Notes
This is not the first time this subject has been covered on the IEA blog – but the point needs repeating. We should remove all impediments to employment in a recession and this should include a suspension of the minimum wage – or at least a reduction to its 2006 level. Other labour market regulation should be suspended too. This could be done in a pragmatic way – for example creating a 12-month or 24-month waiting period before employment regulation applied to new contracts.

Last week, the President of the European Central Bank said in a speech that the ECB was asking governments to borrow more money to keep economies going in the recession. If the ECB regards it as its job to promote fiscal remedies that are likely to be unsuccessful then why does it not promote labour market remedies that are likely to reduce the extent of long-term unemployment arising from the recession? The employment effects of the 1990s recession were much shorter-lasting than those of the 1980s recession because of the liberalisation of labour markets. We need to return to those more liberal days, if not in the EU as a whole, at least in the UK.

The minimum wage is particularly important in times of falling employment – times through which it has never been tested. Its level can be set such that it does not significantly reduce employment during good economic times, but what then happens when jobs are lost?

Workers who lose their jobs generally have to take jobs in areas where they are less highly skilled and experienced. Whether it is because of the costs of retraining or the lower levels of productivity in alternative occupations, the wage an employer is willing to pay may be below the minimum wage – especially for the most vulnerable groups (the old, the young, the disabled and the poorly educated). If such people cannot get jobs quickly after losing a job, because the minimum wage prices them out, their skills deteriorate and their productivity falls further below the minimum wage and a vicious circles sets in. We then end up with an “insider outsider” labour market. That is something that we must avoid.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

12 thoughts on “Time to suspend the minimum wage”

  1. Posted 20/02/2009 at 10:49 | Permalink

    The final point about an ‘insider/outsider’ labour market is a good one; but of course that is precisely what we now have with many aspects of Employment Law heavily weighted in favour of existing employees. That means they are weighted AGAINST both employers and not-yet-employees. As usual the politicians concentrate on what is immediately seen and ignore what is slightly longer-term or indirect. And we must not forget the politicians’ (of both parties) responsibility for the truly dreadful state education system, which releases people after more than ten years, about twenty per cent of whom seem to be virtually illiterate and innumerate with hopeless attitudes — in fact, unemployable.

  2. Posted 20/02/2009 at 10:49 | Permalink

    The final point about an ‘insider/outsider’ labour market is a good one; but of course that is precisely what we now have with many aspects of Employment Law heavily weighted in favour of existing employees. That means they are weighted AGAINST both employers and not-yet-employees. As usual the politicians concentrate on what is immediately seen and ignore what is slightly longer-term or indirect. And we must not forget the politicians’ (of both parties) responsibility for the truly dreadful state education system, which releases people after more than ten years, about twenty per cent of whom seem to be virtually illiterate and innumerate with hopeless attitudes — in fact, unemployable.

  3. Posted 20/02/2009 at 11:04 | Permalink

    Agreed, but it is a mistake to just focus on NMW and regulations. Getting anywhere near full employment requires a four pronged attack:

    1. Reduce or scrap Employer’s National Insurance (and ultimately VAT, which is an indirect tax on jobs and investment).
    2. Deregulate.
    3. Reduce income-related benefits withdrawal, so that there is a real benefit to claimants who take on a part time, low paid or temporary job.
    4. Scrap NMW.

    Labour’s mantra about “minimum wage and tax credits making work pay” is A Big Fat Lie, the two actually cancel out (click my name for worked example).

  4. Posted 20/02/2009 at 11:04 | Permalink

    Agreed, but it is a mistake to just focus on NMW and regulations. Getting anywhere near full employment requires a four pronged attack:

    1. Reduce or scrap Employer’s National Insurance (and ultimately VAT, which is an indirect tax on jobs and investment).
    2. Deregulate.
    3. Reduce income-related benefits withdrawal, so that there is a real benefit to claimants who take on a part time, low paid or temporary job.
    4. Scrap NMW.

    Labour’s mantra about “minimum wage and tax credits making work pay” is A Big Fat Lie, the two actually cancel out (click my name for worked example).

  5. Posted 21/02/2009 at 03:29 | Permalink

    Minimum wages are merely a way of injecting demand into the economy. Job creation which results is not therefore, real jobs but another form of state provision.

  6. Posted 21/02/2009 at 03:29 | Permalink

    Minimum wages are merely a way of injecting demand into the economy. Job creation which results is not therefore, real jobs but another form of state provision.

  7. Posted 21/02/2009 at 08:59 | Permalink

    While I have the same name it seems we differ in views – I was going to write a response to this post but came across The Guardian’s editorial on Monday:http://www.guardian.co.uk/commentisfree/2009/feb/16/praise-minimum-wage
    What we really need is a Living Wage:http://www.newstatesman.com/uk-politics/2008/08/living-wage-london-cleaners
    And in terms of economic answers look no further than:http://www.greennewdealgroup.org/

  8. Posted 21/02/2009 at 08:59 | Permalink

    While I have the same name it seems we differ in views – I was going to write a response to this post but came across The Guardian’s editorial on Monday:http://www.guardian.co.uk/commentisfree/2009/feb/16/praise-minimum-wage
    What we really need is a Living Wage:http://www.newstatesman.com/uk-politics/2008/08/living-wage-london-cleaners
    And in terms of economic answers look no further than:http://www.greennewdealgroup.org/

  9. Posted 21/02/2009 at 21:21 | Permalink

    Gerry O’Neil:

    HOW does a minimum wage inject demand into the economy? The Min Wage simply takes £X.00 from the employer and gives to the employee. There is nothing additional here at all. Its merely an exercise in income redistribution (ultimately job destruction but thats another story).

    By all means wax lyrical and at great length about the role of the Min Wage in achieving sthg you would call social justice as there could be substance to that argument. But any suggestion that a Min Wage acts to increase aggregate demand in the economy is nonsense – pure and simple.

  10. Posted 21/02/2009 at 21:21 | Permalink

    Gerry O’Neil:

    HOW does a minimum wage inject demand into the economy? The Min Wage simply takes £X.00 from the employer and gives to the employee. There is nothing additional here at all. Its merely an exercise in income redistribution (ultimately job destruction but thats another story).

    By all means wax lyrical and at great length about the role of the Min Wage in achieving sthg you would call social justice as there could be substance to that argument. But any suggestion that a Min Wage acts to increase aggregate demand in the economy is nonsense – pure and simple.

  11. Posted 22/02/2009 at 22:01 | Permalink

    Philip Booth: nice to hear from you. Is this is a third PB? There is also the one who campaigns against ID cards: if that is you, I wish you well. The Guardian is missing the point (and I suspect missing the point of Chris Chope’s move too though I don’t know anything about that). I was quite specific in talking about the problems that might arise when people have to move into less productive occupations in a recession. I happen to think it wrong to have a minimum wage at all times, but you cannot judge the effect in a recession by the effect when employment is expanding rapidly. I believe we have the second highest minimum wage in the EU: we do not want similar structural unemployment rates

  12. Posted 22/02/2009 at 22:01 | Permalink

    Philip Booth: nice to hear from you. Is this is a third PB? There is also the one who campaigns against ID cards: if that is you, I wish you well. The Guardian is missing the point (and I suspect missing the point of Chris Chope’s move too though I don’t know anything about that). I was quite specific in talking about the problems that might arise when people have to move into less productive occupations in a recession. I happen to think it wrong to have a minimum wage at all times, but you cannot judge the effect in a recession by the effect when employment is expanding rapidly. I believe we have the second highest minimum wage in the EU: we do not want similar structural unemployment rates

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