I know it sounds good but will it work? Thoughts on big rises to minimum wages.

Be careful what you wish for - or so they say:

The study, commissioned by the city government of Seattle and published by the National Bureau of Economic Research, found that Seattle’s law incrementally raising its minimum wage — to $13 an hour last year, en route to $15 — resulted in low-wage workers’ earning less money rather than more. This surprised many in Seattle, who had been assured by all the best economists, including Paul Krugman, that such a thing would not come to pass.

The debate about minimum wages is a really important one. And, like all such debates, one that is dominated by righteous assertion - 'how can you not support people being paid a basic minimum, they have to eat' - rather than through considered analysis. It is probably time to take the pain and ask again whether minimum wages work.

The theory (at least as I understand it) tells us that, under all but the rarest of circumstances, if you raise the price of something the demand for that something will decline. All we need to examine is the magnitude of this effect - how quickly or slowly that demand falls as the price rises. It is stretching credulity to breaking point if we suggest that these effects do not apply when the price is the price of an hour's labour. So if we mandate a higher price for certain types of labour the result will be less demand for that labour either through the work concerned being forgone, reduced amounts of the work or else through automation (or, in extremis, through the business that used the labour in question ceasing to exist).

You all know this of course but how come we are all so keen on raising minimum wages (for good and noble reasons about people having a 'living wage' or whatever)? Partly this is because there have been a lot of studies suggesting that minimum wage effects are, at worst, small. The classic - if that's the word - in this genre is a study of fast food restaurants in New Jersey following a minimum wage hike:

Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent. We also compare employment growth at stores in New Jersey that were initially paying high wages (and were unaffected by the new law) to employment changes at lower-wage stores. Stores that were unaffected by the minimum wage had the same employment growth as stores in Pennsylvania, while stores that had to increase their wages increased their employment.

So much for supply and demand theory! Minimum wages rises increase employment! The problem is that things don't change quickly and reduced employment is built into business plans rather than implemented immediately - employment is sticky (partly because most business managers and especially small businesses really don't like laying folk off).

But there is a middle ground:

Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession. This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages. Moreover, weighing employment losses against wage gains raises the broader question of how the minimum wage affects income inequality and poverty.

What's being suggested here is that in a market like the USA that generates lots of work all that increases in minimum wages do is anticipate rising wages - it's not that there's been a reduction in the numbers of jobs (and it doesn't really matter whether this is 100,000 or 1,000,000) but rather the impact on overall employment. If raising minimum wages doesn't raise unemployment this can only be because the rate at which the economy is generating new demand for labour is greater than or equal to the reduced demand for labour consequential on a higher minimum wage. And in a recession the wage floor might mean a more rapid shedding of labour.

In the UK we have seen surprising labour market resilience - employment has risen despite relatively slow growth and perhaps because of stagnating levels of productivity. A lot of these jobs have been minimum wage jobs but so far the effects of a rising minimum wage (the cutely tagged 'National Living Wage') haven't been seen in overall levels of employment - indeed quite the contrary as record employment and record immigration tell us.



UK wage distribution 2016. Source:ONS

This graph shows the effect of gradual increases in minimum wages. The question is whether the current approach of gradually increasing the minimum wage will continue to protect wage levels for low paid workers without the negative effect of reducing levels of employment for those low paid workers. A minimum wage is no use at all if its consequence is merely more unemployment or fewer hours of work for those low paid workers.

This for me is the reason why the Seattle findings are so important. It's not that we shouldn't consider minimum wages but that the impact of a massive rise in minimum wage is simply to increase unemployment and income among the lower paid. In Seattle, by 2021 the new minimum wage will increase wage costs for employers of minimum wage labour by 60%. It seems to me that the City got itself ahead of its labour market - here are the key findings from the University of Washington study that caused all the fuss (bear in mind that the study found the usual very small effect from the first minimum wage hike in 2015):





It does seem that Seattle has discovered that demand curves slope downwards and we should take lessons from this unsurprising revelation. The best way to improve wages for the least well paid isn't to require that employers pay them more - 18% more in the case of Seattle's 2016 minimum wage rise - but for economic growth to increase demand for labour.

For the UK our ever more surprising ability to create new employment masks these minimum wage effects:

...retail executives concede that sharp increases in the minimum wage have lent urgency to their efforts to use workers more efficiently, by investing in technology that makes many low-skilled jobs obsolete. “On a personal level, we all want to pay our workers more,” said a top executive at one large retailer that has recently announced redundancies. “But there’s going to be unintended consequences from what the government is doing. Automation that used to be too expensive is now cheaper than the people it can replace.”

The question is really how much longer can our economy absorb the workers shed as firms reduce labour levels and introduce automation? So long as the workers leaving Sainsbury or John Lewis can get a job elsewhere with relative ease the rising National Living Wage won't be an issue. But when that rising wage results in job losses the economy can't fill and sees reducing hours worked it becomes counterproductive. Labour's policy of an across the board £10 an hour minimum wage is great politics but such a huge increase in wage bills results in the sort of system shock seen in Seattle. And the people who would feel this shock will be the very low paid workers the policy is designed to help.


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Taxes and the "living wage"

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On Tuesday Bradford Council debated (if that's the right word for a time when we all rather agree with eachother) exploring a 'living wage' policy for the City. And we agreed to look into the matter through the Corporate Scrutiny Committee and subsequently a report back to council.

All this got me to thinking. Mostly about whether such a policy - especially if enforced through public procurement - complied with though tricky EU rules. I have my doubts but that is something we'll doubtless discover in due course.

Meanwhile, some cleaners in Whitehall hit on the idea of popping a letter onto the desks of ministers pointing out that they earned below the "living wage" for London:

Over 150 cleaners from across Whitehall signed – and personally delivered – letters to eight cabinet ministers including George Osborne, Theresa May, Nick Clegg, and Vince Cable, and the president of the supreme court, Lord Phillips, in an attempt to increase their pay from the national minimum wage of £6.08 to the London living wage – two pounds more.

A pretty effective campaign when you also tell the papers!

However, something else struck me at this point - even with the tax threshold raised to £10,000, people who are earning minimum wage pay income tax. Parliament sets the lowest rate at which people should be paid and then takes some of that away in income taxes.

It seems to me that rather than using moral pressure to get businesses to raise their costs (wages are, after all, a cost) we could improve lower earners standards of living simply by saying that people on minimum wage shouldn't pay income tax. Indeed, if people think that actually £8 and odd is the appropriate lowest rate (in London) then people on that minimum income shouldn't pay income taxes.

It seems to me that there is common cause here between us grumpy old free marketers and the massed hordes of lefties - gang up on big, corporate government and tell them to stop taxing poor people quite so much.

Now that's a thought...


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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.

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On national wage deals...

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Up here in the relatively less well paid North the pay of the teacher, the nurse and the social worker - set by national collective bargaining or through a national pay body - is a good wage. In truth a better than good wage compared to average earnings in the North's private sector.

The opposite is true for London.

Which is why we should welcome this:

Foundation trusts are showing an unprecedented willingness to publicly consider moving away from nationally negotiated staff terms and conditions.

Of course the unions don't like it:

In April, the Royal College of Nursing passed a motion allowing it to ballot for industrial action if an employer attempted to impose any proposal “which challenges the nationally agreed pay agreement”.

But then we don't run our health services for the benefit of those employed by those services do we?

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So Ed Miliband is an economic illiterate after all! No surprise there then!

The are moments when I am tempted by the blandishments of the left – the sense of justice, the desire to right wrongs using the power of government, the noble cause of a better society. It’s rather like the moment Galadriel is offered the ring.

And then I am reminded of just how economically illiterate much of the left’s thinking has become.

Ed Miliband’s latest wheeze looks pretty ace doesn’t it? We get firms to pay a ‘living wage’ and make a saving by not paying in-work benefits. Plus offering those firms the incentive of a tax break (or rather not allowing the lower rate to apply to bad firms who don’t sign up to Ed’s jolly scheme). Now we know that minimum wages affect unemployment – marginally when the rate is very low as it is in the UK but to an increasing degree as the rate rises.

The impact of Ed’s scheme will be as follows:

1. Where the tax gain is equal to or in excess of the cost of the ‘fair wage’, firms will comply. Most firms would do this in any case as they employ few, if any, people at below the proposed £7.60 per hour. Obviously, for employers with large numbers of people paid below that rate the benefit is unlikely to exist and they will not take part – preferring instead to reduce tax exposure

2. Firms participating in the scheme will be less likely to take on new workers as this increases the cost and, at some point, is likely to take them to the point where the marginal cost of employing someone extra is negative. This will sustain levels of current unemployment and have a further negative impact on benefit levels

3. The main benefit is gained by firms who do not pay anyone the between £5.80 and £7.60 per hour. Most of these firms are paying higher wages because the market dictates that without higher wages they would not be able to recruit the skills needed to do the work

It all seems very sweet, the Guardianistas are frothing with excitement but, and this is a big but, it is crap economics and will act only to reinforce barriers to work and to sustain the benefits culture.

Maybe that’s what Ed wants?

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