Timmy Elsewhere

At CiF.

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.

11 comments on “Timmy Elsewhere

  1. Do you, Tim, at a minimum, actually believe either or both of the points you directly hypothecate:

    1) “market wages are insufficient for reasons of justice or fairness”

    2) “then it is incumbent upon us as a society as a whole to pay for that not to be so”

    Tim adds: More accurately, if you believe 1 then I think you should also believe 2 as a matter of both logic and morality.

    I’m also perfectly happy to agree that market wages are indeed sometimes insufficient. Even in our own society. The amount that a severly handicapped Down’s syndrome adult could earn would not be sufficient, at purely market wages, for their continued sustenance. And yes, I do think there should be a welfare safety net to support those who cannot support themselves. One which we should all pay for through the tax system.

    Now, that does not then mean that I think the current market wages on offer to the hale are indeed insufficient for reasons of justice of fairness. Only that those who argue that they are should be willing to cough up their own cahs to increase them, not dumpt those costs onto a subset of society.

  2. “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”

    If by “goodies” you mean the services dispensed by the Zanu Labour voting army of useless ‘B’ Ark people, then yeah, I can live without them.

  3. “a very good article, not least for the head-popping that will ensue at CiF”

    And on cue we get:

    “Well of course someone like Tim Worstall would say that, wouldn’t he. What he would really like is a return to slavery; that way the fat cats wouldn’t have to pay anything at all for labour, and get even richer.”

    Tee hee! One can only hope they pop a blood vessel and get treated by the compassionate health service that has flourished under a decade of glorious Labour Party rule:

    http://www.guardian.co.uk/uk/2008/dec/31/ambulance-crew-arrested-alleged-neglect

  4. “I’m also perfectly happy to agree that market wages are indeed sometimes insufficient. Even in our own society. The amount that a severly handicapped Down’s syndrome adult could earn would not be sufficient, at purely market wages, for their continued sustenance.”

    If you force me to pay as much for a broken person as an unbroken person will I not choose to employ a unbroken person rather than perhaps feeling kindly and employing the handicapped, stupid or unattractive but at some lower rate?

    Will you not have to use some coercive apparatus to ensure I don’t make such choices?

    Is that not simply and obviously totalitarian?

    Tim adds: You’re (deliberately perhaps) missing the other part of my argument. That if we, societally, agree that it would be wrong to leave Down’s Syndrome types out in the streets to starve, and that the wages which they would earn in a purely market system would lead to that, then it is incumbernt upon as as the whole society to pay for the not starvation. That is, that a collective decsion should be paid for collectively. Specifically not by insisting that a specific (or even employers in general) must pay Down’s Syndrome types a living wage. So very much the opposite of what you impute is my reasoning above.

    I have in fact, over the years, used Down’s types as an example of precisely why there should not be a NMW at all (obviously, a piece stating purely that we shouldn’t have one, end of story, isn’t going to get into the G. Thus my mention of the fact that we should indeed abolish it in the first line and then moving on to discuss why, if we are still to have it, we shouldn’t raise it). One supermarket I used to shop at employed a not too seriously “differently abled” lad to bag groceries. Minimum wage hike came through and with it (this was in the US) a specific clause that abolished the deductions from the MW possible for those “differently abled”. The lad’s job went, just like that. My argument is and always has been, surely better for the lad to work for what an employer thought his work was worth and then, if and only if we societally did not think that was enough to live on, then we topped that wage up societally, from our taxes.

  5. “surely better for the lad to work for what an employer thought his work was worth and then, if and only if we societally did not think that was enough to live on, then we topped that wage up societally, from our taxes.”

    The top-up model is not good either: it feeds back into the wages set. The state ends up subsidising the wages bill of the employer.

    Better would be to give everyone a minimum income and let the market decide how much to pay for work: work itself becomes the “top up”.

    Tim adds: Sure, but for The G I was starting with a blank slate. Had to start from where they were already….

  6. I’m not seeing how a government topped-up minimum wage would work. If the employer and employee both know the employee will get the top up, won’t they just lower the wages to almost nothing? Or even nothing?

    Hang on.

    This will mean the unemployed will be employed for free, with their wages paid by the Government. It would reduce unemployment to zero. Any person who can perform any useful task, no matter how small, would be employed and paid for by the Government.

    A minimum wage, zero unemployment – it’s brilliant!

  7. Actually I had missed your remarks indicating that you did not in fact support a minimum wage.

    To me the minimum wage is such a pernicious thing and its consequences for the poor that I cannot imagine arguing for its retention in any form. It’s a bit like arguing in favour of being less cruel to slaves rather than aboloition.

    In passing let me say that I do think that the strawman of unfortunates starving in the streets is used as a rhetorical and social cudgel and that in fact human compassion would ensure little of it took place – provided that is the excuse of welfare state was not at hand to excuse personal inaction.

    If you don’t think that NMW is right why would you write a piece arguing the opposite?

    Tim adds: Because, I wrote a piece that stated I don’t support an NMW….but if we are to have one we shouldn’t raise it. Come along now, you have to feed these ideas to the guardianistas slowly, can’t do it all in one piece.

    Alternative explanation. I’m a media tart and they offered £85.

    Your choice.

  8. Just read as many comments as I can bear.

    I thought you argued for increasing the take-home pay of the working poor by £1500 – but according to the comments you said the poor should receive no more money. It’s bizarre how so many people can misread something to suit their prejudices (unless I’m the one misreading).

  9. Pingback: Making Things Worse, Or At Least Different - Charles Crawford

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