In which we test a prediction about minimum wages

So, higher minimum wages for all!

Decent enough rallying cry: but of course we\’re all aware that the minimum wage can be too high. If it is too high (and is enforced) then all of those whose labour is worth less than that minimum wage will find themselves unemployed.

\”Too high\” therefore becomes a value judgement of those proposing the rate. As Mr. Dillow (pbuh) has repeatedly pointed out there are effects of the UK\’s minimum wage upon unemployment. They are however small.

Yet we can still argue that at some higher point that the effects will be large: and thus not worth the unemployment that comes along with higher incomes for those in employment.

Well, we could argue that but we do need to find ourselves an example of such.

Worthwhile Canadian Initiative has several posts crunching through this and the empirical result seems to be that if the minimum wage is more than 45% the median wage then we\’re moving into the realms of lots of unemployment. Meaning that, perhaps at least, proponents of such a rise might rethink whether it\’s worth it.

So, do we have an example?

How about South Africa?

NEWCASTLE, South Africa — The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor — the supposed beneficiaries of the crackdown — clambered atop cutting tables and ironing boards to raise anguished cries against it.

“Why? Why?” shouted Nokuthula Masango, 25, after the authorities carted away bolts of gaily colored fabric.

She made just $36 a week, $21 less than the minimum wage, but needed the meager pay to help support a large extended family that includes her five unemployed siblings and their children.

Hmm, what\’s that minimum wage? $57 x 52 / 12 gives us $247 a month, or 1,720 rand or so.

Not a fortune by anyone\’s calculations, wouldn\’t want to live on that alone, let alone support an extended family.

So what\’s the average wage: As The Guardian tells us (hey, we take our sources where we can):

Among the black population, who make up by far the majority at matches, the monthly average wage is 1,620 rand.

Yes, I know, average and median aren\’t the same thing and yes, this is also of the black population not the entire one.

However, we would, using our supposition above about the relationship between minimum wages and unemployment, predict that there would be some unemployment problems, no?

For over a decade, the jobless rate has been among the highest in the world, fueling crime, inequality and social unrest in the continent’s richest nation. The global economic downturn has made the problem much worse, wiping out more than a million jobs. Over a third of South Africa’s workforce is now idle.

And there are such problems.

No, we haven\’t proven the contention: but we\’ve not disproved it either.

Which leads us to an interesting domestic political issue.

UK median (full time) wage is currently £489 a week (2009 figures, ONS). At 37.5 hours a week that\’s £13.04 an hour.

Current minimum wage is £5.91 an hour. That\’s 45% of median wage.

Then we have the living wage enthusiasts, those who would insist that wages should come up to the £7.60 an hour which constitutes the pre-tax income needed to live not in poverty as defined by the public through the Joseph Rowntree Trust. That\’s 58% of median wage.

Now, I\’ve long contended that there\’s a trick being missed here. The difference between £5.91 an hour and having a personal allowance for tax and NI of £12,000 and £7.60 an hour under the current tax system is, for post tax income,  if I remember my calculations properly, something like 3 pence an hour. So we can achieve our (joint, yes, I desire it too) desire of taking the working poor out of poverty simply by not taxing them so damn much.

However, there are those who disagree and insist that, no, we must raise pre tax wages instead.

OK, *shrug*.

Which leaves us with the following: maybe WCI is correct, that moving minimum wages above 45% of median is what takes us along that road towards the South African situation? Perhaps we have, by luck, arrived at the highest minimum wage we can have without having lots of that unemployment caused by a minimum wage too high?

You know, maybe the economists who have studied this are right?

All of which means that the living wage peeps are taking something of a gamble, aren\’t they?

To which the correct question is, just how lucky you feelin\’ punk?

Bonus point for sceptics: median wage in the US is just $13.40 an hour or so. Minimum wage is $7.25 an hour.

Yup, 54%.

Looked at your unemployment rate recently?

4 thoughts on “In which we test a prediction about minimum wages”

  1. The real thing that got me there was the logic behind that policy in SA – ‘You’re working for below the minimum wage?! This is unacceptable! Therefore we’re going to throw you out of a job to stop you being exploited. Hope you enjoy grinding poverty!’

    The mind boggles.

  2. South Africa is cursed with first-world labour laws but third-world (for the most part) economic participants (thanks to the apartheid government’s school policies, and the even more damaging “liberation before education” of the opposition).

  3. Pingback: Penny’s dreadful | The Libertarian Alliance: BLOG

  4. How does one go about “simply extorting money from the poor”? Is it by not taxing income at a rate above or below a particular level and or abolishing VAT?

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