How should we think about trade-offs in economic policy? Some tweets by Jon Stone have raised this question.
To see the issue, take the Resolution Foundation's estimate (pdf) of the effect of fully implementing a living wage. It reckons such a policy would raise the gross earnings of around five million workers by a total of £6.5bn, though some £2.9bn of this would be clawed back by the government in the form of higher taxes and lower tax credits and benefits.However, the higher wages would cost 160,000 jobs.
For the sake of argument, let's assume these numbers are roughly right. Is the cost of 160,000 jobs a good trade for higher net incomes for millions?
In terms of workers' raw income, the answer's yes: the £3.6bn rise for those who keep their jobs outweighs the income lost by those losing their jobs.
Measured by well-being, however, it's a closer call. Wellbeing increases only weakly with income, but falls sharply with job loss. This means that we need lots of winners from a living wage to offset the unemployment of a few.
We can roughly quantify this. A paper by Nattavudh Powdthavee suggests that, in terms of wellbeing, we need a 30% rise in income to offset being unemployed. This means that if the average winner from a living wage gains 3%, we need at least 10 winners for every unemployed*.
You might think this condition is fulfilled. It is, if we consider only the wellbeing of those earning less than the living wage. But their higher wages come at the expense of profits. How much you're troubled by this depends on how you regard those employers. Are they exploitative tax-fiddling mega corporations, or are they small businesses struggling to get by?
And then there's the standard question about utilitarianism: is it legitimate to impose (largeish) costs upon a minority so that the majority enjoy other benefits?
These concerns explain why many supporters of a living wage don't think it is something that should be mandated by legislation, but rather campaigned for on a workplace-by-workplace basis.This, though, runs into the problem that unions - the intelligent, non-statist way of improving workers' living standards - just don't have the bargaining power to do this.
There is, however, a way to improve workers' bargaining power - to have a (high) basic income which gives workers a decent outside option and thus greater ability to reject exploitative working conditions.
Which raises the question: why is the campaign for a living wage so much more popular than that for a basic income? I suspect the answer has less to do with technocratic or high-brow ethical considerations than an appeal to reciprocity: the living wage demands that hard workers get a "fair" deal. But I wonder whether such appeals - powerful as they are - are a sufficient basis for policy.
* 3% might seem small. But remember that many people earn only a few pennies less than the living wage (which is one reason why it would destroy so few jobs), and others are second earners in quite well-off families. I say "at least" because this calcuation ignores the income loss of the unemployed themselves.
Another thing: You can't justify a living wage by its net gain to the Treasury - that's just deficit fetishism.