Saturday, 18 February 2017

When You State It Like This, The Minimum Wage Doesn't Seem Quite So Lovely, Does It?


My local newspaper has a feature that looks to name and shame businesses that are finding ways to get around paying the full minimum wage to employees. The people that should actually be named and shamed are the short-sighted politicians that impose this law on people trying their best to run a business and people doing their best to find work.

I wonder if anyone has ever thought of the minimum wage the other way round, from the perspective of a law against the employee rather than the employer. That is, not of it being illegal to pay someone less than £7.20 an hour, but for it to be illegal to sell your labour for any less than £7.20 per hour. When it’s stated that way round it emphasises the point a bit more of how much of an infringement on our liberties the minimum wage law is.

When you think of Tom, Dick and Harry getting out of bed, eating their breakfast, all ready and willing to go out to their £6.50 an hour jobs - jobs they enjoy - but suddenly being disallowed to go to work because the government decides to slap an extra 70p on their legally mandated price floor, it doesn't sound anywhere near as positive, does it? To compound the point, have a look at this typical supply and demand graph.
 
 
An illustration much like the one above ought to make it clear. The equilibrium point is the point at which the supply and demand curves cross - which basically means that it's the one price where the quantity supplied and the quantity demanded are equal. Suppose the graph represents a 25kg sack of potatoes, and the equilibrium price is £6 per sack. That means that if the market price is not at the equilibrium - say at £8 per sack - then the quantity demanded and the quantity supplied would not be equal.
 
The same is true of wages. Suppose the equilibrium price for a gardener is £6.50 an hour. If a government sets the minimum wage at £7.20 an hour then as you can work out from the demand curve, demanders (that is employers) would want fewer gardeners, while suppliers (gardeners) would want more of their labour sold, thus creating disequilibrium. Thanks to this government price floor the suppliers are now not able to sell all the labour they want to. Not only that, but of course, demanders are not happy either because they cannot buy the quantity they would like to, as they prefer a price of £6.50 an hour to hire a gardener, not £7.20.
 
The result: supply and demand for gardeners is at a disequilibrium, and the country has fewer gardeners. What I didn't tell you is that Tom, Dick and Harry are gardeners - or, at least, they were until the former chancellor hiked up the minimum wage an extra 70p an hour, and sent Tom, Dick and Harry, and lots more like them, to the job centre - where there'll join the thousands of other people who are already there, and have been for a very long time having never had a job, because said chancellor has made it illegal for them to sell their labour at the supply and demand equilibrium point.

5 comments:

  1. There's always a trade off with any intervention in the market...eg The existence of out of work benefits raises the clearing price for labour.

    Importantly though, the uk employment rate is at an all time high, suggesting tom,dick and Harry aren't struggling to find work.

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  2. A problem I see here is, and feel free to correct me, you can sell your labour for less through an alternative means. Just donate the excess time until your price is that which you want.

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  3. Anonymous 1,

    Tom, Dick and Harry may still be struggling because employment levels do not tell the full story. Number 1, it doesn't measure the harm done to the majority of the people unemployed - that is, the long term unemployed. They are the 'unseen' factor in this equation because they didn't acquire jobs to lose in the first place. Without them unemployment would be even lower. Number 2, unemployment levels must be analysed alongside number of jobs created. An economy that has healthy job creation statistics will probably see unemployment levels fall, even though minimum wage laws are pricing some jobseekers out of the market. Moreover, the 'unseen' factor in this equation are the jobs that people would willingly do but that do not get created due to the minimum wage laws.

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  4. //Moreover, the 'unseen' factor in this equation are the jobs that people would willingly do but that do not get created due to the minimum wage laws. //

    Jobs such as?

    #2

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  5. Jobs that have a marginal value of less than £7.20 per hour.

    ReplyDelete

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