How and how not to debate minimum wages

In the March issue of Economic Affairs, a paper by Karthik Reddy analysed the empirical literature on the employment effects of minimum wages. The paper shows that there was indeed a period in which several studies challenged the common interpretation of minimum wages causing unemployment.

Unsurprisingly, there is no shortage of studies challenging the challengers again, and the differences in outcomes appear to be mostly down to differences in the choice of the time period and/or the control group. Reddy concludes that the majority of the literature clearly supports the ‘orthodox’ position, but the paper shows that unresolved issues remain, leaving room for a serious debate on minimum wages.

But by implication, this also shows that there should be no room for the sort of emotive self-righteousness with which Jody McIntyre covers the issue on the Independent Blog. Following up on Philip Davies’ proposal to permit disabled people to opt-out of the minimum wage, McIntyre comments:

‘Well thank you for the privilege Mr. Davies, because £5.93 is a bit steep for us “scroungers”. […]

[H]e chooses to reinforce the discriminatory myth that people with learning difficulties are more of a risk to employers. […]

[T]he attitude that Davies conveys in his comments […] allows not only employers, but many sections of the public, to continue to look down on disabled people as lesser or inferior members of society.’

McIntyre concludes – you guessed it – that Philip Davies himself should work for less than the minimum wage.

The text brims with misunderstandings. Firstly, it is wrong to overcharge economic variables by reading a philosophical statement into them. The wage rate an employer is prepared to pay does not reflect his appreciation of an applicant’s human qualities, let alone of their ‘value’ as a ‘member of society’. It is merely the result of the interaction of demand and supply in the labour market, nothing more and nothing less.

Secondly, it is perfectly understandable if a disabled person, who has successfully learned to manage their disability, finds it frustrating if they have to emphasise in job interview after job interview that their disability is not a drag on their productivity. But we have to acknowledge that most employers are not medical experts who know a great deal about what can or cannot be expected from somebody with this or that condition. We should not ascribe employers’ wariness in hiring disabled people to ill will or prejudice when it might simply reflect uncertainty.

Philip Davies’ proposal should be interpreted as a means to overcome this informational asymmetry, by making it more attractive to employers to give a disabled person a chance. If Davies’ critics have better proposals, let’s hear them. But what better way could there be to signalise competency in a job than demonstrating it on the job?

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).

9 thoughts on “How and how not to debate minimum wages”

  1. Posted 22/06/2011 at 16:18 | Permalink

    I disagree with the idea that the disabled should be able to work for less than the minimum wage for this one simple reason: why ought the disabled be able to under-cut other potential workers and put them out of a job? What needs to go is the minimum wage, not allowing special groups dispensations to avoid it, which is simply discrimination.

  2. Posted 23/06/2011 at 10:08 | Permalink

    While I agree with you Whig, there are already special dispensations for young workers and apprentices. The rationale for these exceptions could in principle be extended to other groups. I have myself sometimes argued for regional variations in the minimum wage as a second-best policy.

    I felt sorry for Mr Davies. While he might perhaps have put his argument slightly better, he did not deserve to have the Newsnight interviewer demanding three or four times that he apologise.

  3. Posted 23/06/2011 at 10:12 | Permalink

    Further to my comment, what if the government provided a subsidy to employers taking on someone with a disability? This policy has often found favour with Guardianistas, but doesn’t it amount to something rather similar?

  4. Posted 23/06/2011 at 12:56 | Permalink

    I should perhaps have been clearer. Under the circumstances he was correct. I entirely agree that having a national miniumum wage is nonsense – if the minimum wage is sufficient for London it must surely be driving employment out of the regions where wage rates are naturally much lower.
    What is evident, however, is that if we have an exception for young workers, apprentices, different regions, the disabled etc we are disadvantaging others – say, the older worker. Doesn’t that pose a problem for the Equality Laws that you must not discriminate on grounds of age? But legal niceties aside – again, why ought these groups be priviledged in the employment market over others? It merely exposes the fallacies of minimum wage law in that there are exceptions to it! If we have to keep the minimum wage I agree with Mr Davies, but what’s needed, again, is abolition of the minimum wage, not exceptions to it.
    The vitriol is merely typical of those statists who like to foam at the mouth at any suggestion that they might be wrong instead of engaging in rational debate – something they are clearly incapable of as they could not have arrived at the conclusions that they have reached if they had undergone it.

  5. Posted 23/06/2011 at 14:18 | Permalink

    Whig, why should there be a contradiction? Suppose some group was exempted from the minimum wage, and its employment rate went up. Sooner or later, some people would then realise that the minimum wage is perhaps not such a brilliant idea.

  6. Posted 23/06/2011 at 14:26 | Permalink

    Or those who benefitted from the exemption to the MW would fight to retain it as the discrimination is in their interest, as opposed to opposing it at the moment as it harms their interests. Combined with those who are employed and benefit from the reduced competition (they cannot be outcompeted on wage levels) there is a powerful lobby group with a vested interest in retaining it.
    Given that there are i) already exemptions and ii) there is still a minimum wage I’d say that there is a problem with your assumption.
    As I said, under the circumstances, Mr Davies was correct, but only insofar as things stand. We ought to be abolishing the minimum wage, not creating discriminatory exemptions to it!

  7. Posted 23/06/2011 at 15:33 | Permalink

    Should the Equality Laws also be abolished? I’m in favour of allowing (or not forbidding) discrimination by potential private employers. (Not for state monopolies, I agree, but I’m against those.)

  8. Posted 23/06/2011 at 21:19 | Permalink

    So will this proposed debate be founded purely on the premise that the minimum wage is a net benefit to society, but that its implementation needs to be modified slightly for certain groups of people? Or will it just be another Trojan horse argument that is really designed to attack the very existence of the minimum wage in any form, by first undermining it bit by bit, and thereby bringing about its ultimate eradication?

    As for those with disabilities, what if the employee has a hidden disability (like a health condition) that the employer is initially unaware of when the person is hired? Suppose the disability has no impact on the employee’s capacity to do their job, but the employer finds out about the disability much later. Should the employer then be allowed to enforce a lower minimum wage on that employee? And maybe claim back any excess pay? Or should that (or every) employee be forced by law to disclose their entire medical history when applying for every job?

    And how disabled does a person have to be before they are classed as disabled? And whose choice should it be to lower the minimum wage for the disabled worker? Should the employer be able to demand it, or should the employee have to volunteer for the lower wage? If it is the latter, how free will the employee’s consent really be? Will the poor first be coerced into claiming disabled status, and then coerced further into accepting lower pay than they can actually live on? And will that not just drive down conditions for others near the bottom? It is a very slippery slope.

    Kristian Niemietz is right (in this instance at least) to note that:

    “The wage rate an employer is prepared to pay does not reflect his appreciation of an applicant’s human qualities, let alone of their ‘value’ as a ‘member of society’. It is merely the result of the interaction of demand and supply in the labour market, nothing more and nothing less.”

    And if supply exceeds demand then wage rates for those at the bottom will crash.

    The reasoning behind the minimum wage is not to reduce unemployment (although indirectly it may actually do so). Its purpose is to support low wages and prevent them from crashing to subsistence level or lower. And yes it is inevitable that at the margin a few jobs may be ‘lost’. However by supporting wages, vastly more people benefit by virtue of having increased incomes, not just those at the minimum wage level, but also those paid slightly above that level who will see their incomes rise above what would otherwise be the case. The result is that the spending power of the poor increases, and so too does economic activity. More money is put into the pockets of those who spend everything they earn, and more is taken out of the pockets of those that don’t.

    The corollary to this is that removing the minimum wage would probably send us back into recession. Perhaps that is why the Tories in particular have had to accept it in practice even if they dislike it in principle. In which case the argument generally put forward in favour of abolition is not an economic one, but one of comparative advantage for those who generally vote Tory.

    This debate about disability and the minimum wage is therefore not the right debate because the issue is not disability. The issues are poverty, full employment and long-term unemployment. The last of these could be better addressed by lowering employers’ National Insurance contributions when they employ the long-term unemployed, not lowering the minimum wage for already vulnerable groups.

    As for the issue of regional variations, surely the market should solve that problem? If a region like London has higher living costs, then low paid jobs should move to lower cost areas. If they can’t move (for instance because they are service sector jobs that serve the London area), then the shortage of labour should push up local wages for those jobs, so government shouldn’t need to intervene by increasing the local minimum wage. The market should do it itself. The resulting cost would be borne by the affluent local population, thereby making them less affluent. That is after all how markets are supposed to auto-correct. If that isn’t happening, then it is a market failure. So perhaps the IEA should consider that issue first!

  9. Posted 27/06/2011 at 13:11 | Permalink

    I prefer minimum wage waived for all special cases and localised.

    Seeing as each individual is a special case and that localism should, unless supported by exceptional reasons, mean that same individual, it means each person decides what their own “minimum wage” will be below which they will refuse employment.

Comments are closed.