A few clarifications on the minimum wage

– ‘Unexpected item in the bagging area.’

– ‘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.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

8 thoughts on “A few clarifications on the minimum wage”

  1. Posted 20/01/2014 at 11:06 | Permalink

    The reason you don’t hear about people smashing up self-checkout machines is that most people are capable of following an incredibly simple set of instructions and so find them easily usable and hence are employable by somebody other than a think tank.

  2. Posted 20/01/2014 at 14:11 | Permalink

    There is another reason why you don’t hear about people smashing up self-checkout machines: those of us who object to being shouted at by a machine simply refuse to use them.

  3. Posted 20/01/2014 at 18:47 | Permalink

    Where I live the self-checkout machines won’t take £50 notes. As that’s what I’ve got to spend, I require human intervention anyway, to provide me with change, so I prefer to use the ‘old-fashioned’ lines with a human till operator.

  4. Posted 20/01/2014 at 20:01 | Permalink

    The first paragraph is an opener, for god’s sake, you’re not supposed to take every word of it literally. I thought we Germans were the ones who don’t get humour.

  5. Posted 21/01/2014 at 08:22 | Permalink

    “There is one problem, and one problem only, with NMWs, and that is their impact on the employment prospects of the (currently) least productive.”. Kristian, I really do not think that this is correct. If the NMW prevents employment of low-productivity people, then the work they would do will not be done. So, overall, less work is done in the economy and the economy will be smaller. Of course, as they are the least productive people and as the NMW (at its current level) only prevents a small percentage of the population from working, then the impact on GDP will be small, but an impact there will be. Also, because it prevents the entry of young people into the labour market (as evidenced by the high percentage of young people who are NEETs) it prevents them from gaining new skills while in employment and therefore also has a long term impact on productivity.

  6. Posted 21/01/2014 at 08:49 | Permalink

    David – to be fair to the self-checkouts, the recognition of banknotes is the one respect in which they have improved. The early ones would only recognise banknotes that were as smooth as a freshly printed one, and then it had to be inserted in an exact 90-degree angle.

  7. Posted 21/01/2014 at 10:59 | Permalink

    HJ – I don’t dispute that, but I wonder how big a factor that is at the macro level, compared to the myriads of other sources of inefficiency.

  8. Posted 21/01/2014 at 11:21 | Permalink

    Kristian – I doubt that it adds up to a large percentage of GDP (as I said) but I doubt too that it is insignificant, especially if it prevents routes into work and the acquisition of productivity-improving skills by low skill workers and hence their ability to increase their contribution to GDP. So I disagree with your statement that there is only one problem with NMWs.

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