The living wage could put some people out of work even if it has only small effects upon aggregate employment.
I say so because of a new paper by Jan Kabatek which studies the effect of the Dutch minimum wage, which increases with age for workers up to the age of 23. Mr Kabatek shows that workers are more likely to lose their jobs around the time of their birthdays*. This is consistent with employers getting rid of workers as they become more expensive, and replacing them with cheaper younger ones.
This might have implications for the living wage. It will apply only to over-25s. Mr Kabatek’s work suggests that it might reduce employment among those slightly over 25 at the expense of younger workers.
Supporters of minimum wages sometimes claim that the price-elasticity of demand for labour is low because employers cannot easily substitute between capital and labour. That’s true. But they can more easily substitute between 25-year-olds and 24-year-olds. Granted, such substitution might be small – as it is in Mr Kabatek's study – but the more the living wage rises relative to under-25s wages the bigger this effect might be.
Does this matter? Maybe not. On the one hand, youngsters suffer disadvantages in the labour market: the unemployment rate for 18-24 year-olds is 12.3% compared to just 4.9% for 25-34 year-olds. Anything that tilts the balance in their favour is therefore a good thing.
But on the other hand, over-25s are more likely to have families so their joblessness might add to child poverty. And whereas youngsters’ low wages might be due merely to inexperience, over-25s low wages might be due to more fundamental reasons for low employability such as low skills or poor health. This means they could find it especially hard to get back into work.
For me, there are two points here. One is that the effects of minimum wages aren’t all obvious from macro data: substitution from 25-year-olds to 24-year olds won’t show up in the headline monthly labour market data. There’s danger therefore that (wilfully) incurious journalists and politicians will under-estimate the consequences of the living wage.
Secondly, all this corroborates my priors – that the living wage is a poor way to help the low-paid. Better options would include stronger trades unions, increased aggregate demand and hence a tighter labour market, and a job guarantee. All these policies would increase their bargaining power.
But let’s face it, Osborne did not announce the living wage because it is the best way to help the low-paid. He did it to embarrass the Labour party and to try to reduce in-work benefits. Such motives are no way to improve the life-chances of the worst-off.
* The word “around” does some work here. Some workers are sacked just before their birthdays, in anticipation of their higher cost. Mr Kabatek says that research which ignores this possibility – such as this paper – understates the cost of minimum wage laws.