Yes, of course we should freeze the minimum wage.
The piece got cut a bit so here\’s the full version.
We\’ve been asked, should we freeze the national minimum wage? (NMW) Given that, sadly, we\’re not going to abolish it any time soon the answer is yes, of course. For three different reasons.
The first is a technical point. It\’s one of my favourite truisms about economics that we don\’t actually have solutions, we only have tradeoffs. Yes, we can make some things better but it will be at the cost of making some other things worse: or at least different. Whether we think that the overall bargain is worth it is often a matter of personal choice, of course, but we do need to look at all of the effects before making such. And, contrary to what many say, the minimum wage does have deleterious effects. As far back as 2005 the Low Pay Commission was reporting that the rather lower NMW of those times was having some undesirable effects:
In particular, appendix 3, which starts on page 213 of this pdf. It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.
It really shouldn\’t come as a surprise that if you raise the price of something then people will purchase less of it and yes, this applies to labour just as much as anything else. The effects are small at the current level of the minimum wage but every rise makes them bigger. A recession will also make such effects larger than they would be in better times. In a time when we expect there to be 3 million (anyone want to bid higher?) unemployed, we really might not want to adopt a policy which we know is going to increase that number further.
The second is a moral point. Things in markets are worth what the markets say they are worth. This applies to labour just as much as to apples or iPods. It\’s also true that we often don\’t like the values that markets come up with so we intervene to change them. The Common Agricultural Policy does so for many foodstuffs, tariffs do so for certain foreign goods and the NMW does so for the value of low skilled labour. Now I reject all these of those interventions but that isn\’t quite my point here. Rather, it is that if we as an entire society (or that majority of it necessary to pass a law) decide that a certain price is immoral, one that should be changed, then it\’s incumbent upon us as that entire society to do the paying for that price to change. As you can see from the numbers above, the burden of the NMW falls on three groups. Those who employ low skilled labour, their profits shrink. Those who purchase goods made with said labour, the prices they pay rise. And of course those unskilled workers who lose their jobs (or have their hours reduced) as a result of the economising being done on the employment of low skilled labour. But if we really think that wages of below £5.73 an hour are immoral then it is all of us who should be dipping into our pockets to increase market wages to that sum. That means that we all get taxed and the money redistributed.
To insist that wages should rise but that those people over there should pay, no, not me, is I think an immoral thing to do in itself.
However, the third reason I think we should freeze the NMW is that it has already achieved what it set out to do. The aim was always that someone who worked full time would not be mired in poverty. This idea that a fair day\’s (or a fair year\’s in these figures) work should lead to a fair day\’s pay and that such fairness could and should be defined as not being in poverty. So what should that definition of poverty be then? I\’m very much taken with the number that came from the Jospeh Rowntree report in the summer.
A single person in Britain needs to earn at least £13,400 a year before tax for a minimum standard of living, the Joseph Rowntree Foundation (JRF) says.
There\’s something very Adam Smith about the way that the number was calculated. Smith did, after all, point out that a linen shirt was not a necessity for any man. Yet if a man lived in a society which regarded the inability to acquire a linen shirt as a sign of poverty then if he couldn\’t get said linen shirt then he was, by the standards of that society, poor. This is just what the Rowntree report did. It asked a number of focus groups what was the minimum set of possessions, the minimum ability to take part in leisure (yes, including drinks and the occasional meal out) activities which would mean that someone was not poor in our society. The advantage of this approach is that it neatly sidesteps all that cant about “relative poverty” which is a measure of inequality rather than poverty itself.
But I say that the NMW has already achieved this while those with calculators will note that a 40 hour week all year long on the NMW brings in just shy of £12,000 a year, something quite short of the £13,400 required. Note, however, that that latter number is a pre-tax number.
One of the entirely vile things about the UK\’s current taxation system is that it reaches so far down the income scale. It\’s possible to be working part time on that NMW and be paying income tax. Indeed, a full time worker who gets that pre-tax £13,400 will be paying around £1,500 a year in income tax to say nothing of further National Insurance deductions. The perceptive will have noted that £13,400 minus £1,500 is £11,900….which is just about that amount that a full time NMW worker will make before tax. So, if we weren\’t taxing the working poor then, by the measurement of the Joseph Rowntree Trust, they wouldn\’t in fact be poor, for they would have a post tax income sufficient for them, by the standards of this society, not to be living in poverty.
Which is, I think, the thing that we all actually desire? And it\’s certainly been one of the major justifications for the NMW itself, that this should be so. That a full year\’s work does indeed attract a full year\’s pay, it being fair and just that such a full year\’s pay not leave the worker in poverty.
It\’s precisely this sort of analysis that leads ghastly neo-liberals like myself (neo-liberal should, in the way it is used around CiF, be spat out with a certain venom I feel) and the Adam Smith Institute, with which I am associated, to recommend that the personal allowance should be raised to £12,000.
Yes, this will mean that there is less to go around for the government to spend on other things but to reiterate my second point, if we really do believe as a society that market wages are insufficient for reasons of justice or fairness then it is incumbent upon us as a society as a whole to pay for that not to be so. We\’ll just have to put up with fewer of the goodies that government can shower upon us in order to pay for this thing which we value more highly, those incomes of the low skilled workers.
Or if you\’d prefer the whole thing in a nutshell, if we want to make the working poor better off then we should stop bloody taxing them.