When you get stuck on the tube, and hear the driver’s voice on the loudspeaker saying ‘we are currently being held here at a red signal’ – do you sometimes feel a flash of anger at said red signal? Do you feel like shouting at the driver to ignore the damn thing, and press ahead anyway? To me, at least, this happens all the time. It is entirely irrational, the kind of response one would expect from the tribesmen of the Tintin comics if they were suddenly exposed to a modern city environment. But it sure feels right.

Economic debates are often driven by similar urges, but there is one big difference to the tube situation: we are terrifically good at making up sophisticated justifications to rationalise them. The ongoing debate about the Living Wage (LW) is a perfect example. The LW, supporters argue, is a tool businesses should use to boost staff morale and decrease absenteeism. Boris Johnson, apparently a belated convert to Keynesianism, has praised the LW as an economic stimulus: if you pay people more, they spend more, thus kick-starting the economy. It is also good for society, argues Fiona Phillips: if parents need fewer working hours to make ends meet, they will have more time to spend with their children, which generates social capital.

The possibilities to rationalise pro-LW intuitions are endless. I even have a few proposals myself:

People who are paid the LW…

…can afford healthier food. This will lower obesity rates, blood pressure and cholesterol levels, leading to future cost savings in the NHS.

…can afford to invest more in home insulation, which will lower their carbon footprint.

…have more money to give to charity, or more time to volunteer in local community projects.

The problem is that none of these arguments, neither the genuine ones nor the ones I made up, are really arguments in favour of the LW. All they really are is a description of some of the benefits of greater prosperity. And that is why they all thoroughly miss the point. Nobody (apart from radical environmentalists etc) is opposed to greater prosperity. But we do not reach greater prosperity by shouting at employers to pay more – for the same reason that we do not reach our destination quicker by shouting at the tube driver to ignore the red signal and drive ahead anyway.

Economists notoriously disagree about almost everything, but one of the few things which most of them agree on is that prices and wages are signals – signals of scarcity, which coordinate economic activity. We cannot ascribe moral qualities to them, and we cannot meaningfully apply terms like ‘fair’/’unfair’ or ‘just’/’unjust’. They are as morally neutral as the red signal in the tube tunnel.

Red signals as such do not cause delays; they are caused by factors which we do not see while stuck in the tunnel, and the red signals indicate their presence. In the same way, low wages are merely signals of underlying economic factors. They could signal that a sector or a profession is ‘oversubscribed’, in the sense that many people want to work in them but only so many can be accommodated. Or they could signal that many people lack marketable skills, probably as a result of deficits in the education system, and in vocational training in particular.

And this is why the LW debate is so counterproductive. By implying that low living standards were merely the result of employers’ miserliness, we lose sight of their real causes. Why bother with mundane topics such as vocational training, if all it takes is talk about the benefits of higher pay?

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He 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). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.

1 thought on “The Living Wage campaign: shouting at red signals”

  1. Posted 09/11/2012 at 16:39 | Permalink

    I’m not sure David Ricardo would agree.

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