividend would wipe out the stigma attached to benefits but it also seems to put an unnecessary strain on the state purse.

Also does the state really reward failure at the moment? It seems to me that those who depend on the state live at a subsistence level whereas the successful live as if they are in paradise. The incentive is definitely to find specialist work, if not you can be at worst used as a living mule. Yet ironically those who do this work are also essential to the functioning of our society but they are seldom treated as if this is the case.

zola said...

Who was it that talked of the "equalisation of all value" under a capitalist amoral logic? Think it was Simmel but never mind names. Just rang an old bell.

Raymond Williams used to ask us to always remember the labouring folk whenever we switched on an electric lamp. Another old bell ringing from comments above.

Toby Lewis said...

No idea. I like the Raymond Williams advice. It sounds like a kind of Marxist epistemology: because this light is shining I know someone is working.

zola said...

Too many power cuts though !!!