A few clarifications on the minimum wage
– ‘Please put the item back in the bag.’
– ‘Please wait for assistance.’
If you have heard these phrases before, you are probably familiar with that most infuriating of modern ‘labour-saving’ devices: the self-checkout machine. I wonder why we never read about raging customers trashing checkout machines with baseball bats, because I am frequently tempted. Those machines are effectively motion detectors that blurt out random error messages, completely unrelated to how one uses them. It has even repeatedly happened to me that a machine has said ‘Please wait…’, and then gone back to normal, as if to say ‘You’ve done nothing wrong, I just wanted to irritate you a bit.’
And the spread of this scourge has probably been aided by the National Minimum Wage (NMW). More on this point in a moment.
In this article, I would like to highlight some of the less obvious errors that are floating around in the NMW-debate, and I will begin with the errors made by those whose conclusions I broadly support. You can reach a sensible conclusion for the wrong reasons. Business organisations such as the CBI and the IoD have argued that the NMW-hike announced by George Osborne could:
– threaten the economic recovery,
– undermine Britain’s long-term economic competitiveness, and
– jeopardise the prospects of small businesses.
Well, no. The NMW does no such thing. There is one problem, and one problem only, with NMWs, and that is their impact on the employment prospects of the (currently) least productive. That is a good enough reason to oppose them. NMW hikes hurt those at the margins of the labour market, not ‘the economy’.
The distinction matters because you can easily have a thriving economy which generates well-paid jobs for most people, but which keeps small subsets of the population permanently excluded. France, for example, was not always the basket case it currently is. But long before the country came to resemble the final pages of Atlas Shrugged, it had a huge problem with long-term economic inactivity among certain groups.
Or take Sweden, where groups of mostly long-term unemployed young immigrants took to rioting last year. The British left was flabbergasted, because Sweden was supposed to be the land of tax-funded milk and state-provided honey, where such things were not supposed to happen. So Sweden quickly had to be recast into a neoliberal hellhole to ease the cognitive dissonance. The reality, though, is a lot simpler: Sweden is a generally good place to live (or so I’ve heard), but its job market ladder has no bottom rungs.
Secondly, the notion that large companies can afford to pay a high NMW, while small ones cannot, is also misleading. The impact of the NMW is not about ‘affordability’. My own demand for bottled water, for example, is highly price elastic. That is not because I ‘cannot afford’ bottled water. It is because I consider tap water good enough, and I do not value an extra ‘unit’ of quality very highly. So even if I won the lottery, I would not be prepared to spend more than a minimal amount on bottled water.
We should think about labour demand in the same way. The relevant question is not whether a company could theoretically afford to hire another low-skilled worker, but whether it would make sense for them to do so.
The answer will partly depend on the extent to which the respective labour service is already being provided, and this leads us to the flaws in the reasoning of the pro-NMW-hike camp: they fail to think at the margin. They argue that minimum wage jobs are usually jobs which have to be done, come what may – leaving them undone is not an option. That is probably true. But even if the first units of a service are indispensable, it does not mean the last units will still be. We cannot do without office cleaners, for example, but we can choose between different levels of cleanliness. Does an office have to be as clean as an operating theatre, or is it enough if it is cleaned, say, once a month?
The second major flaw in the thinking of the NMW supporters is that they are too quick to interpret ‘absence of evidence’ as ‘evidence of absence’. They argue that neither the original introduction of the NMW in the UK, nor subsequent hikes, have led to mass layoffs in low-paid industries, and conclude that NMWs have no effect whatsoever. But the trouble is that there are numerous ways, most of them much subtler than outright layoffs, in which employers can respond to changes in wage rates. The premature introduction of inappropriate labour-substituting technologies, an example of which is mentioned in the opening paragraph, is just one such way.
There are far better, risk-free and highly cost-effective ways to deal with poverty. The coalition should start implementing those, before taking a gamble with the employment opportunities of those in the weakest positions.