Living wage trade-offs

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.

Comments

[Anonymous]

The restoration of wages council may also be a means of redressing low pay.

Such an approach has the advantage that the same minimum wage would not apply identically across all sectors. Instead, each sector would have its own minimum wage set by the relevant wage council to reflect the particular market factors pertaining to that particular sector.

What's not to like?

[aragon]

What is the sufficent basis of policy, if powerful social norms are insufficent ?

Of course the impact (which may be nil) would be mitigated by other policies.
see Beyond_the_Bottom_Line_-_FINAL.pdf p29.

There is more to work than just wages.

http://www.dailyrecord.co.uk/news/scottish-news/remploy-death-a-terrible-legacy-of-tory-1568236
"Take away the social support that work provides for many of us and decent people are plunged into despair."

[...]

"It is a deeply abhorrent act, an assault on the lives of the most vulnerable in society and one which everyone can see has painful consequences far beyond the short term savings that are made."

Jobs where people can not support themselves and the average family are Zombie jobs dependent on a public subsidy to the employer, rather than the employee.
And there is no limits to the employers profit and therefore total subsidy.

A full blown Job Guarantee scheme is effectively a basic income for the excess labour, with some of the non-financial (social) benefits of work (that expands and contracts with demand for labour).

Increase wages, reduce hours (four day week)
and you move towards a basic income, as hours get shorter.

Machines cannot do all the work - yet!

[Ideophilus.wordpress.com]

"But their higher wages come at the expense of profits."

Not necessarily. The cost of the higher wages may be passed on to consumers.

[Staberinde]

For the State to implement a policy which deliberately destroys 160,000 jobs is utterly callous and immoral. People are ends in themselves, not a means.

Of course the State often destroys jobs through incompetence or inadvertently, but at least neither is immoral.

When the Left uses the State in this way, I can't see how it's any different to penalising single parents or discriminating against homosexuals. It's all for the 'greater good' isn't it?

I thought the point of modern democracy was to protect minorities from the majority. To avoid the idea of the State as social triage in favour of the State as neutral service provider.

Sad.

[james higham]

Wellbeing increases only weakly with income, but falls sharply with job loss.

And with the very interference of govt.

[aragon]

Staberinde/James

The overall package would be job positive as the intention is to stimulate the economy through increased wages, and other fiscal stimulus like capital spending.

You can only mitigate the downside risk, not eliminate risk, the alternative is paralysis.

A full blown job guarantee would mitigate the risk, but nothing is perfect.

http://econ.economicshelp.org/2008/03/unemployment-price-worth-paying-for.html

"Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying."

- Norman Lamont, Chancellor of the Exchequer. 16th May, 1991 (Hansard)

[Staberinde]

@Aragon

You seem to be arguing that in order for some people to become more prosperous, others should become poorer. Does this not make you even a little uncomfortable? Treating people's livelihoods like numbers in a chart?

"...the intention is to stimulate the economy through increased wages..." Ah, trickle-down? Fascinating.

"A full blown job guarantee would mitigate the risk, but nothing is perfect." Yes, let's have another policy to clean up the mess we anticipate our first policy will create. On the positive side, I suppose you are giving Conservatives something to cut when they come in after you.

"...the alternative is paralysis." No, the alternative is 'first, do no harm'. Works for doctors. I appreciate that you want to make an omelette and that you'll need to break some eggs to do so. You haven't convinced me that I want an omelette. The task is not to convince me you know how to cook one.

[aragon]

Trickle down ?
A more equal distibution of wealth by increasing the income of the poor.

http://www.guardian.co.uk/film/2013/feb/02/inequality-for-all-us-economy-robert-reich

"Half of the US's total assets are now owned by just 400 people – 400! – and, Reich contests that this is not just a threat to the economy, but also to democracy."

I know what society live in, and the policies to change the status quo.

You may have a different Weltanschauung.

[Staberinde]

"A more equal distribution of wealth by increasing the income of the poor."

Don't confuse wealth with income.

The proposal for a living wage isn't funded by a raid on the 1%'s mansions, it's funded by 160,000 low earners losing their jobs.

The argument you want to make is that unemployment will be short-term in nature, and that the increased spending of those on higher wages will create replacement jobs.

In a booming economy, you might be able to run with that - it was the experience of the minimum wage. If, however, we're at the beginning of a generation of low-to-no growth, you might find these households saving rather than spending. This would benefit corporate balance sheets rather than stimulating low-end employment.

Now, you might welcome a living wage which reduces household indebtedness at the expense of 160,000 jobs. But I struggle to see the difference between this and, say, a Tory government cutting public sector employment to make debt repayments.

[Edward Lambert]

In the US, the natural rate of unemployment has risen over 2% just from falling labor share of income. Thus, if real wages are raised, you would gain back 2% employment. Here is a link to my work...
https://docs.google.com/folder/d/0BzqyF_-6xLVEelhXNXFHdmhYMjQ/edit#docId=0BzqyF_-6xLVELWVQUkpPa1pEN1k

[aragon]

Apart from Edwards argument.

The coporate sector would be funding the wages including reduction in public sector subsidy. The worse case consequance is the loss of 160,000 jobs,

Fiscal stimulus and a full blown Job Guarantee are policies that could mitigate this worst case scenario.

Circulating money from the coporates, via the low paid and public sector, will generate economic activity.

Other policies increase capital spending and direct support for the unemployed (Job Guarantee). I don't have a deficit fetish, I would increase public spending.

The Tories wish to make reductions in the public debt (deficit) through public sector job (spending) reductions, not household (private) debt.

Reducing household debt and savings are net increases in wealth for the public.

[Min]

Instead of mandating a living wage, how about having the gov't offer jobs at that wage to everyone who wants one? (If, for some people at some times and places, a job would not be available, they could be paid for showing up for work. That would be like a basic income, but could still be regarded as fair. :))

[aragon]

Min

That is what a full blown Job Guarantee would do if the minimum wage was set at the same rate as the living wage.

The Labour party is currently proposing a limited Job Guarantee after two years unemployment at the minimum wage and for six months duration.

[Nike Lebron 10]

I won't wish the wish you wish to wish.