The living wage & productivity

Nida Broughton at the SMF says:

If businesses can increase productivity there is less likely to be a risk of higher unemployment as a result of the introduction of the National Living Wage.

This is true only in a very particular sense. In other senses, increasing productivity means raising unemployment.

Let’s start with the definition of productivity. It is value-added (GDP) per hour worked. This definition tells us that there can only be four ways in which productivity can rise. To see them, take the case of the Rovers Return*.

One way in which it could raise productivity would be simply for Michelle to cut their hours and expect Sean, Eva and Sarah to spend less time lounging around and more time serving customers.

In this sense, the claim that the NLW will raise productivity is the same as the claim that it will reduce employment.

So, how can Ms Broughton possibly be right?

It’s because there’s a second possible way in which productivity can rise. Workers could produce more value-added. For example, Sean, Sarah and Eva could mix fancy cocktails instead of pouring pints. If so, the Rovers customers would pay more for the better service, thus covering the higher wage costs.

Personally, I find this improbable. Norris Cole and Tim Metcalfe aren’t going to start drinking strawberry daiquiris.

A third possibility is that the Rovers could get more customers, so the same number bar staff will produce more value-added.

This will not happen because the NLW shifts income from employers to workers, thus redistributing income from people who have a low propensity to spend to those who have a higher one. For one thing, Corrie’s employers, such as Michelle and Carla (aka the future Mrs Dillow), in fact spend a lot. And for another, workers at Underworld will see their higher wages partly offset by lower tax credits. The upshot will be a cut in aggregate demand.

How, then, might Michelle attract more customers? She could promote the pub better, for example by having karaoke or singles nights. But these have already been tried, with mixed results. If there were obvious ways for the Rovers to get more punters, they would have been tried by now.

This leaves only one last possibility: Michelle could try to raise prices. She could get away with this, because demand is relatively price-inelastic; the Flying Horse will probably raise prices too. Value-added per worker would thus rise because customers are paying more for their beer. However, this would leave the Rovers’ customers with less to spend elsewhere. Roy and Dev might therefore suffer a loss of demand – although it’s unlikely Dev will sack Erica as a result.

Overall, then, I fear that if the Rovers is to increase productivity, it will happen by cutting hours. This is just what the OBR expects. It expects total working hours to fall by four million by 2020 as a result of the NLW (p204 of this pdf.)

Productivity, though, is not the only margin of adjustment. Michelle might simply accept the higher wage costs and the lower profits they imply. Or she might try to employ younger bar staff: the NLW only applies to over-25s.

Whichever it is, the NLW will impose costs upon someone.  It is not a magic money tree.

* Almost all issues in economics can be understood through football or Corrie.

Comments

[aragon]

Coronation Street is not a Government, and therefore allegory is inappropriate for macro-economic policy.

Where the state does control the creation of money (a magic money tree), rather than a zero-sum game we can put under used resources to work, and automation (technology) allows less work and more product. True increases in productivity.

If you wish to return to subsistence farming we can all spend all our short brutal lives producing food. Full employment!

Not an attractive option to me. The issue is the distribution of the product of society, not productivity which can be achieved through technological progress.

[Deviation From The Mean]

The problem with all the productivity examples given is that they all face the "However, this would leave the Rovers’ customers with less to spend elsewhere.".

For example if the Rovers attracts more customers, then the other pubs will get less customers. The thing balances itself out.

Surely the main way to raise productivity in the Rovers is to sack the bar staff and employ a robot in their place. Now this may not happen in pubs but it happening elsewhere. And when robots, machines or computers replace people this may or may not impact employment in the short, medium or long term.

I understand why you used the Rovers analogy, this article was but a subliminal message of unrequited love dressed up as smart arsed economics.

"automation (technology) allows less work and more product"

But in reality results in increased hours and more inequality. But you are correct to say that automation isn't the problem, capitalism is!

[gastro george]

Isn't the IFS expecting a move to more "self-employment" as an evasion of the NLW?

[Calgacus]

Whichever it is, the NLW will impose costs upon someone. It is not a magic money tree.

No. This is just not true, as Aragon points out, and it doesn't even need new money from the government. Of course it is almost always wildly wrong if the government does actively spend to ensure full employment, through a JG or an approximation of that. Minimum wage laws may be redistributive. But they can increase as well as decrease employment, & several economists noted the former would have been a likely result at the depths of the Great Recession in the USA. Capitalists get what they spend. Workers spend what they get.

[Ralph Musgrave]

Nida Broughton’s initial point above is utterly naïve. Reason is that as productivity rises, so does the minimum wage or living wage. What we nowadays regard as the minimum socially acceptable wage would have been regarded as a grossly extravagant lifestyle in the Middle Ages.

[Rhys]

"This will not happen because the NLW shifts income from employers to workers, thus redistributing income from people who have a low propensity to spend to those who have a higher one." - so surely people on agrregate will be spending a higher percentage of their income? being a boost albeit in the short run to aggregate demand or am I looking at this wrong?

[Deviation From The Mean]

Actually fascist Ralph makes a good point.

Also, we should remember that when New Labour brought in the minimum wage legislation a number of right wingers and their academic lackeys were telling us that it would have a terrible impact on employment. It DIDN'T.

They were scaremongering and lying then, I have no reason to believe they are not doing the same now.

[Asher Dresner]

I'm intrigued by your point about tax credits.

Surely if a rise in NMW is offset by a fall in tax credits, demand stays the same. Why are you sure it would fall?

Not only that, we know that not everyone who is entitled to a tax credit claims it, whereas the NMW will be enforced. So surely it is more likely that the rise in NMW will increase the spending power of those with a relatively high MPC, and so perhaps raise productivity via your third channel.

[RJ]

"This will not happen because the NLW shifts income from employers to workers, thus redistributing income from people who have a low propensity to spend to those who have a higher one."

This seems clearly incorrect, since the lower one's income, the lower one's propensity to save -- just because higher-income people "spend a lot," it's still a smaller fraction of their income than an average lower-income person.

[chris]

@ Deviation: one reason why the NMW didn't have much effect upon employment (though it did have some) is that it was deliberately set at a low rate by the LPC. This isn't the case for the NLW.
@ Asher, Rhys. I fear I might have garbled my point here. Assuming no employment effect, the NLW transfers £1 from bosses to workers. Its advocates say this would raise demand, because workers save less than bosses. I doubt this, partly because bosses of the low-paid are themselves often small businesspeople on modest incomes with a high propensity to spend rather than megafirms with big cash balances. Also, the transfer is a negative sum one, as tax credits are withdrawn. Yes, some NLW recipients don't get these credits. But some do, and their withdrawal means a cut in aggregate demand.
I agree that a NLW, if introduced with sensible macro policies, needn't cost jobs. But this isn't what we're going to get.

[Bob]

"I agree that a NLW, if introduced with sensible macro policies, needn't cost jobs. But this isn't what we're going to get."

That's precisely the point. Which is why they fight so hard against 'sensible macro policies' and try to control the framing. See Kalecki:

http://mrzine.monthlyreview.org/2010/kalecki220510.html

[Mikep]

Not sure if your fourth way of raising productivity is correct. It raises value-added at current prices, but not at constant prices.I don't think either double deflated or single deflated value added would change if drink prices were raised (in the absence of any quality change in the drink).