Tories & the minimum wage

Is it right to impose misery upon a few so that many people can gain? This ancient ethical question is raised by reports that the Tories are considering an above-inflation rise in the minimum wage.

I don't think this is motivated by a conversion to a Card-Krueger style belief that demand curves don't slope down (and nor perhaps should it be), or to the merits of wage-led growth. If this were so, there'd not be much left of conventional Tory economic thinking.

Instead, the justification for hiking the minimum wage could be the belief that the wage gains to the many more than offset the job losses suffered by a few.

To get a rough feel for how this is possible, let's use some estimates by Nattavudh Powdthavee*. He's calculated that a 1% rise in income raises well-being by 0.019 points, on a 1-7 scale. (I'm taking the fixed effects results in table 1).

If we take 100 minimum wage workers, you might think this means a 10% rise in the minimum wage would raise "utility" by 19 points - 10 x 0.019 x 100. You'd be wrong, because the higher minimum wage would trigger reductions in tax credits and other benefits. If we assume a withdrawal rate of 50%, we get a utility gain of 9.5 points.

Now, Professor Powdthavee also estimates that unemployment reduces well-being by 0.289 points. This implies that if fewer than 32 workers lose their jobs, then our 100 low-wage workers are, in aggregate, better off as a result.

This is plausible; it's unlikely that the price elasticity of demand for labour is as high as 3.2.

So, hiking the minimum wage is justified on utilitarian grounds, right?

Wrong. Higher wages for minimum wage-workers come out of employers' pockets, so they suffer a loss of utility. What's more, because higher minimum wages go party to the Treasury, their income loss isn't fully offset by workers' gains.

You might justify this by an empirical claim that the marginal utility of income is much lower for an employer than it is for an employee, or by a moral claim that low-wage workers' well-being matters more than that of employers. But I doubt a Tory would be comfortable with either.

Even if we allow for only a few job losses, therefore, it's likely that - from a Tory mindset - a minimum wage hike isn't a good utilitarian policy.

So why adopt it?

One possibility is that the public finances also enter Tories' utility function, so that a reduction in spending on tax credits becomes a good thing. This, though, is daft; in a liberal society, the state has no interests other than those of the people, so a transfer of income from employers to government can't raise utility.

The more rational possibility is that a rise in the minimum wage would steal Labour's clothes or shoot their fox - or whatever other vapid metaphor you prefer. If this is so, it means Tories are jeopardizing the (short-term) interests of some capitalists for their own advantage. Which raises interesting issues about the nature of the state in capitalist society.

* There are lots of ways you can quibble with this calculation, but I don't think doing so overturns my main points.

Comments

[Simon Cooke]

It's a calculation - firstly that raising the minimum wage will be popular and will head off the (confused) debate about the "living wage"; secondly that the increase will have a minimal effect on economic growth and the positve direction of other indicators.

The suggestion is also a reminder that Conservatism as a philosophy is essentially neutral on economics. What matters is good institutions (whatever that means), good institutional leadership and stability.

[JADHazell]

OK how about this as devil's advocacy? Even though the effects of minimum wages on employment are debated, there's a strong consensus that they are an effective anti-poverty measure (http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/04/economists-agree-raising-the-minimum-wage-reduces-poverty/). It seems to me that, if you take Conservative reasoning at its best, they see the minimum wage as an effective anti-poverty measure with no implications for the national debt. If you believe (questionably) that:

(a) Tories want to minimise the national debt in good faith; and
(b) They genuinely care about poverty reduction

Then it seems to be an excellent step. Whether or not a or b are true is a different matter ...

[Dave Timoney]

Surely it would be reasonable to assume that every Tory policy pronouncement from here on in is crafted with a view to electoral advantage in 2015. We can expect talk of a "grand bargain" with the utility companies any day now.

[Metatone]

Just occasionally I think George Osbourne gets a case of Stockholm Syndrome with the interests of the country as a whole and gets wound up by the way corporate interests extract the urine in every situation.

He had a little flurry of speeches about corporate tax avoidance. Now, he's gotten annoyed that employers are basically using various benefits as a subsidy and lowering the wages they pay. Hence the latest speechifying.

I'll leave you to analyse how much changed in actual corporate tax avoidance policy and thus to consider how likely it is that the minimum wage will actually rise…

As a side note, you link to the IEA on this issue. I'm not sure that's ever a good idea, but in this case it seems particularly blinkered.

[Deviation From The Mean]

"in a liberal society, the state has no interests other than those of the people"

That made me laugh thanks.

Where is the evidence that increasing the minimum wage increases unemployment? Give us the empirical data rather than theoretically abstracting from the many variables to give us one possible scenario.

I think the Tories are considering this because they, as you say, want to outflank labour and also to be able to claim that they are on the side of 'hardworking' families and against those nasty good for nothing layabouts (not bankers, welfare recipients).

[Boffy]

Marx explained why the higher wages are in the interests of Capital. He cites the point made by Adam Smith that wherever wages are low, the price of labour is high and vice versa. That is wherever wages are low it is an indication of low levels of productivity. So, for example Marx gives the example of the difference between the labour provided in a developed economy and an undeveloped economy. In the latter the actual amount of labour provided - and the value of that labour is lower than in the former, because productivity is lower.

But, also for that reason Marx explains the rate of surplus value in the less developed economy is lower than in the developed economy, because the lower productivity means that a greater proportion of the working day is required to reproduce the value of the labour-power, even allowing for the lower standard of living/wages.

But, for the same reason, higher wages encourage capital to invest in raising productivity. It means the amount of labour provided, and the value of the labour provided rises - unit labour costs fall. But, it also means that the rate of surplus value and rate of profit rises.

The increased rate and volume of profit means that accumulation can accelerate, so although less labour is employed relatively, the amount of labour employed absolutely can rise.

I doubt the Tories understand this,as with many of their other policies, they are not geared to objectively benefit capital in general, but are political positions adopted to increase their chance of re-election. In this case, as you say stealing Labour's clothes, and possibly an argument for reducing Benefits further.

[Deviation From The Mean]

Of course the tendency has been for big capital to move it's productive operations to low wage areas from high wage areas.

Marx was of course abstracting to make a specific argument, to apply this abstraction as a general principle is a quite a step to take.

[Mat]

"If this is so, it means Tories are jeopardizing the (short-term) interests of some capitalists for their own advantage."

Well, couldn't you justify the urge to grab power on utilarian grounds - rather than simply for it's own sake, or for the agents utility?

What I mean is, if Tories, acting either on general utility maximisation or utility maximisation of their own client group, believe that their other policies have a sufficiently large offsetting utility maximisation impact (as against the raft of policies adopted by the counterfactual labour government), and that by adopting the min wage policy they ensure (strictly speaking, gain sufficient increased probability of) electoral victory: then surely the (utility decreasing) policy is justified against the overall utility maximisation they can deliver by being in government?

[TheOnlySanePersonOnPlanetEarth]

Mat - Just a tip for you, may help you in life:

After you say "What I mean is",

follow this up with a clear, succinct summary of of your argument, and preferably in 'plain English'.

[rogerh]

Purely electoral. Just getting back in is the name of the game. The UK's problem seems to be on the income side. But every European nation except Germany is in the same boat and so will therefore adopt any usable tactics. But that has not happened, there are no good tactics, so no big increase in income in prospect either. So stagger on until the election and then hope something will turn up.

Think of a landed estate in reduced circumstances, the footmen and butlers are still on the staff (with ironclad contracts) and the family living it large (though the '21 Yquem has now gone). But the gardeners went years ago and the place is looking very tatty and the ditches are overflowing. So, sell off, build a funfair, open a brothel, get into crime and drugs - been done elsewhere and not really George's scene. I see no solution - a takeover bid perhaps. But something will turn up - maybe.

[Socialism in One Bedroom]

roegrh,

your scenario would be plausible if it were not for the fact that, for the rich, wealth has increased and the estate is looking anything but tatty!

So don't think of a landed estate folks, simply think you are being taken for a ride by very nasty people!

[Boffy]

I think largely electoral but not entirely, the message seems to be getting through. In the US, there is also discussion about a significant rise in the Minimum Wage, and some states have already raised the Minimum Wage. Germany is to introduce a Minimum Wage as part of the deal with the SPD.

A number of economists have now made this point - Paul Mason made it on C$ News recently - that developed economists are on to a loser trying to compete on the basis of low wages. Chinese wages are rising fast, but China is moving low value production itself to Vietnam, and developing Africa.

The developed economies that have done well have not been those that attempted the Thatcherite low wage/high debt model but those that adopted a high wage/high value, low debt model, such as Germany, Singapore etc. Economies like Singapore and Malaysia and other Asian Tigers deliberately discouraged low wage/low value production once they had gone beyond a minimum level for that reason. The Chinese Government is adopting the same position supporting workers demands for large wage rises, and encouraging capital thereby to move away from these low value areas into high value production.

A look at those areas of even economies like the US and UK that adopted the Thatcherite model shows that it has not been the low wage industries that did well. The high profits were made in the high wage sectors such as high technology industries, the rapidly growing leisure sector such as games production, film and media etc.

[rogerh]

@SioB

Mmm, even worse than I thought. May explain why the generals are now looking to track social media - perhaps they plan to Tweet 'The (New) Riot Act' before drawing sabres. Maybe time to dust off my Regency history.

[Deviation From The Mean]

Maybe Boffy can provide some statistics which show that the USA is a 'low wage' economy and that Germany is a 'high wage' economy?

New industries will make higher profits because of lack of competition, barriers to entry and exit etc etc.

The UK were at the forefront of gaming technology (along with the USA and Japan), most gaming entrepreneurs were die-hard Thatcherites!

[Blissex]

«every Tory policy pronouncement from here on in is crafted with a view to electoral advantage in 2015»

They are desperate to defeat the UKIP!

If the UKIP manages to take a significant fraction of the tory vote, given first-past-the-post the Conservatives could end up in a large number of South East seats in second place, even if the combined Conservative+UKIP vote were higher than the Labour one; very many Conservative MPs from previously safe seats could end up unemployed, and they would really hate that, the City does not have enough directorships to keep them in the style they are accustomed to.

For the Conservatives defeating the UKIP in the South East is an existential struggle, and they are determined to buy as many South East swing votes as they can at any cost.

[Magpie]

Chris,

You said,

"Higher wages for minimum wage-workers come out of employers' pockets, so they [i.e. employers] suffer a loss of utility."

I suppose that's a way of looking at things. But I prefer a different point of view: employers' profits come out of workers' labour, so they [i.e. workers] suffer a loss of utility with every dollar (or pound or euro) that goes into the employers' pocket.

It's the other side of the coin, but now things look a whole lot different, don't they?

[avs]

higher wages do not have to mean lower welfare benefits; and higher revenue for some poor guys does not have to mean less jobs and more of the poorest.

The solution to all that tradeoffs is to replace welfare payments by an unconditional basic income, that does not desensitize to work. Such an income would also mean that more demand from the first bottom of the population does not have to mean higher wage costs hence lower production.

I am an uncoditional fan of your blog. You complain, maybe every six months, that a basic income is completly out of the debate. The thing I don't get is who should be explaining to the general public what a basic income is and how it could contribute to solve current issues discussed in the policy debate. I would say a good candidate is a progressive blogger who likes to talk about policy, economics, and things like combining pragmatically Marxisms and markets.

[Boffy]

@Blissex

"They are desperate to defeat the UKIP!"

But, in that case its not clear why you think they would advocate a higher minimum wage for electoral purposes! UKIP represent the views of the small capitalist, backward middle class strata even more than the right-wing of the Tories do, and it is those sections that would be most opposed to any kind of Minimum Wage at all.

By contrast, not only is a Minimum Wage quite compatible with the interests of Big Capital - which is why the US has one and is increasing it - but it favours them as against their small capitalist competitors. The classic Social-Democratic view of Big Capital was set out in that regard by Winston Churchill in 1909 when he introduced the first Minimum Wage, as President of the Board of Trade. He said,

"It is a national evil that any class of Her Majesty’s subjects should receive less than a living wage in return for their utmost exertions… where you have what we call sweated trades, you have no organisation, no parity of bargaining, the good employer is undercut by the bad and the bad by the worst; the worker, whose whole livelihood depends upon the industry, is undersold by the worker who only takes up the trade as a second string… where these conditions prevail you have not a condition of progress, but a condition of progressive degeneration."

[Blissex]

«But, in that case its not clear why you think they would advocate a higher minimum wage for electoral purposes! UKIP represent the views of the small capitalist, backward middle class strata even more than the right-wing of the Tories do, and it is those sections that would be most opposed to any kind of Minimum Wage at all.»

Well first of all the UKIP would have very few voters if it just represented the «small capitalist, backward middle class», and indeed it used to have just those few.

The mere existence of the UKIP is not an existential threat to the Conservative party... It is that they they "suddenly" got 25% of the vote in council elections, thus splitting the tory votes.

The Conservative strategist analysis is that it is a protest vote, and the protest is by upper working class and lower middle class (mostly female) voters against the cracking of their "aspirational" dreams; no coincidence that it happened "suddenly" as house prices went down and salaries stagnated. It has very little to do with the EU or small capitalists.

An old article in The Times, 2011-09-17, by Janice Turner gives a glimpse:

«The C2 women who voted Conservative last time did so because they, in low to middling-paid roles such as nurses, secretaries and carers, believed welfare had grown too generous, that benefits rewarded the do-nothings while they toiled. They hoped the Tories would crack down.»

The increase in the minimum wage is symbolic politics: giving that kind of voter not just a crack down on northern male unemployed "scroungers", but also a signal that the Conservatives really care about stagnating wages.

The article linked to by ChrisD indeed says:

«The Tories have traditionally backed calls by business leaders to keep down the wages floor. But their planned U-turn reflects their concerns at being seen as “out of touch” with ordinary people hit by what Labour calls the “cost of living crisis.”»

So to defeat the UKIP the Conservative strategists decided to create a nice new house-price bubble, promise that interest rates will stay low forever for all those who have withdrawn equity, re-announce a list of expensive boosts to welfare that goes mostly to older female voters, cut ever more social insurance mostly going to male and younger voters, and ponder symbolic measures to show they are concerned with wage stagnation.

The Conservatives also are not just the party of Big Business; of course are also still the party protecting the interests of incumbents and property rentiers.

And they are not stupid; they are prepared to sacrifice a little now to gain more later.

[Deviation From The Mean]

Blissex,

I *think* I disagree with your argument. I don't think UKIP come into this. Let's face it, if the Tories increased the minimum wage above inflation this would be a suprise.

I think they have done it so they can continue their war on that social layer destroyed by the iniquities of capitalism. And so their attack dogs can keep up the attack on immigrants etc. The Tories are getting flack for the fact that their benefits cull is affecting people in work. By increasing the minimum wage they will claim they are on the side of hardworking wage slaves and against those good for nothing idlers (again not bankers but welfare recipients) and smelly foreign scroungers.

Also the polls indicate that Labour will win the next election, the Tory strategists will be alarmed that they appear unable to win majorities anymore. So a combination of scraps off the table and good old fashioned appealing to the lowest common denominator will be the Tory strategy at this election.

But this parliament is all about the ideological attack on the welfare state, it is what the attack dogs have been promised for nigh on a decade or more.

[Boffy]

@Blissex

"The mere existence of the UKIP is not an existential threat to the Conservative party... It is that they they "suddenly" got 25% of the vote in council elections, thus splitting the tory votes."

But, the turnout in Council Elections is typically between 20-25%, and in recent local elections often less than that. 25% of 20% is just 5% of the total electorate. Its the same reason the BNP won seats in the EU parliament last time round, and look where they are now!

In theory, UKIP could pick up more votes in a General Election, but more likely in proportional terms they will not. If the EU elections had General Election size turnouts of 70% plus, they would win no seats in this years's elections either.

UKIP might pick up 7-8% if they are luck in a General Election, which would come almost entirely from the Tories, but the Liberal vote will collapse. In the South where Liberals have always been Tories, there is no reason to vote Liberal rather than Tory, especially if you want to keep out UKIP or Labour. In the North where the Liberals pretended to be a more socially liberal version of Labour, they have shot their bolt with the Coalition, and their various policy shifts on Tuition Fees etc.

If the Tories Minimum Wage policy is designed to win votes from anyone its from Liberals, especially given that the Liberals form a natural social-democratic block with people like Ken Clarke. The reality is that Cameron is in a very dangerous position for UK Capital and Big Capital in particular, as this week's letter from back-bench Tories shows.

If the Tories look like the anti-EU wing might push them further towards an EU exit, which is the logical conclusion of all the recent positions, they will come under intense pressure from Big Capital, in fact some of that has been seen already with threats by Rolls Royce and others to pull out of Britain if the UK left.

Cameron needs to shore up the social-democratic wing of the Tory Party to counter the right. That is one reason for this policy.

[Stella]

Thanks-a-mundo for the article.Really thank you! Really Great.