Against the minimum wage

Polly Toynbee rehashes the arguments for a higher minimum wage. So I'll repeat the arguments against.
1. A higher minimum wage does not materially reduce poverty. The low-paid face enormous marginal tax rates, so most of the higher wages end up in the state's pockets, not workers'.
2. The fact that the Stupid party was wrong to say that the minimum wage would destroy a million jobs proves nothing. No-one would mistake the slaverings of imbeciles for economic analysis.
3. The fact that jobs have been created since the introduction of the minimum wage is also irrelevant. The test of the effect of the minimum wage is not: how many jobs have been created since it began? It's: how many jobs would have been created, had we not had a minimum wage?
4. The effect of the minimum wage on employment is not the true test of its impact. Economic theory tells us that a higher price reduces the demand for labour. This could mean a drop in hours worked, rather than in employment.
5. Even if all the impact of the minimum wage is upon jobs rather than hours, the jobs lost are just too few to show up in macroeconomic data. Put it this way. New Labour has promised to raise the minimum wage by 30p - 5.9% - in October. This implies a rise in the aggregate wage bill of barely 0.1%. Assuming a price-elasticity of demand for labour of 0.7, this implies that just 17,500 jobs will be destroyed; there are just under 25 million employees. This is half a week's inflow into unemployment. It's undetectable in aggregate figures. To find the impact of the minimum wage, we need detailed microeconomic studies. Like this one (pdf). It found "some evidence of employment and hours reductions" - just what theory predicts. 
6. The claim that the minimum wage doesn't reduce hours or jobs is a radical one. It implies that the first rule of economics - that if you raise the price of something, people will buy less -  is wrong. How can this be? The least implausible explanation is that there's monopsony in the market for low-paid workers. But even this implies that higher minimum wages reduce profits (pdf). Lower profits might reduce business start-ups, or cause  firms to close.  If you think profits have no such effects, why not call for the abolition of capitalism?
7. Even if a higher minimum wage doesn't reduce employment and hours, it might change the composition of the workforce. A higher minimum wage might attract the semi-retired, housewives or students into work. As employers would find these more employable that the semi-literate unskilled, the latter would see their prospects worsen. Why should egalitarians welcome this?
8. The real way to help the poor is not to raise the minimum wage but to introduce an unconditional basic income. This would give people the choice of whether to accept low-paid jobs or not, and so genuinely empower them. But then, New Labour's mission is to harrass and manage the poor, not to liberate them, isn't it?

Comments

[The Pedant-General]

Chris,

This is an aside to your (perfectly sensible) point no.8 which occurred to me the other day. I would very much welcome your thoughts on the matter:

How would a CBI scheme work in practice (i.e. really in the real world, rather than in theory) WITHOUT a mandatory biometric identity scheme to ensure eligibility and avoid fraudulent multiple claims?

And a bonus/tie-break question: What impact would a CBI scheme have on immigration policy? How would legit refugees or legit economic migrants be handled. (I am sort of assuming that we can ignore illegals as, by definition, they are under the radar).

These questions are slightly off topic for this post, but might form the basis of a later discussion perhaps?

To be honest, I ask because I suspect that there is a tricky issue at stake but have not the least idea how to start to arrange the arguments.

Toodle pip!
PG

[david]

This is so wrong: "No-one would mistake the slaverings of imbeciles for economic analysis." Thomas Friedman is considered wise on matters economic in my country.

But this is even righter: "But then, New Labour's mission is to harrass and manage the poor, not to liberate them, isn't it?"

Bring in power, and point 6 doesn't look so crazy. Point 7 is assuming an awful lot. But hours worked is definitely a measure that should receive more attention in this discussion.

[Raw Carrot]

As a general rule what comes out of Ms Toynbee is usually nonsense. But good to see that some discussion is going on.

[Chris Lightfoot]

"How would a CBI scheme work in practice (i.e. really in the real world, rather than in theory) WITHOUT a mandatory biometric identity scheme to ensure eligibility and avoid fraudulent multiple claims?"

Well, as I've remarked before, you could probably have a go at implementing this with biometrics, though whether it's worth doing would depend on the incidence of false claims and of the knowledge to spoof the biometrics in use. What you don't need is a biometric "identity scheme" (by which I'm assuming that you mean a system which can perform a nonconsenual lookup from biometric information to a record of an individual) -- it'd be perfectly possible to implement a scheme which tested only for double-claims, without having the other unhappy consequences of a universal biometric register.

(For those who didn't see this before, the basic design has a ring buffer that stores only a hashed biometric identifier of the last N people to claim, where N is the number of claimants plus a bit, say 50 million, times the number of times they can claim in a year, say 12 if the money is disbursed monthly. If you believe that the biometric identifier is perfect -- i.e., unique and repeatable -- then this can tell you how many times in the past year the person claiming has claimed their CBI previously; you can then accept or decline their claim based on that number. If you decline their claim presumably you allow the claimant to appeal, at which point you have to be able to prove that they've claimed before. This approach would be fairly cheap to implement, though as I say, whether it'd be worthwhile is unclear.)

It's also worth saying that biometric data can't be used to test for eligibility. That's a social construct and can only be tested socially; the fact that (let's say) an individual presents a different iris code from all the other individuals you've given money to lately does not mean that he's eligible for receiving the CBI.

[Matthew]

"It implies that the first rule of economics - that if you raise the price of something, people will buy less - is wrong."

True of carrots, but of people? When you pay people more it is clearly possible they are happier, more motivated, more productive, etc, something that is not true with carrots.

[Mr Scargill]

I'm unsure whether this point has been rectified or not in legistation but the minimum wage does not apply to part time employment.

Thus surely you can employ twice as many people on half the number of hours each. Both recieving less than the minimum wage, thus total expendeture is less than the minimum wage. Plus you get the bonus of decreasing the governments unemployment figures and swelling its coffers.

[Tom di Giovanni]

On the whole I like the idea of the minimum wage. The worst thing for me about the current law, as far as it goes, is that it is age-discriminatory.

But that said, you make some really good points here. Point 1: I totally agree; the marginal "tax" rate of the low-paid is a scandal. That's what keeps people poor as much as anything, and NuLab is only making it worse. That's what we get for electing a bunch of tories waving red flags, I suppose.

So following on from your point, an increase in the minimum wage is to a large extent a sneaky tax on businesses that employ people at that rate. If that's the case, then with the elasticity figure you quote, it's probably not a bad form of taxation, at least in terms of how much it tends to distort the market. But I'm not presenting that as an argument in favour - I'd much prefer to see a situation where marginal tax rates could never decrease as income increases.

Point 8: this is the best of the lot. Yes, a national income scheme would make a minimum wage completely unnecessary. It would also help with the ridiculous marginal tax rates you mention in point 1. Bring it on!

[thomaskust]

Let's look at this question from the opposite direction.

The problem for society exists in the areas of people who commit crimes, are sick, injured or generally unhealthy, people who are homeless, in need of education or experience etc. Going further, our athletes don't win gold medals (our football teams don't qualify for top tournaments), many would-be artists don't have the space to develop. In the family, life is under pressure as work (and the travel to work) eat up ever more hours of the day, the social bonds are loosened by dinner in front of the TV, convenience foods have made us obese...

The single thread that links all our problems together stems from the over-commercialisation of the public space. Because everything is all about the economy, as a nation we're turning into robotic morons bowed down by the stress and general demands of life to the extent that we can now rarely ever glimpse any break in the clouds.

We know what to do and we are always inmproving our methods of doing it, but we are in danger of forgetting why we do.

Government has lost legitmacy as it has failed to continue to convince those on the fringes, and the frontiers of the state are readying to collapse as a result.

Where once the current crop of cabinet ministers claimed they would legislate to prevent bad things from happening, now they legislate because bad things just won't stop happening - and they won't stop legislating, they legislate more and more and more!

With the ever increasing ubiquity of the market, a price is being placed on everything while any values are being sold up the river - Government has stopped setting the standards and has started imposing its systems. All the while the restrictions of government mean ever more inventive circumventions are required just to survive - just look at Labour's party funding fiasco.

For any system of Basic Income to function effectively, a mechanism is required where values are recognised and upheld. This must be universal and universally transferable, as well as tangible.

If you're rich, you may say it's about the economy, but I say: it's about education, stupid.

Can you value your education? How much do you value your education? How do you equitably monetise different levels of education?
Would you stop truancy if kids knew they were being endowed with an actual wealth of knowledge?
Could you make criminals pay for their incarceration and reconstitution from such a universal trust fund?
And wouldn't age discrimination disappear as pensions became a thing of the past and the health service was made needs-oriented by such a method of insurance?

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Baby bonds were a half-hearted attempt to show the direction, but have since been abolished through lack of courage and nouse to draw the link.
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Biometric ID databanks are a half-arsed attempt to substitute universal security for universal access.
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Minimum Wage setting through negotiation is arbitrary because it is based on openly partisan interests and ignores the link between time spent and the knowledge acquired via any activity.
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Recent arguments over Inheritance Tax are negated by CBI, as the recognition of a socially created fund reverts to society on death.
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Global poverty would reduce according to the level of education provided, as governments and individuals see their interests benefit.
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Global patterns of migration are no longer a political issue as the value of knowledge is recognised as inalienable.
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International exchange rates would normalise based upon nominal education rates, and stock markets would minimise the impact of speculation since knowledge is not a tradable commodity.
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The creation of a direct link between knowledge and money removes the destabilising effect of fiat money, while gold stocks lose their lustre; there is clear, transparent and measurable relationship between individual freedom and purchasing power, the size of the economy and the state of the polity.
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State boundaries and barriers fade into irrelevance beyond administrative units...war is abolished...love rules the world!

OK, I'm overstating the case for Basic Income as the universal panacea in this rant, but I think it is part of the package.

For most pupils and students going to school/college/university is the equivalent of going to work, so logic insists a minimum wage rate should be expanded to include this sector.
The only difference being that the educational value credits and accrues in some sort of a national savings/endowment/trust fund that is personally held - after all we know how pension funds and taxes have been and continue to be manipulated by those in charge of controlling them. Once education is completed/reduced to minimum interest above inflation transfers as income, while maintaining capital value up to a maximum. On death, the maximum capital value reverts to the state to be reinvested into the lifecycles of younger citizens.

Because citizens have the civic responsibility to keep their society functioning, by recognising the investment we each hold, any failure to do so as a group will be felt in our individual purchasing power and forms sufficient deterrent and balancing force against sole dependence on the Basic Income.

In a wider sense, society needs the recognition of how knowledge is transferred from generation to generation and person to person for it to do happen efficiently, which, ultimately, is economically benefitial to all of us.