Posted, though not written, by Sean Gabb
Abolish the minimum wage
There are some things which few people will thank you for saying, but still need to be said. There are some statements which will lose a politician more votes than they gain him, but still need to be said.
As Sean Gabb says in “Free Life Commentary”:
“A political leader, as opposed to a demagogue, has a duty to listen, but also to educate. This means on occasion resisting the will of the majority. It means the sort of patient explanation of truth that I last saw in the early 1980s, when several dozen Conservatives, in or out of office, went about the country telling often hostile audiences why the calls for reflation had to be resisted.”
One thing that needs to be explained is the badness of the minimum wage. Just as any price-fixing will cause a shortage or a surplus, the minimum wage causes unemployment (a surplus of labour). There are some people whose labour is simply not worth the minimum wage. With minimum wage laws, they will never get a job. To believe otherwise is to believe that government can legislate against the laws of economics. But governments can no more do that than they can legislate against the laws of physics.
Of course, if a minimum wage is brought in at £5/hour, not everyone previously earning less than £5/hour will suddenly lose their jobs. Like most political decisions, some people benefit from it, and some people lose out. But there are plenty of tasks which are simply not worth paying for at that cost. Various jobs are destroyed, and plenty of people do become unemployed. The government know this, of course, which is why there are different minimum wages in the UK for those aged 22 and above (£5.73), those aged between 18 and 21 (£4.77), and those younger than 18 (£3.53). Most under-18s are not skilled enough for their labour to be worth the adult minimum wage. Rather than see even more unemployment, the government created a tiered minimum wage. But it is not the case that the labour of everyone in any particular age band is worth the same. There are plenty of adults (currently unemployed) aged over 22 whose labour is worth less than £3.53/hour. Rather than differentiating by age, we should differentiate between each individual. But that would mean abolishing the minimum wage. This clearly demonstrates that the minimum wage was created for reasons of political popularity, despite the clear economic argument against it.
A good way to see why minimum wages are bad is to ponder why the minimum wage is currently £5.73.
In this clip from the BBC’s “Politics Show”, a woman says “I’ll vote Labour if they put the minimum wage up to £8″. Why isn’t it £8/hour? Or indeed £20/hour?
Perhaps this woman was on minimum wage. It’s hardly surprising that someone would turn to a politician for a pay rise when they couldn’t get it from their boss. However, raising the legal minimum wage to £8/hour would certainly have the unintended consequence of lowering this person’s actual wage to £0. Rather than increasing their income, they would become unemployed as a result of such a policy.
On Thursday 6th November 2008, in the annual “No Confidence” debate at the Union, Oliver Letwin was asked, “Why did you vote against the minimum wage?” It didn’t seem to have occurred to the questioner that there could be any good reason for opposing a minimum wage. Mr Letwin replied that he had been responsible for changing Conservative policy on the minimum wage “because we were wrong about it. It turned out not to price people out of jobs the way we thought it would. The reason we were sceptical about it is because we thought it would price people out of jobs… I hope, I trust, that it’s not going to rise to a level where it does that in a recession.”
Mr Letwin is wrong that the minimum wage has not priced people out of jobs. Indeed, now that we are in a recession, it is surely responsible for even more unemployment. The reason the minimum wage is not £8/hour is because that would cause more unemployment. So the choice for a politician when setting the level of the minimum wage is: How much unemployment do you want? Unemployment will never be minimised as long as minimum wage legislation remains in force.
Lowering or abolishing the minimum wage is of increased importance at the moment, because lowering wages is essential to end recessions.
“It is common and indeed conventional knowledge that only World War II ended the Depression… What is less often acknowledged is that the New Deal as such thus failed to end to the Depression. Nor is it generally understood why the Depression did not return in 1946, after the military was demobilized and war production ended. By all rights, nothing should have been any different from 1939. But the Depression did not return. Despite demobilization and the end of war production, unemployment in 1946 was 3.9% and in 1947 3.9%…
So why didn’t the Depression return in 1946? Because wages were frozen even while the money supply was inflated with the war spending. This drove down real wages, the opposite of the consistent policy of Hoover and Roosevelt for a decade to drive up wages. In 1946, wages were low enough to clear the employment market. If employers could then hire workers at a market wage, and produce consumer goods, business could get back to normal. It did.”
However,
Dave Prentis, general secretary of Unison, will cut a special cake in the Commons to celebrate the anniversary, saying that the current £5.73 an hour rate should increase to £7.45 by October 2010.
The union also wants apprentices to be covered by the minimum wage, adding that the “development rate” for younger workers should be scrapped as it “discriminated” against young people.
As Tim Worstall puts it,
Are these people mad? A 30% pay rise in the middle of a recession? When people are shedding labour left, right and centre, you’re going to make labour more expensive?
The minimum wage is a blunt instrument. Prices are information, and setting prices (including wages) distorts the market, preventing it from solving the economic calculation problem and allocating resources efficiently. Just as we don’t set prices, we shouldn’t set wages.
The minimum wage is unfortunately popular amongst many people that it harms. If you want to redistribute wealth, which is what the minimum wage tries to do, a negative income tax would be a far more effective method.
Tags: economics, free markets, markets, minimum wage, socialism
This entry was posted by Hugo Hadlow on Thursday, April 2nd, 2009 at 8:15 am and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Abolish the minimum wage « Cambridge University Conservative Association
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I’m an advocate of the negative income tax, not only for its social welfare applications, but also because it could be used effectively as an anti-bureaucracy policy. Implementing a negative income tax in the UK, a government could link it to an individual’s National Insurance number.
Then, they could abolish the Jobcentres and Working Tax Credit offices, and run the entire system through the Revenue and Customs. This would surely save hundreds of millions per year. No new claims to be processed, no crossed wires. Just a basic change in status every so often.
Moreover, benefit fraud would become impossible, because the only possible crime therein would be tax evasion, and if a person evades the tax, they, by default, forfiet their rights to a guaranteed income through the negative income tax system.
It would also solve the minimum wage problem, because those receiving the guaranteed minimum income would be free to work in low paid jobs as they saw fit, which allows both parties to win.
Who thinks I should become a policy advisor for the government? 😛
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