Eugenics & The Dark History Of The Minimum Wage

Many people believe that the minimum wage is a state policy that helps poor people. Some even think it should be higher than it currently is. People who actually understand the real effects of the minimum wage – a club you’d hope would be larger than it is – know that this is economic foolishness: that the minimum wage actually makes the vast majority of poor people worse off (see my Minimum Wage / Living Wage side bar on this).

Some people know something else on top of that – that, actually, far from being a state policy that helps poor people, the minimum wage was actually sinisterly invented as a eugenics-type method of keeping so-called ‘undesirables' out of the job market (I wrote an article about this for the Adam Smith Institute – re-printed in full below).

When politicians support economically foolish policies, the relevant incompetent or dishonest? question looms large: Do they support foolish policies because they don’t understand they are foolish, or do they know the policies are foolish but support them anyway because they are popular vote-winners? Of course, added to the second option is the reality that in some cases they support a policy because to not support it would be damagingly unpopular.

One clue of the answer to that question might be this. We all know of instances in which politicians understand that artificially raising the cost of something will reduce its consumption, because that's what they try to do with taxes on goods like sugar and alcohol. They seem to understand the basic principle that their actions will reduce consumption of the thing they're taxing, so they probably could work out that artificially raising the cost of employment will reduce employment. To me it indicates that in many cases they probably know the policies are foolish but support them anyway because they are popular vote-winners.

Here is that article I was talking about, talking about the minimum wage's very dark history:

We read today that the national minimum wage will increase by 20p an hour to £6.70 from October, and that this will benefit more than 1.4 million workers. What we hardly ever hear from politicians is how many people will feel the costs of this increase, in addition to the people who are already being hurt by having a minimum wage law in the first place.

The problem with state-enforced minimum wage laws is pretty standard economic text book stuff: the minimum wage makes it harder for low-skilled workers to get a foot on the labour market ladder, it unfairly loads the burden on firms that employ low-wage earners (a burden that could be avoided by simply reducing the tax low-earners pay, or taking them out of tax altogether), and as a result it often causes inflation of prices and reduction in staff as firms try to recoup their losses.

With the announcement today, and with the Budget looming, I was very interested to stumble upon an article this week by Jeffrey Tucker about a Eugenics Plot Behind the Minimum Wage, in which we find out that in the early 20th century some eugenicists tried to introduce the minimum wage as a means of getting some of the lesser able people out of the employment market. Here are some relevant quotes that are bound to shock:

A careful look at its history shows that the minimum wage was originally conceived as part of a eugenics strategy — an attempt to engineer a master race through public policy designed to cleanse the citizenry of undesirables. To that end, the state would have to bring about the isolation, sterilization, and extermination of nonprivileged populations.

It was during this period and for this reason that we saw the first trial runs of the minimum wage in Massachusetts in 1912. The new law pertained only to women and children as a measure to disemploy them and other “social dependents” from the labor force. Even though the measure was small and not well enforced, it did indeed reduce employment among the targeted groups.

Leonard documents an alarming series of academic articles and books appearing between the 1890s and the 1920s that were remarkably explicit about a variety of legislative attempts to squeeze people out of the work force. These articles were not written by marginal figures or radicals but by the leaders of the profession, the authors of the great textbooks, and the opinion leaders who shaped public policy.

“Progressive economists, like their neoclassical critics,” Leonard explains, “believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’”

So when we hear politicians make minimum wage commitments in the run-up to the election, bear in mind that those that preceded them were always fully aware that wage floors precluded people from the labour market, and that they were once deliberately implemented to expunge the demographic landscape of those they thought inferior citizens that were unworthy of earning a living. That they so readily endorse a policy that places a barrier to employment for so many people tells you just about all you need to know about the extent to which winning votes matters far more than aiding people’s job prospects.

I hope that, in my lifetime, politicians and social commentators begin to get the simple message that if you artificially remove the lower rungs on the labour ladder, you make it difficult (often impossible) for people to climb it, or in some cases, get on it at all.

Heck, Even Corbyn Has Out-Corbyned Himself This Time

Jeremy Corbyn has felt buoyed recently - his better than expected election vote-share and the cult of personality that's surrounding him are giving people amnesia about the fact that his policies are complete economic lunacy and would bring about the worst recession this country has faced in decades.

But this latest bit of publicity - insisting that teen workers should get £10 an hour by law - so comprehensively exposes his ignorance and carelessness that even many dyed-in-the-wool lefties are now saying "What the heck is he playing at?". Because you would have to be so wilfully uninformed about even the basics of supply and demand curves to even think of such a ludicrously counter productive policy, let alone publically declare it as a policy on your wish list.

Being completely clueless about the negative effects of price floors is one thing. But what's truly bizarre about it is that when you analogise it to a topic that isn't jobs but goods or services no one has any trouble seeing how silly the principle is. Suppose the government made it illegal for anyone to sell bathroom suites for less than £10,000. It is obvious who would be hurt by such a policy; those that cannot afford bathroom suites of £10,000 or more, and those trying to sell bathrooms below £10,000.

Such a silly law wouldn't help people in the market suddenly be able to afford a bathroom suite, and it wouldn't help the firms trying to sell them either, because the law won't make less expensive bathroom suites suddenly worth £10,000. Anyone who can see the logic of being against a £10,000 minimum price of bathroom suites but cannot see the same logic for minimum wage laws is not being consistent.

If you still cannot see this, let me put it another way. Suppose you support Labour's plans to raise the teen living wage to £10 or £11 or even £12, thinking how wonderful it'll be for low teenage earners to now get a 'fair' wage. I'd have to ask, why don't we make a law that gives them an even 'fairer' wage - say £20 an hour or £30 an hour or even a 'super-fair' wage of £40 an hour?

I don't think there is anyone in the country who thinks a £40 an hour living wage is a good idea, because anyone can see the problems that would occur with it. So you'll note that that means even die-hard Corbynites can agree in principle that there is a living wage law that would be too high to implement because it would do lots of damage in skewing the marginal value of labour, particularly in the teenage labour market where inexperience and additional risks are built into the employer's decision about whether to hire.

What isn't clear is why they can see it's a bad idea for £40 an hour, or £30 an hour, or even £20 an hour, but they cannot see it for £10 an hour. You may come back with the argument that it's obvious that £40, £30 and £20 are too high, but there comes a point when the number is just right. But that doesn't hold, because if you can see the logic that a price floor hurts both buyers and sellers, whether it is for bathroom suites, cars, labour or any example you'd care to mention, then the price floor is going to hurt more people than it helps at any level where it interferes with the real value of prices determined by supply and demand.

Suppose the living wage is set at £10 an hour. In the labour market, if a worker can produce £7, £8, £9 or £9.50 per hour worth of output to his (or her) employer he will be hired for a wage rate that's below the marginal value of his output. This means that a living wage law of £10 prices out all those people from the labour market - it makes it illegal for them to provide the firm with the value of their labour, which is bad enough for adults, but positively asinine if you extend the law to preclude inexperienced teenagers who are worth even less to prospective employers, and are keen to break in to the job market.

Equally, it fails to account for the fact that if a teenager's labour is really worth £10 an hour to an employer, his salary should climb up to that value purely by market forces. To see why, suppose you are producing £10 per hour worth of output to your employer but you are being paid £7.50 an hour. As long as prices are not too sticky, a competing employer could procure your services for a rate higher than £7.50 an hour but lower than £10 an hour - and in a competitive market your wage rate would be bid up until it fell just below £10 an hour.

I hear Jeremy Corbyn and John McDonnell are scheduled to appear at Glastonbury this weekend. My advice to all the teenagers at the festival would be to grab handfuls of mud and chuck it as these two fools until they look as dirty as their latest imbecilic living wage policy.

 

 

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.

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 a typical supply and demand graph.

   

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.

The Economist Doesn't Do A Very Good Job With This One

From the days when I used to read it every week (long before the days of the online option) The Economist has always come across as wishing to be economically slightly right of centre and socially slightly left of centre. My impression these days from sporadic reading is that in terms of its economics it is drifting implacably to the left, probably to appeal to a younger readership.

It is still friendly to free trade, but in my view not trenchant enough in its repudiation of bad leftist policies. A good example is this article, which despite being two years old, grabbed my attention this morning when it was shared on The Economist's Facebook page and generated lots of attention in the comments section.

It's not just that the article sits on the fence too much regarding the minimum wage, it's more that by only focusing on how the policy affects statistical employment levels in terms of having only a moderate effect on job losses, it fails to consider the most important statistical group - the people that cannot get a foot on the rung of the employment ladder in the first place (and that's to say nothing of the other negative effects such as unfairly loading the burden onto employers of low-skilled workers and causing price inflations that hit those same people hardest).

An article that makes itself so oblivious to the entirety of the net cost on society is rather like an article on assisted suicide that makes no mention of the pain and suffering of the people that wish to end their life. The minimum wage is basically a tax on people who do the most for low earners - a tax passed on to low-earning consumers, which ought to tell you almost everything you need to know about it (and let's not forget that it has a very dark history with sinister eugenicists who knew exactly what kind of effect it would have on struggling factions of society, as I wrote about in this article for the Adam Smith Institute) .

The minimum wage legislation occurs because the UK government wants low-skilled workers to receive more in wages than the market value of their labour - but it rather reminds us of an old political maxim: don't judge a policy by its intentions.

The desire to ensure low earners have enough to make ends meet is a noble one - but it can, and should be achieved by supplementary benefits, which basically amount to a tax funded by taxpayers as a whole, rather than the minimum wage, which is a tax on people who employ low-skilled workers, where the cost is largely borne by consumers of firms that employ lots of low-skilled workers.

It should be obvious, but as I explained in this blog, if you want to help low-earners it seems bizarre and unnaturally wrong to expect the vast majority of the cost to fall on the sub-section of society already doling the most for low-skilled workers and for consumers who buy the goods and services provided by low-skilled workers.

Like the ill-conceived tariffs I mentioned in a recent blog post, the minimum wage benefits are tangible and easy to endorse, whereas the costs are spread out widely across the population (particularly for people whose labour value falls below the government's mandated price floor and remain unable to sell their labour). Like the tariffs, politicians like minimum wage legislations because they conceal the subtlety of the tax*.

In the past few decades government spending has hovered around the 40% mark of the entire GDP, which constitutes a massive proportion of total spending. Plus if you add on all the hidden taxes in the form of regulations, price controls, tariffs, etc - plus government borrowing, which is basically deferred taxation (which this graph does not factor in), it's probably over 60% of GDP.

That is to say, if the government taxes Jack 20p in every £1 earned and gives some of it to Jill, that transaction is recorded as a tax. If however, the government forces Jack to pay Jill more than her market value, or consume at a price above the market value, those transactions between state and citizen won't be recorded as a tax

Just as the tariffs prevent you from buying cheaper alternative goods and services from more competitive foreigners, the minimum wage prevents you from buying cheaper alternative goods and services domestically. Not only do both these regulations generate many deadweight losses on the economy, they are deadweight losses for which the majority of our citizens continually lobby the government.

Alas, I'm sorry to say - almost all our society is controlled and governed around left wing constructs (progressive taxation, price controls, state-provided health, education, defence, a quasi-governmental central bank that controls interest rates, and it's impossible to undertake any mutually beneficial transaction with another agent without incurring numerous instances of State-regulation or state-enforced taxation on earnings that have already been taxed - usually both).

* To give you an additional point to consider regarding the absurdity of this price floor; suppose our new chancellor Philip Hammond was injected with a potion that made him believe all old banger cars in circulation have suddenly increased in value. 

From now on, irrespective of whether your car is falling to bits, rusty, leaking, worn out or on its last legs, under this new potion’s influence the Chancellor now believes that no car is worth less than £1500. On the basis of this, he creates a minimum car sale law that prohibits anyone from selling a car for under £1500.

Who do you think this will hurt most? You've got it, the people trying to sell inexpensive cars. Philip Hammond's law won't make those cheap cars any more valuable to buyers than they already are - which means the law will simply prohibit a lot of people from being able to buy and sell cheap cars. The same reasoning can be applied to minimum wage laws.

 

Four Quick Things This Week: Racism, The Minimum Wage, Hillsborough & The Blame Culture

Thing Number 1 - Racism

Don’t know if you picked up on this yesterday, but after the furore surrounding Ken Livingstone’s inappropriate comments about an easily identifiable group, there was a similarly inappropriate comment by Andy Burnham on Question Time last night, where he told us his policy about foreigners. He said that he’d like to introduce a law that bans an easily identifiable group of foreigners from being able work in the UK purely on the grounds that they are foreign. Of course, he didn’t use those words, he said it the other way round – that he wanted a law to protect British wages so companies could not look to recruit labour at a more competitive rate from abroad. Apart from the different choice of wording, the statements made by both men should have made the headlines as being dodgy – but, alas, we live in a society in which that is highly unlikely to happen.

Thing Number 2 - The Minimum Wage

So, a chap I know called John told me today that having applied for the government’s cycle to work scheme in which he purchases a bike and accessories, and through the salary sacrifice initiative makes savings of 42% via reduced tax and National Insurance contributions, his application has been rejected because the monthly deductions on this (don’t forget voluntary and beneficial) purchase will take his earnings below the legal minimum wage, and makes him ineligible for the scheme. 

Great – another of the many minimum wage stories of lament – the consequence of which, in this case, is that staff in his firm on 20-100k per year could obtain the full 42% tax savings on a bike, but John who earns just above the minimum wage cannot. You don’t have to be that bright to see what’s wrong here. I phoned on his behalf and made what was to me the obvious suggestion that in order that minimum wage earners don’t miss out they could extend the 12 month payback duration to 18 months to keep them above the earnings threshold, but they couldn’t alter it as it’s driven by central government. Thanks central government! Thanks Chancellor!

Thing Number 3 - Hillsborough

Despite his ill-conceived comment on Question Time, Andy Burnham covered himself in glory this week with his part in the Hillsborough inquest. The recent Hillsborough ‘Justice for the 96’ outcome was the end result of a controversial process that has lasted 27 years, largely to do with the issue of blame. Initially the police blamed the fans, but given the falsity of this claim it was always likely that eventually, and with an impressive degree of tenacity and perseverance, the campaigners would see the truth exposed – that, in fact, the police were to blame, as were the Football club, and many others involved in the organisation the of this tragic FA Cup semi-final event. The outcome has been pleasing not just because it’s good when justice prevails, but also because it is a lovely demonstration of how honest people working together for a worthwhile cause can find justice in the end and see that the blame is apportioned to the right people, which, as they knew all along, wasn’t the fans.

Thing Number 4 - The Blame Culture

Alas, unlike the Hillsborough campaign, quite often blame does not go to the right people. In a society solidly riveted to the recourse of the blame culture, this often makes for frustrating reading, particularly in the political arena. I’m afraid to have to say that very often politicians and the media get this backwards – that is, they go about their business in a culture in which too many people get blamed for things that aren’t really their fault, and don’t get blamed for things that are their fault. A lot of the things politicians do that are their fault – like imputing price controls, over-regulating industries, and creating artificial shortages – elicit praise and support from large swathes of the population when really these things should be met with ignominy. On the other hand, a lot of the things politicians get blamed for, for which the fault ascribed to them is an exaggeration – like crime levels increasing under their time in office, increased inequality, and increased poverty – elicit reproach and hostility when really these things should be opined about with a more balanced and informed view. 

This Should Create Mass Anger, But Instead It Creates Mass Joy

With the recent introduction of the living wage the red socialist in blue conservative clothing chancellor George Osborne made it clear once and for all that he is just as careless about basic economics as the opposition parties, that he has scant concern for the economic well-being of the people of this country, and that pre-Prime Ministerial popularity is his main agenda.

The living wage price floor is now £7.20, up from £6.70 under the old minimum wage, and within four years it will be over £9. I have written repeatedly about all the ways this is a terrible idea, but I have not gone into as much depth as I'm now going to about how politicians play on this public credulity in such a shameful way. And I'm sorry to have to be the one to tell you, but it is shameful - it's shameful because it's driven by falsity and conceit, and I hope after reading this you'll understand more about why this is the case.

I lamented in a recent Blog post about how the people that govern us make decisions of popularity, not of prudence, based on the fact that the majority of the people they govern prefer popular myths over prudent truths. Consequently, when you have an electorate that is in this position it is incredibly easy to sell them things they think are good for them but are actually not. To understand this, we need to go over the basic economic fallacy that underpins almost all other related fallacies - it's what Bastiat summed up in his seminal essay "That Which is Seen, and That Which is Not Seen" - which is basically about how economic decisions have far-reaching effects beyond the immediacy of our perceptions, and that any idea or policy has to factor in everyone who is affected (It's what I like to call the tangible costs, the tangible benefits, the intangible costs and the intangible benefits, touched on in this Blog post).

It is no exaggeration to say that just about every bad economic idea or imprudent policy in politics is down to the fallacy of only thinking about the immediate effects on an easily identifiable group rather than thinking about the effects on everyone, in the immediate and long term too. The art of a prudent policy is in tracing its consequences everywhere, not just in one easily identifiable place (for more on that, see this Blog post of mine). It is because the vast majority of the public only think of policies in terms of one easily identifiable place that politicians so readily impose these imprudent policies on us. Only when the populace wises up will there be selection pressure on politicians to wise up too.

This State-mandated living wage of £7.20 an hour benefits a select group of people (a proportion of low skilled workers) but harms just about everyone else (employers, the people that lose their jobs because their employer has to let some staff go, the consumers who have to pay higher prices, the hundreds of thousands of people whose labour is not worth £7.20 an hour to a prospective employer, and at a broader level, the nation as a whole as State-mandated price fixing makes other places more attractive places to invest).

To see why labour price controls are always bad, we first have to understand what labour is. Labour is a commodity - it is a substantially marketable sale of work sold to create value. Its price is dictated by supply and demand, which involves the aggregation of billions of choices, wants, needs and desires going on in the world at any one time. There is no such thing as a 'fair day's pay' or a wage someone 'deserves' or a 'just' wage - they are completely alien to a proper understanding of economics. They are emotive terms uttered only be people who don't have a full picture of how prices are dictated.

Who benefits from labour? The answer is everyone. The person selling his labour, let's call him Fred, benefits because he chose that option over the next best option. The employer benefits too because it's that labour that helps him make a profit, as do all the places Fred spends his money, as do all consumers generally.

How do you know if you are of value to your employer? Easy – your value can be measured by what’s called the marginal revenue productivity of wages, which is basically the benefits your employer earns from employing you. If your wages are more than your marginal revenue productivity then you earn more than the sum total of value you bring to your company.

On the back of that, two things set wage levels, primarily. Firstly wage levels are determined by the skill level of the job in terms of how easy it would be for the next person in line to come in and do the job. A McDonald's burger flipper or a Sainsbury's shelf stacker do not command high prices for their labour because it is easy to replace them in the job centre queue as the job is easy. Lawyers and surgeons command high prices for their labour because it is not easy to replace them in the job centre queue, and their jobs require lots of studying and training.

Secondly, wage levels are determined by which other job opportunities the worker has. Business owners are not just competing with the goods or services they sell, they are also competing in the labour market too. Suppose Sainsbury's has the profit-scope to open several more stores. To do this they need to buy labour, which means either hiring people currently unemployed, or hiring probably better people already doing similar work. To do the latter they must offer higher wages (or some other benefit) in order to attract these workers. So wages are set not just by who is next in line relative to the skill level of the job, but also by how many rival competitors want to buy your labour too. Your pay working for x will be contingent on what y and z are willing to pay you, because x, y and z are in competition not just for bread, milk and cereal, but for the labour upon which their profits are based.

Osborne's popularity-over-substance Living Wage price floor ignores all this, plus it ignores all the harm done to small businesses, to currently unemployed people, and all the soon to be unemployed people. Why aren't the people cheering the Living Wage thinking of these hundreds of thousands of people - the 'unseen' in Bastiat's equation? How come no one thinks about all the elderly people or already struggling people that get hit in the pocket by the higher prices that businesses introduce to pay for this? These are the people that proper economic considerations demand that you factor in too.

The hotel workers and waitresses and bar staff enjoying their extra £20 a week owe their gains to consumers, including students, the elderly and unemployed people, who are forced to pay the higher prices that fund those gains. The net gains to the winners are dwarfed by the net costs suffered by the rest of the population (most of the businesses affected by the Living Wage don't actually make very much profit, by the way).

If George Osborne wants a genuinely prudent solution, why won't he do the good thing for low earners that also isn't the bad thing for employers and consumers and the unemployed, but is somewhat less popular - take low earners out of tax and national insurance, thus making their wage more like a living wage, but not increasing consumer prices and jeopardising employment levels and penalising employers of low-skilled workers? Oh yeah, question asked, question answered, it's somewhat less popular - and he does want to be Prime Minister, of course.

Sometimes I Have The Nicest Fans

 

I got a nice comment today on one of my blogs on the misjudged minimum wage law…..

F**k you are a d**k – you wish to privilege rich f****rs earning sh**loads over poor people earning peanuts.

Anonymous 

I thought I'd better say hello!

Dear Anonymous (commenters like you are always anonymous, aren’t you?),

Let me respond more charitably than you, by saying, actually, we do share the same goals (that the poor become more prosperous), we just differ on the best way of achieving this – and by ‘differ’ I mean out of the two of us we differ in the extent to which we have a basic grasp of the subject at hand.

I could explain all the ways the minimum wage is undesirable, but having already read that, you’re clearly not that interesting in knowing these things. All I’ll say, then, is that it is actually you who wishes to privilege rich f*****s because you want to endorse a state-mandated price floor that makes it more difficult for struggling people to get a job.

The best chance they have of becoming more prosperous is being denied by governmental legislation that prohibits them from bargaining to sell their labour at any price below the state-mandated price floor. By your logic, if caring about struggling people means making it harder for them to get a job, why not ask for the minimum wage to be even higher still – then you’ll ‘help out’ even more struggling people?

Yours Fraternally J

James

Why Doesn't Ed Miliband Offer The Kind Of Help That Will Actually Be Helpful?

Ed Miliband is drumming up support for his party in the pre-election campaign by promising financial help to small businesses to enable them to hire more staff. He is, not for the first time, confused. Post-tax incomes of businesses are not the primary determiner of employment levels. Employment wisdom is simple: if the output for additional staff has a value that covers their salaries then an employer should employ them. If not, then they shouldn't. This rule applies irrespective of whether you're a high street kebab shop or a multi-national corporation. Ed Miliband's financial incentives won't help raise employment levels.

To see why; suppose you've just eaten a nice big two-course meal in a restaurant, and the proprietor comes and offers you a free dessert. If you're stuffed, and you care more about your health and comfort than capitalising on a freebie, you will politely decline the proprietor's kind offer. Your optimum level of food consumption does not depend on whether you've paid for your food or not - it depends on your body's metabolism. Just as you will not take on more food unless your body needs it, similarly you will not take on more staff unless they bring a value that covers their salaries. If they will, then you don't need Ed Miliband's supplements - they would be better spent elsewhere; and if they won’t then Ed Miliband's supplements will not go towards raising employment levels.

This is why, rather than governments getting involved, it is much better if banks loan to small businesses of their own volition. A bank will lend if the borrower's ultimate gain from spending the money enables him or her to pay back the loan with interest. A government won't have anything like the same kind of risk signals, nor the incentive for prudence, as it is spending other people's money, not its own. Miliband’s claim that tax cuts for small businesses will help increase employment is a sure-fire vote winner. But like many sure-fire vote winners, it is fallacious.

What would work better would be large tax cuts for middle and low earners. You see, unlike rich people who delay spending and consume higher end products (Ferraris, yachts, swimming pools, £500 handbags, etc), middle and low earners are likely to increase their spending, which will increase employment. The exact same wisdom applies to minimum wage laws too. Instead of a minimum wage law that creates unemployment, hikes up prices and places an unfair burden on employers of low-skilled workers, the government could simply reduce the tax burden of low earners.

The answer to the question - Why Doesn't Ed Miliband Offer the Kind Of Help That Will Actually Be Helpful? - is that the helpful way is less of a headline grabbing vote-winner, so it's one he's unlikely to pursue with the same enthusiasm.

* Picture courtesy of bbc.co.uk

If Only They'd Get The Message About The 'Living Wage' Fallacy

Oh ah, finally the ill-conceived ‘living wage’ pressures being applied on businesses have brought about the outcome people like me keep banging on about – redundancy and unemployment. After coming under intense pressure to pay their workers a ‘living wage’, Ritzy cinema finally relented – an action which amounted to a reduction of about 20 staff members.

I just hope all the misinformed people who keep going on about a living wage are very pleased with themselves. Might it be too much to hope for that they could just realise that the more they apply this ‘living wage’ pressure, the more we’ll see of this kind of employee reduction?

Sadly, it’s not the first time I’ve had to talk about this minimum/living wage fallacy:

“As well as unfairly loading the burden on firms that employ low earners, it also encroaches on low end business, it reduces job availability, and it often causes inflation of prices as firms try to recoup their losses on increased wages. A minimum wage does two further things. It shifts capital from employers in an unstable competitive market to low paid workers, and it induces some employers to let their staff go because they cannot afford the wages. If you’re getting £7 per hour and only bringing £6 per hour worth of benefits to your company, you’ll likely find yourself on the dole. If you are a lower paid man or woman going from here to there in different jobs, you will find less work available with every rise in the minimum wage – and the higher the rate the more unemployment. This might amount to a road block for young, unskilled workers and the unemployed – which is why tax credits are a more effective method because they target those who have children or high level benefits, and need high wages to make it worth their while signing off benefits, but who don’t have the skills or experience to command that kind of salary. “

Why is such a simple thing so difficult to grasp for those on the economic left? If prices (that’s goods, services and wages) are artificially set higher than their natural profitability or productivity, the costs will have to be offset elsewhere, either by increased prices for customers or, as is the case here, a reduction in staff. I’m sad to say that I think the only explanation for this continued fallacy is that a great many supporters of the living wage are not interested in what’s best for low paid workers, they are only interested in self-congratulation and moral posturing. That is to say, in seeming to support the underdogs they don’t mind hurting them as long as there are enough credulous people out there conferring praise on them.

We see a similar thing going on with trees and paper. Some people claim to care about preservation of trees. Such people stridently champion paper recycling as the best way to preserve our forests. The reality is, if they really cared about trees they should be against paper recycling, not for it. It is not hard to find out that paper is cheap and that recycling is worse for trees and for consumption. Trees are farmed for economic reasons too, and in commercial terms they are planted for future sales. To give you a compelling analogy, does anybody think that if we recycled chicken breasts there'd be more chickens in the world? Of course not. It's the same with trees. People who are for paper recycling share this commonality with people for the ‘living wage’ – they are either outrageously misinformed, or they are not interested in the number of trees in the world and the number of low-skilled people in work, only in moral posturing. 

What makes me so sure of this? Easy, it’s the fact that they have been told time and time again that there is a better way to stand up for the underdogs – a way that boosts their income but doesn’t jeopardise their employment - yet they continue to ignore it. All the government has to do to help low earners is take them out of tax and national insurance – thus making their wage more like a living wage, but not jeopardising employment levels or penalising employers of low-skilled workers.

I hope that, in my lifetime, politicians and social commentators begin to get this simple message (illustrated well in the cartoon below) – if you artificially remove the lower rungs on the ladder, you make it difficult (often impossible) for people to climb it, or in some cases, get on it at all.

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.

Follow Up: Rents, Housing, The Minimum Wage, & Too Much Employment

After a friend from America commented on the last Blog regarding how she agreed that rises for low earners are dwarfed by other prohibitive factors, I thought I'd do a quick follow up about the specific case she mentioned - rent prices rising with rises in the minimum wage, producing a nullifying effect. Here's how things are in the capital of England  In London there is a great need for low-skilled work, but rent prices make it hard for low-skilled workers to live in London, so the Government subsidises them with housing benefit.

Suppose we have John the cleaner; John works in Canary Wharf cleaning for a big city firm, and is subsidised by the Government (which means the taxpayer).  John's housing benefit is stopped, meaning he can no longer afford to live in London, which means his firm has to hire another cleaner.  But when John represents all low-skilled earners, things change, as city business that need cleaners will have to increase wages of cleaners to enable them to live in London, lest they have cleaner-less offices.

So assuming we stop the minimum wage, as my last Blog post suggests, we are left with a choice, with neither option perfect. We ether:

A) Stop topping up the incomes of low earners with tax credits as that is only really a further subsidy to the employers of low-skilled workers, letting the market care for itself, which would reduce the probability of inflated housing cost and under payment for low-skilled workers, but would create a vortex.

B) Continue to top up the incomes of low earners with tax credits, whilst having the corollary effect of increasing the inflated housing cost problem (among other things).

Most people in the UK prefer B, which is fair enough, as it's the pearl of great price of the welfare state.

Incidentally, here's where the situation started to intensify. Until the eighties Conservative government sold off their council houses, local councils used to build council properties and rent them out for modest sums (modest sums subsided by the taxpayer, of course).  Naturally, the selling off of council houses was ideological in the sense that the Tories expected to secure votes from these house-owners, but also it was seen as efficient, because it transferred the cost of maintaining properties from the council to the individual property owners.

But this had a knock-on effect; low-earners were then expected to rent property from private landlords, which causes problems when they are numerous.  One of the ineluctable laws of economics is that if demand increases and supply decreases or remains unchanged there will be a higher equilibrium price to account for the scarcity of supply. That is to say, to apply it here, when claimants of housing benefits constitute a greater part of the market, rents are hiked up. As a corollary, higher rents engender a surge in buy-to-let investments, which forces up house prices, which comes full circle in justifying high rent.  This 'locking in; effect means that taxpayers are expected to subsidise low earnings to guard against a low-earner exodus from London, or a compelled increase in the minimum wage.

Too much employment?

Another rule of economics is that taxing something produces less of it, and subsidising something produces more of it. The minimum wage (which is basically a stealth tax on employers of low-skilled work) reduces employment by a little, and income tax credits (which are basically subsidies) increase employment.  But by how much?  That's the key question few people ever ask, which is irresponsible, because although subsidising something produces more of it, it is a great mistake to assume that the more the better, because that assumes it is automatically preferable to have too much of something rather than too little of something else.  If someone is going to pour some sugar and some salt on your roast dinner, you'll certainly hope they pour very little sugar and the right amount of salt.  But only a fool would argue that because they under-did the sugar then any amount of salt won't ruin the dinner. Clearly, while the right amount of salt is good for bringing out the flavour, too much will ruin the dinner altogether. 

In the above situation, the minimum wage is like sugar and income tax subsidy is like salt - too much salt and you'll have too much employment, which engenders inefficiency.  In other words, one mustn't assume that just because employment is good that there can't be too much of it - too much unemployment is bad, but so is over-employment.  If increases in income tax credit push employment past the optimum level of efficiency, then we'd either look for a reduction, or an alternative policy.  To put it another way, it is injudicious to focus only on who enjoys the benefits of a policy without examining who picks up the costs. As we've seen in the last Blog, the cost of the minimum wage falls on the employers of low-skilled labour, which, in the long run, is borne by the customers of the businesses in price hikes. The cost of income tax credit subsidies falls on the government, which means it falls on taxpayers as a whole. While I think income tax credit is preferable to the minimum wage - even the minimum wage becomes preferable to a situation whereby too much employment is created by tax credits that are too high.

 * Photo courtesy of bbc.co.uk

Why The Minimum Wage Is More Costly Than Beneficial

In my last Blog I proposed an interesting way that employment laws conceal hidden costs that impair those they are supposed to protect. On a more general level, what's also strange to me is the extent to which in everyday life things are often automatically assumed to be good, just because it's easy to focus on the headline-grabbing positives while overlooking, or not understanding, what lies beneath. When you hear that the law imposes a compulsory work break on employees, it sounds like a good headline-grabbing positive, because it appears to guard against employers denying people their rightful break time. But in reality, in a competitive market where supply and demand applies to labour as well as goods, no firm in the UK would last very long if they imposed a 'no breaks' policy on their staff (even if such a thing was legal) - so the law is largely superfluous in that matter. With that in mind, let's look at another policy in which a supposed headline-grabbing positive overlooks the hidden costs that lie beneath. I'm talking about the minimum wage.

A SIMPLE REASON WHY THE MINIMUM WAGE DOES MORE HARM THAN GOOD

In a famous parable in the second book of Samuel in the Old Testament, Nathan conveys to King David an illustration of a rich man who took away the one little ewe lamb belonging to his poor neighbour. David responded with indignation and disgust until realising that the illustration was actually an indictment against him for his actions regarding the death of Uriah the Hittite and the impregnation of his wife Bathsheba. Here's my own little parable for people (including a great many politicians) who think the minimum wage is a good thing overall.

In a town called Beansville there are lots of harsh winds that damage the town on a regular basis. When this happens there is always a regular group of volunteers (comprising 10% of the population) who on top of their regular jobs spend time clearing up the mess and repairing the damage, while the other 90% go about their business. Out of the blue the Mayor of Beansville declares that even more time needs to be dedicated to clearing up after the harsh winds, and that the people to take on this extra voluntary work should be the 10% of people in Beansville already volunteering.

If you told that parable to a minimum wage-endorsing MP he or she would almost certainly be outraged at the Mayor of Beansville's inequitable policy. But just like King David, the MP should be remorseful and contrite because the Beansville policy serves as a good indictment against the MP's support of the minimum wage. Here's why. Should we decide that the extra burden ought to fall on those people in Beansville already volunteering? Or should we decide that everyone else ought to muck in as well? I think most sensible, fair-minded people would agree that it should be shared more evenly, not all heaped on a small segment of that society. Why, then, do so many people support the minimum wage, when the policy is more or less as skewed and injudicious as the Mayor of Beansville's policy? Or to put it another way, if we're going to give low-earners a boost, why do so many people fail to realise that it is unfair to place the entire cost of that boost onto the small percentage of the population that employs low-paid workers? The prudent and fairest thing to do is to spread the cost among all of us - which can be done through a taxation that is passed on to low-earners in the shape of tax credit for low-earners, or probably even better, lower personal tax thresholds for low-earners. That in a nutshell is why the minimum wage is not a good policy overall - it unfairly heaps the burden on a small segment of society - a small segment, you may note, that is outweighed by a much bigger majority in terms of potential voters.

Consider some analogous examples; we don't expect the entire burden of our navy bill to fall only on a few people, nor our health bill, nor our parks, nor our roads and streetlights - we expect the cost to be broadly shared through taxation. The same applies (or should apply) to the minimum wage - if we want to do something for low earners we should share the cost. Let me state it in the most compelling way. Poundland, Bernard Matthews, McDonald's, Burger King, KFC and similar such businesses employ a few thousand low-skilled, low-paid workers in your region - all of whom are better off than they would be on the dole (which makes us all slightly better off). So Poundland, Bernard Matthews, McDonald's, Burger King, KFC and similar such businesses are all doing something for low-skilled, low-paid workers. What, on the other hand, have you or I done for low-skilled, low-paid workers recently? 'Not much' would be my guess - so if it's desirable to do something more for low-skilled, low-paid workers, maybe it's our turn rather than the turn of Poundland, Bernard Matthews, McDonald’s, Burger King, KFC and similar such businesses, who are already doing their bit.

You might argue that our navy, health bill, parks, roads and streetlights are all public goods and services, which is why we pay for them in taxes, and that Poundland, Bernard Matthews, McDonald’s, Burger King, KFC and similar such businesses are privately owned and do not need subsidising. But that misses the point; those who support the idea of a better wage for low-paid earners (which seems to be everyone on the left, and a great many on the right) are doing so precisely because they consider it to be a public good, so the objection is remiss. And further, if you think low-paid workers are being ripped off by wealthy companies earning heavily from their labour, you'll pleased to know that one of the basic rules of economics is that the very nature of low-skilled labour is that it is easily transferable from person to person, and that because of the forces of competition, the wages of low-skilled workers are dictated by the marginal product of that labour.

It's true that the minimum wage has so-called positives (at least they're claimed to be positives by minimum wage proponents); it increases living standards for the poorest in society, and it increases the incentive for people to get back to work. But it does no good to simply endorse a policy based only on its qualities, without considering the negatives, and whether they outweigh the things in its favour. One might argue that the ill-effects of the minimum wage are more detrimental to the economy. The minimum wage has positives, but as well as unfairly loading the burden on firms that employ low earners, it also encroaches on low end business, it reduces job availability, and it often causes inflation of prices as firms try to recoup their losses on increased wages. A minimum wage does two further things. It shifts capital from employers in an unstable competitive market to low paid workers, and it induces some employers to let their staff go because they cannot afford the wages. If you’re getting £7 per hour and only bringing £6 per hour worth of benefits to your company, you’ll likely find yourself on the dole. If you are a lower paid man or woman going from here to there in different jobs, you will find less work available with every rise in the minimum wage – and the higher the rate the more unemployment. This might amount to a road block for young, unskilled workers and the unemployed – which is why tax credits are a more effective method because they target those who have children or high level benefits, and need high wages to make it worth their while signing off benefits, but who don’t have the skills or experience to command that kind of salary.

THE MINIMUM WAGE ALSO CONSTRAINS TRADE
One of the other golden rules of economics is that if you limit the use of monies you limit transactions too, because money brings about increased opportunity for trade. Minimum wage restrictions are an example of constraining trade by indirectly discouraging the use of money against the natural 'invisible hand' mechanism of supply and demand. Here's a simple illustration to show why this applies to the minimum wage. If I want to pay someone to do my gardening for me at a rate of £4.50 per hour, the law says I'm not allowed to. Yet the law doesn't prohibit me from saving £4.50 by doing gardening myself for an hour. So the law is an imposition precisely for the person it's claimed to protect - the gardener who needs the £4.50 an hour - which, if I don't want to do the gardening myself, then only encourages cash-in-hand tax-avoiding payments. Income taxes have a similar effect. Suppose I am willing to pay no more than £12 per hour to have some work done, and the workmen at the lowest rates are willing to do the work for anything over £10 per hour. That being the case I should have success in finding someone to do the job. But once the Government imposes 20% income tax, things change, because now the most the workmen can earn from me is £9.60 per hour, which means they'd be unwilling to do the job for me. This can mean that we all forcibly pay more - but quite often it doesn't, it means we try to get things done cash-in-hand on the cheap, or do more ourselves inexpertly.

Obviously it's easy to extol the virtues of income tax, but as you can see, it provides a good analogue for how the minimum wage constrains trade, as it has negative effects beyond involuntary payments, despite being a beneficial policy overall. I can't say the same about the minimum wage - its negative effects outweigh the positives to the extent that it is a bad policy to endorse. These are what are technically referred to as invisible deadweight costs - they restrict trade and transfer of money, and they damage employment prospects - but yet they are always sold as headline-grabbing positives by politicians. I think we shouldn't be surprised, though, that the Government wants to unfairly heap the low-wage burden on a small segment of society that is outweighed by a much bigger majority in terms of potential voters. Invisible costs occurring for the sake of vote-winning visible benefits are music to most politicians' ears.