Saturday, 26 November 2011

The right isn't stupid - it just disagrees with your stumbling and mumbling

Apparently “the right” – of which I am a proud member – are stupid:

What interests me here is: why should the standard of rightist argument be so low - almost wilfully ignorant of opposing evidence?

And the reasons – such as they are explained – relate to several specific factors:

  1. The relationship between “employment protection” and levels of employment
  2. How minimum wages – especially for the young – affect the economy
  3. Whether taxes and specifically higher rates of income tax impact negatively on enterprise

We’re told by this (I assume) left-inclined expert that there isn’t any evidence supporting what the right asserts.

So let’s have a look:

Here’s the International Labour Organisation (ILO) on the subject of how employment protection legislation (EPL) impacts on the labour market:

EPL is significantly correlated with certain labour market flows across countries, such as labour turnover, inflow into unemployment, duration of unemployment and the share of long-term unemployed. The stricter the EPL is, the lower the labour turnover, the higher the inflow into unemployment, the longer the duration of unemployment and the higher the proportion of long-term unemployment in total joblessness are.

So the ILO says that stricter EPL contributes to higher levels of unemployment and especially long-term unemployment. There are a load of caveats to this but it seems that “the stupid right” do have a point when they suggest that looser employment rights might have a positive impact on employment.

In the case of minimum wages the research is (I’ll be kind) all over the place. Much of this is because of ideological and/or theoretical prejudices – both for and against minimum wages. However, nearly all the research shows a small effect on employment and a bigger effect on levels of long-term unemployment especially among young people.

We find that movements in both French and American real minimum wages are associated with relatively important employment effects in general, and very strong effects on workers employed at the minimum wage. In the French case, albeit imprecisely estimated, a 1% increase in the real minimum wage decreases the employment probability of a young man currently employed at the minimum wage by 2.5%. In the United States, a decrease in the real minimum of 1% increases the probability that a young man employed at the minimum wage came from nonemployment by 2.2%.

The “stupid right” are on pretty sound grounds questioning minimum wages and in suggesting that reducing the level of such wages for young people might stimulate employment. For sure, like changes to employment legislation, it won’t solve the problem but it might help!

And the high marginal tax rates – they don’t helpeconomic growth:

This article explores the impact of tax policy on economic growth in the states within the framework of an endogenous growth model. Regression analysis is used to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals a significant negative impact of higher marginal tax rates on economic growth.

OK it’s just one piece of research – there will be others that suggest different outcomes. Indeed, some studies on entrepreneurship see cuts in personal taxes as a disincentive to self-employment – mostly because it’s a damn sight easier to avoid taxes if you’re self-employed!

But again the research suggests that the “stupid right” have a fair point - lower marginal rates of personal tax ceteris paribus have a positive effect on economic growth. Therefore, cutting the UK’s top rate is a good idea!

None of this suggests that there aren't different policy options, different taxes and alternative appraisals of the effect that such decisions have on the economy. What I am saying is that these suggestions – lower minimum wages, less strict labour laws and low marginal rates of personal taxation – are not “stupid”.

And saying they are is well...pretty dumb, really.



chris said...

Thanks for this reply. If you put things in the cautious, caveated way you do, I certainly wouldn't call the ideas stupid. For example, I'm more symapatheitc than many lefties to the notion that the NMW does have a mildly adverse effect on employment.
What I think is stupid is something you haven't said, but which others say or imply - which is that these policies will have large effects. I don't think the evidence you cite supports that view - for example the ILO paper says that "there is no association between EPL strictness and overall unemployment."

Stephen said...

I suspect that wage suppression at the top of the income tree will have a far larger impact on unemployment than wage suppression at the bottom. Suppressing top wages will ripple downwards so that wages at every level will be reduced. hence employment at all level should increase. It is interesting how Tories never prescribe wage suppression for themselves, don't you think?