Is the minimum wage working, or just stopping work?

Wednesday 12th October 2011

It’s been announced today that unemployment is at a 17-year high, and that 16-24 year olds are being particularly affected. In that group, unemployment is higher than it’s ever been.

Back when the minimum wage was introduced, there was a particularly interesting argument put forward against it. This was that it would have an adverse impact upon people whose labour is not worth the minimum wage. In particular, it was argued that younger people with less training or experience, would simply not be worth hiring any more. Given today’s unemployment figures, this argument seems at least plausible.

The intention of a minimum wage is – presumably – to ensure that people are paid enough money to allow them to have somewhere to live, food to eat, and some sort of good standard of living. And that’s an absolutely good intention. But is pricing people out of the job market really the best way to deliver this? Isn’t it better that people work for whatever wage they’re able to collect (and, of course, are willing to work for) so that they’re at least gaining experience which increases the value of their labour, and allows them ultimately to secure better-paid employment? And if a wage is deemed to be too low, wouldn’t it be better for the government to supplement it, rather than trying to force employers to pay over the odds?

Is it time to scrap the minimum wage and come up with a more intelligent way of dealing with this? Perhaps something like a negative income tax?

Posted at 3:00 pm | Posted In: Politics Tagged:



Wednesday 12th October 2011, 5:08 pm

So essentially you’re saying that Income Support benefits should increase? And that the government should effectively foot the bill of companies paying their workers peanuts?

I also inherently dislike the idea that somebody’s labour is “not worth the minimum wage”. Not worth it in terms of direct profit, maybe, but not worth it in human terms? Really?



Wednesday 12th October 2011, 6:49 pm

Well, technically I didn’t say anything should happen. I just pointed out that what we have doesn’t seem to work very well, and posed several questions…

To answer your question though, actually I think there’s a good argument for scrapping benefits, in favour of a negative income tax (or something like it). This would not mean that government are “footing the bill” for low wages (at least, no more than they already do; presently people with low-value labour just don’t get jobs, so government pays for benefits and the bureaucracy that goes with that). It would just mean that people on low wages don’t have to live on a pittance, and that they gain experience that makes them more employable. I suppose it can be argued that businesses would be indirectly benefiting from this (and if that were true, it would perhaps filter through to consumers in the form of lower prices, meaning that ultimately we all benefit!), but the previously-unemployed individuals with money and jobs would be directly benefiting, financially and otherwise. I can’t see a problem with that.

‘I also inherently dislike the idea that somebody’s labour is “not worth the minimum wage”. Not worth it in terms of direct profit, maybe, but not worth it in human terms?’

The value of each person’s labour is different. For example an hour of a highly qualified brain surgeon’s time is obviously worth much more than an hour of a cleaner’s time. This is because an hour of the brain surgeon’s time can save someone’s life, whereas an hour of the cleaner’s time can… well, make somewhere a bit cleaner. And to state the obvious, a person not being dead is worth more than a tidy room.

So if we accept that logic, it follows that there are some people whose time is worth a lot, because in a given amount of time they can have a big impact, they can create a lot of value. Other people cannot be as productive, so their time is worth less. And so it also follows that if a minimum wage is set, the value of the time of people who are inexperienced, lowly-qualified or both, may be worth less than the minimum wage. They simply aren’t productive enough to warrant the minimum wage.

I don’t understand what you mean by “not worth it in human terms”. Why “in human terms” might it be bad to accept that the value of a person’s time is less than some completely arbitrary number? And if that is bad, it still doesn’t stop it from being true; in which case our aim should be to find a way to help – or allow – such people to increase the value of their labour.

From a pragmatic point of view, I suggest that “in human terms” it’s much better than someone with low-value labour gets paid whilst improving the value of their time, rather than them getting money for doing nothing – and thus not increasing their chances of getting better pay at some point – because we’ve arbitrarily and accidentally disallowed them from the labour market. That’s just unfair.

This comment is twice as long as the post was. Heh.

Running with Stethoscopes

Tuesday 25th October 2011, 2:28 pm

There is a problem with the idea that we all benefit if, as you seem to be suggesting, the government’s negative income tax results in reduced labour costs and lower end costs to the consumer (and, in many cases I suspect, higher profits for business). The problem is the limited number of pounds in the economy – if prices are lower because the government is effective shoring up business by subsidising labour then in order to finance that taxes would need to be higher. You then end up with a very similar system to that which we have now, except that there are a select few CEOs walking away with bundles of what is effectively taxpayer’s cash in their pockets*

I agree that the current system has it’s problems but I can’t immediately think of a way to better it. The problem with being on benefits is, as you point out, that it is not a thing that makes you particularly employable. I guess the system that would make the most sense to me is allowing below-minimum wage jobs to claim a percentage of benefits based on the level of their wage, with the minimum wage being the level at which no benefits are paid. The caveat would be that the employers should be forced to provide, if they wish to use that system, what is effectively an apprenticeship with a view to employing that person at an above-minimum wage level within x amount of time as defined by law. That idea has it’s own problems in that, business being business, there will be all sorts of things that are claimed to be these nouveau-apprenticeships (why yes, he is an apprentice toilet-flush quality-control checker!) and all sorts of ways produced of getting out of having to actually employ someone at the end of their ‘apprenticeship’ bit. Nevertheless, even if someone is then dismissed then they have some extra experience to put on their CV.

Advantages of this are apparent if you can get it right – businesses get some cheap labour but simultaneously the opportunity to generate skilled workers with a less-expensive run-in time. The workers end up having enough to live on and are made more employable as a by product of the system.

Sadly, I think the main problem is that there are simply too many people, and not enough to do, and that is not something which is easily changed.

“This is because an hour of the brain surgeon’s time can save someone’s life, whereas an hour of the cleaner’s time can… well, make somewhere a bit cleaner.”

If you believe health and safety I think you’ll find that the cleaner saves lives much more efficiently than a brain surgeon! Imagine how many people might be inadvertently injured by that slippy piece of floor, or by the hundreds of ‘bad bacteria’ that Dettol would have us believe lurk on every surface ready to kill us all by MRSA septicaemia. But that is a rant for another day…

*remind you of anything recently?


Sunday 30th October 2011, 9:23 pm

Fundamentally, I’m describing a form of welfare which is less distorting to the labour market, because artificial distortions (such as the minimum wage) have a tendency to make markets less efficient (e.g. as described in the post). Ultimately, that does a great deal of harm.

Implementing some other form of system – such as inverse taxation – might seem to have a higher upfront cost. But the lower distortion should negate some of that; if currently labour markets are less efficient than they can be, then making them more efficient will cause money to be saved somewhere else, be that in the form of lower prices to consumers, higher profits to shareholders, higher wages, or something else. You’re right (ish) that there is a limited amount of money in the economy; what I’m advocating is simply a more efficient use of that money.

Of course, this policy could also be implemented with other policies to reduce government spend. Government takes a huge amount of money, wastes a great deal and does a bunch of things that really don’t need to be done by government (if they need to be done at all). Stopping some of this might mean that we can use tax money for useful aims for a change.

With regards your proposed system, I don’t get why there should be the requirement for a job to be an apprenticeship. The aim is to liberalise the labour market and remove distorting effects, and to allow more opportunities for people with more basic skills or training. Adding more bureaucracy would fail the first aim, and requiring employers to sign up for apprenticeship schemes still maintains some barrier to entry: what about people who don’t warrant even that level of investment, or jobs which really don’t warrant minimum wage?

Thinking from first principles, I suppose that it all comes down to the way one perceives liberty. If someone wants to hire a toilet-flush quality-control checker for £2 per hour, and someone else is willing to do that job for that wage, then why should you, me, or the government get to say that’s wrong? And if a wage is too low to provide what we as a society collectively decide to be a fundamentally good standard of living, then I think that legislating away someone’s ability to earn any wage at all – essentially condemning them to joblessness – is a really stupid way of fixing that problem.

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