Wednesday, 8 January 2014

Minimum Wage Rise: Why It's A Bad Idea

The minimum wage debate has emerged again today, with current talk of adding 50p (or in some quarters, a £1) onto the current hourly minimum wage of £6.31. The Liberal Democrats are keen (as ever), largely because their economics sucks; and now David Cameron is keen(ish), largely because (I suspect) he wants to gain some popularity with working class voters. Vince Cable (as ever) shows there’s no end to his arithmetical incompetence by hoping that “the increase will be generous”. As I’ve explained comprehensively in previous Blog posts (specifically here, but also here), this is not to be advised, as every generous increase hits employers disproportionately; it hits small businesses even worse, and it is disastrous for the majority of low-skilled workers on whom the minimum wage has a prohibitive effect (an effect that no politician seems to pick up on).

Worst of all in this is the Work and Pensions Secretary Iain Duncan Smith, who has conflated two kinds of madness by wanting the 50p added to the minimum wage, but also wanting people on benefits to work for those benefits. The latter idea isn’t entirely without merit at an intrinsic level, but when being endorsed alongside the endorsement of the minimum wage, it is preposterous in its lack of proficiency.

To see why the minimum wage is a bad thing, let's see why people think it's a good thing. In doing this we’ll then see the absurd inconsistency behind Iain Duncan Smith’s thinking. People think the minimum wage is a good thing because they think that making it illegal to work for less than £6.31 an hour helps unskilled workers in the labour market who aren’t, in their opinion, earning enough (I notice though they usually don't mind under 18s working for £3.21 per hour).  I know why governments allow £3.21 per hour for under 18s - it's supposed to encourage employers to take on youths and help youths start in employment. But that suggests that a young man of 18 needs the work more than, say, a man of 24 who can't find work* because his skills are only worth, say, £5.50 per hour in the employment market (bear in mind that an over-supply of unskilled labour reduces its hourly value).

Quite evidently, as even those with a basic grasp of arithmetic and probability could tell you - to make it illegal to work for less than £6.31 an hour doesn't help unskilled workers whose labour value is £5.50 per hour - it makes the situation harder for them and all those like them (people who far outnumber the beneficiaries of the minimum wage, by the way). To show how absurd it is, suppose the government imposed a mandatory car sales law; from now on it is illegal to sell a car for less than £3000. Jack has a car worth no more than £1500. Do you think he'd welcome the mandatory car sales law? The answer is obviously, no. But minimum wage proponents must, I assume, think it would help Jack because he'll get to sell a car for double what it is worth. In reality though, he won't be able to sell it at all - because the government's mandatory £3000 car-sales law won't make Jack's car be worth more than £1500, nor will it increase anyone's value of it. The law would effectively prohibit Jack from selling his car.

Similarly, the minimum wage doesn't make an unskilled worker whose labour value is £5.50 per hour more desirable or valuable to employers, it simply excludes those workers from the labour market. You may say that what it actually does is force employers to pay people more than they are worth, but labour rates of value are not set by governments, they are set by supply and demand - so in reality those being over-paid are costing the country more. Of course, I understand that we desire people to be paid more (I desire it too) but for every one person the minimum wage helps, it hinders tens of others by making it illegal for them to sell their labour in what is a free market that near-perfectly matches cost of labour with supply of labour and demand for that labour. The stark irony is that by imposing a £6.31 per minimum wage the government must think it's better for someone to be on the dole than working for £6.30 per hour. Somehow I don't think that's really helping all the people for whom that desire is realistic.

The minimum wage is sold as a positive thing because it is supposed to guard against slave labour - but ironically, now Iain Duncan Smith is introducing all these 'work for your jobseekers allowance' policies, he is the generator of slave labour. Does he really think that not allowing someone to work in Tesco's for £6.30 an hour and instead forcing them on the dole where he'll get them to work in Tesco's for their jobseekers allowance is better for them than letting them work for £6.30 an hour? If he does (and the above strongly indicts him on this) then he must be a good candidate for Britain’s most incompetent politician.

Moreover, the minimum wage doesn't actually stop people working for less than the value of £6.31 an hour - it only stops them ‘earning’ less than £6.31 per hour.  To see why, consider that I'm not allowed by law to hire a professional (currently) out-of-work painter to paint my fence for £6.30 an hour, but I'm allowed to do it myself, no doubt doing a worse job than the professional, and being worth less than £6.30 per hour for those skills (although ironically costing me more in time if my working salary in my day job is £15 per hour or £20 per hour). My friend makes cards and sells them for £2.00 each. She makes 3 per hour, which is a £6 hourly rate. The government doesn't stop her doing this - but if she wanted to work in her local card shop for £6.00 per hour the government wouldn't let her. This kind of madness must be exposed more ubiquitously.

The minimum wage is arbitrary in its ethical considerations because it only stops a small proportion of work below £6.31 per hour (I can paint, cook, etc - but I'll bet my painting and cooking is not worth £6.31 per hour to anyone else) and it restricts the thing that makes the free market most fruitful - division of labour in accordance with supply and demand. The benefits of a minimum wage are evident and obvious, but the costs are greater, and much less obvious, which is why you only tend to hear people talking about the benefits, and making out that those benefits alone amount to the policy being efficient. That’s like saying that a burglar breaking in your house and stealing your possessions by smashing your back window is good for you because it gets you to buy a new window with better locks.

Apparently George Osborne is reluctant to increase the minimum wage because it could “destabilise the labour market and damage the coalition’s record on job creation”. I hope, on this issue, his colleague David Cameron listens to him, because he is much more right than his somewhat timorous reservation suggests.

* Why this assumption is made is beyond me, as an unemployed person of 24 is probably in more desperate need for work and a career than an 18 year old.

** Photo courtesy of