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.