Yee-Haa!

by Quinn

I’ve just had a brilliant idea. This week’s announcement of an increase in the minimum wage from £5.35 to £5.52 an hour gives me the perfect bogus pretext to dust off and resurrect that half written, half thought out post on the minimum wage I was faffing about with in November, before the birth of my daughter child caused me to reprioritise. So here, for what it’s worth, is my fully written – but, I hope, still half thought out, and certainly half baked – musings on the subject. So what are we waiting for?

I had been wondering, you see, how little seems to annoy economists more than when boneheaded thickos like me refuse to unreservedly accept that the minimum wage is a bad policy that costs jobs. Why can’t the public get it into their daft heads and just accept that the policy is flawed because real economists instinctively oppose it?

This assumption, of economists’ antagonism towards the minimum wage, took a bit of a hit when over 650 of them – including some prominent names – signed this declaration that argued in favour of just such a policy in the US, stating that “a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed” and that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment”. So much then for the economists’ consensus.

Of course, this was still mocked by opponents of the minimum wage. Café Hayek inducted all those who had signed the declaration into their “Hall of Shame”, stated that the signatories must “believe that demand curves are vertical”, and asked, “how can you sign your name to something like that and call yourself an economist?” That, I guess, is how you maintain a consensus; by cutting adrift and blanking out those who disagree with you.

Now it is a good line of Café Hayek’s, saying that these rogue economists believing in a vertical demand curve, but I think you can get too hung up on such details. I remember being told about the unemployment effects that can be caused by the minimum wage when I studied for my degree, and it certainly makes sense. If memory serves, the diagram explaining it goes something like this.

And before the minimum wage was introduced in the UK I myself cautioned against it, flaunting the meagre economics knowledge I had gained from my shiny new BSc on the subject (many years ago; now my 2:2 looks old, tired and tarnished, and I don’t know where you can buy Duraglit these days).

But surely you don’t need knowledge of economics to see the harm that a minimum wage can do? You can forget curves and their angles; at its heart the idea is simple. An increase in the minimum wage means an increase in costs for any business that employs people on the minimum wage. Businesses have to deal with that. They may absorb it from their profits; they may pass the increased costs onto their customers in the form of higher prices; but some may seek to cut costs as a consequence of the increase in their wage bill, and one way to cut costs is to lay off staff (or reduce their hours). In addition, for some firms an increase in the minimum wage, and so costs, may be the difference between just staying in business and going bust. True, such companies are likely to be in a pretty precarious financial position as it is, and just as likely to go bump with the next strong gust of wind; but still and all, the inevitable consequence of a minimum wage is that some people may lose their jobs.

But why single out the minimum wage for such criticism? If you want to rail against the minimum wage, why not rail against anything that imposes costs on companies? Health and safety laws for example, not just the frivolous kind that make the front page of the Daily Mail, but any such intervention that puts helmets on builders’ heads or prevents lorry drivers from mimicking a single-crewed Le Mans race while on the road? Or interests rates? Perhaps we should never raise interest rates because that too can cause problems for business and increase their costs? We should never raise interest rates, for whatever reasons. Or increase taxes under any circumstances whatsoever. I don’t know what we should do when commodity prices rise, but we had better think of something soon.

Of course we can’t do much about the price of commodities on a global market, so business will just have to deal with that. And taxes, and H&S laws? Well again, they are clearly needed at some level, so we must grin and bear them too. Interest rates? Well, obviously, they may have to rise at times, for the greater good, to control inflation or whatnot, as long as they are raised at a careful and sensible level, as long as we don’t go mad and quadruple them overnight. But can’t the same apply to the minimum wage, if it is introduced or raised at a sensible rate? I see loads of adverts in shops and pubs near where I live advertising for staff at the minimum wage, not a penny more. They don’t seem to be looking at redundancies, quite the opposite, and God knows what they would be offering if they weren’t forced to pay more. Can’t the minimum wage be seen in the same light as health and safety, tax and interests rate rises, as something that may need to be done to protect certain parts of our society even if it can also have some negative effects?

Great if you are the one getting the pay rise, it could be said, not so great if you are the unfortunate one losing your job in society’s reshuffle as it digests the increase in labour costs. And it is true, for every action there can be an equal and opposite reaction, and unintended consequences too. But for me, I would take this criticism of the minimum wage more seriously if those making this point and shedding tears for the losers from a minimum wage didn’t tend to find their tears drying up when discussing the jobs similarly lost through offshoreing and globalisation, through industry consolidation and productivity drives, or any other form of profit chasing that can cause job losses. If you think a policy is justified then you think it is justified, in spite of the negatives consequences (just as long as those negatives don’t outweight the positives).

Continued after this musical interlude…

But need there be job losses because of a rise in the minimum wage? Not if you think that the demand for labour is vertical, ha ha. Unfortunately for Café Hayek, their opponents who signed that statement in favour of a minimum wage rise don’t believe this either. They clearly state that a rise in the wage will have “very little or no effect on unemployment”; so they accept the possibility of job losses. Even then, though, I have to ask; how do you view economic models? Are they precise, are they definite, are demand curves perfect sloping lines you can fix a point upon to show the impact of policy decisions? I’m not an economist so I wouldn’t really know, but I say not.

Take the Laffer curve, the theory that states that a cut in the tax rate can lead to an increase in taxation revenue. It is often denounced as a “back of the envelope” theory that cannot be proven, but really it is an accurate truism. At a 0% tax rate there is clearly no tax revenue, while at a 100% tax rate there is still no revenue because everyone will bugger off to a more benevolent country with a generous 99% tax rate. Between these two zeros there must be some sort of curve of tax revenue that rises then falls as the tax rate increases. If you are the right side of the apex of the curve then in theory you can cut tax and still see an increase in revenue. This is no good for policy making – no one knows how the curve is drawn, or where we are upon it – but as an insight into how things work I think it is useful.

And I think the same holds true for demand curves. Of course they slope down, and that is good to know. More people will want to employ me if I say I will work for £1 an hour than if I want £100 an hour. An employer who may be happy to employ me for £1 may tell me where to go if I demand £5.52. So the minimum wage is bad and causes unemployment, no?

But what of the demand curve for Rolls Royce cars? Is that vertical? No, it too clearly slopes down. Demand for a Rolls Royce at £15bn a car? Nil. For £15? Loads. But; taking the current price of a Rolls Royce (which I confess I just don’t know, I’m really not in the market for one), would demand fall if the price rose by 1p – a “modest increase”, as the signatories of the pro- minimum wage statement ask for? No it wouldn’t. What about £1. Clearly not. £100? Unlikely. £1000? I still doubt buyers of new Rolls Royce’s would even blink at such a price rise. £10,000? Now you’re talking, probably. A £10,000 increase in the price of a Roller would hit demand for the vehicle, so the demand curve for the things does slope downwards, it isn’t vertical; but that doesn’t mean that any price rise will cause a reduction in demand. Actually, I don’t know why I picked such a strange example. What about something simpler, more down to earth like a Mars bar. Will demand for them fall if the price rises by 1 or 2p? Will it balls, but economic theory suggests it will. In short, theory suggests that as price rises, demand falls; in practice, price often can rise with nish effect on demand, especially if such a rise is in line with inflation. I think the demand curve, like the Laffer curve, should be viewed as a general illustration of how economics works rather than as a precise analytical tool, or a blunt ideological instrument of scientific fact.

So we’re agreed are we; that a minimum wage needn’t be opposed in principle, it can be accepted as a necessary tool in the policy makers’ toolbox even if, like other elements of policy it can have some undesirable effects, and it may not even cause these side effects anyway? Good. But in reality, is it the best way to help the poor and the low-paid? Ah, well, that is a different question altogether.

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