Thursday, 4 May 2017

Terrible Ideas On An International Scale

How familiar is this? A Guardian columnist - in this case a woman called Van Badham - sees something she doesn't like and proposes a ridiculously absurd solution to rectify it. On this occasion, the beef is with multinational corporations basing their operations in places where workers are paid a lot less than in countries like ours. The solution, she suggests, is an international minimum wage.

It's almost as though these people live in a bubble that insulates them from any critical thought or even the remotest understanding of consequences linked to actions. Yes, we all dislike it when workers are maltreated, and we'd all join the Guardian in speaking out against these abuses - but her article isn't a groan about that, it's a groan about low wages in the developing world.

To see why an international minimum wage isn't the answer, you have to first understand something basic. The reason the wages of workers in places like Thailand, Bangladesh and Cambodia are lower than in places like the UK is because their productivity is lower. Wages for textile workers in Japan used to be similar to wages in for textile workers in Thailand, Bangladesh and Cambodia, whereas now they are similar to wages in the UK. The thing that's changed in the past few decades is that Japan has become much more productive.

So while low wages in Thailand, Bangladesh and Cambodia (low relative to UK wages, that is) tend to upset cosy Westerners like Van Badham - what she is really upset about is that workers in Thailand, Bangladesh and Cambodia are, for perfectly understandable reasons, not as productive as UK workers.

Consequently, then, an international minimum wage is not going to change this productivity differential. It will, however, do lots of other damage, mostly to the poorest people in the world trying to earn enough to survive.

To see this more clearly, let me offer an analogy. Suppose the value of a manual worker around the globe is comparable to cars. A UK manufacturer can be said to be like a £50,000 Porsche, a Spanish manufacturer can be said to be like £30,000 BMW; and a Thai manufacturer can be said to be like a £7,000 Vauxhall Corsa.

Suppose an international minimum car price were to be introduced. From now on, it is illegal to buy or sell a car for less than £15,000. Who is made worse off? It's not the Porches and the BMWs, it's the Vauxhall Corsas, the Peugeots and the Nissan Micras - in other words, the less valuable cars in Thailand, Bangladesh and Cambodia. What ought to be obvious is that an international minimum car price law won't make cars worth £7,000 any more valuable to buyers, but it will make them illegal to sell at their value, because the law inflates their price by at least £8,000.

Once you bring the analogy back to poorer people trying to earn a living, it should be obvious that as an international minimum wage isn't going to increase the productivity of workers, and therefore won't make them any more valuable to employers, it will make it harder for them to hold down jobs and hinder the general growth of developing nations, not to mention probably increase worker maltreatment in the shape of black labour markets.

Other beneficiaries of an international minimum wage law would be the higher skilled workers who don't lose their jobs through such a policy but can now command higher wages as a result of the international minimum wage starving the market of less-skilled competition. History provides us with a real life example of this when in 1930s America the wages of the textile workers were higher in the north than in the south, where the cost of living was lower. The introduction of the federal minimum wage made it much easier for the northern firms to compete, because the wage advantage the south had was cancelled out, which as expected brought about all kinds of difficulties for the southern textile industry.

After spending five minutes perusing a few more of Van Badham's columns, you see the same error repeated in every one of them; she concerns herself only with who gains from a policy without the slightest attempt to enumerate the costs, never mind weighing up the costs against the benefits and giving her readers a framework for assessing what she thinks are net benefits. If she addressed this, she would be more likely to see why an international minimum wage is a silly idea.

Not only is it a silly idea for reasons already mentioned, it is also an unfair idea because it essentially acts as a tax on hiring workers, taking from the people who buy the goods and passing onto the people who make those goods. And if you're observant you'll probably have noticed by now that the many of the people who buy goods from relatively poor people are also relatively poor people. Even in the developed world - next time you're in Burger King, have a look at the people serving, and at the people waiting to be served - the latter do not, on average, appear to any wealthier than the former.

An international minimum wage would place an unfair burden on the employers who are already doing more than anyone else to provide the jobs to help citizens in developing nations - the employers of low-skilled workers with low productivity. An analogy: at lunch times in school only 10% of the pupils clear away their plates and cutlery afterwards. The headteacher decides there are too many plates and too much cutlery left in the canteen after lunch, so she demands that the pupils who already clear up after themselves should do more to help rather than the pupils who do not. In real life the firms doing most to create jobs in the developed world are like the 10% of the pupils that clear away their plates and cutlery after lunch. It is insensible to demand that they are ones that should clear up some more.