Sunday, March 14, 2010

The minimum wage does NOT affect unemployment

Debunking the ongoing proto-Tory myth.

The debate that followed this article on apprenticeships and youth unemployment was hijacked by the Anti-Minimum Wage Crew.

Reprising an argument he'd already put forward here and here, Tim Worstall argued that countries like Denmark and Sweden have lower unemployment rates, including amongst the young, because "[N]either have a national minimum wage".

Worstall is spot-on when he argues that: "[O]ne of the vile things about the UK's current taxation system is that it reaches so far down the income scale [and that] it's possible to be working part-time on the minimum wage and be paying income tax". But the problem there is the tax system, not the minimum wage.

Which is why Worstall is wrong when he writes that "there really is an unemployment effect" caused by the minimum wage, effectively echoing what the Conservatives (including a younger David Cameron) were saying when the Minimum Wage Act was implemented back in 1999: "it would send unemployment straight back up". It never happened.

The argument is flawed on so many levels that it's even difficult to know where to begin. Especially because the causes of unemployment are so complex, both politically, geographically and historically, that it's actually unfair to point at black and white causes and solutions.

Either way, for a libertarian to cling on to Denmark and Sweden as market models is quite peculiar. Redistribution there may not take place in the flimsy guise of a National Minimum Wage, but their top tax rates would cause a free marketeer a seizure. It's 58% in Denmark and 55% in Sweden.

The whole ratio behind the introduction of a National Minimum Wage in the UK was precisely to enable people to earn something closer to "a living", without affecting the overall tax structure.

Also, Denmark may not have a state-imposed National Minimum Wage, but that's because there is already one that was privately knocked out together by the Danish Trade Unions and the employers' organisation covering 81 to 90 per cent of the national workforce. Incidentally, it is so low that virtually all Danish workers are paid above the minimum rate anyway.

In any case, when most countries compare their economic variables with Scandinavia, they tend to come off worse. I don't believe unemployment in Denmark is lower than in the UK because of the minimum wage any more than I believe lower temperatures can explain Scandinavia's lower corruption levels.

Italy -with a population very similar to Britain- has never had a National Minimum Wage. Yet it's joblessness rates have consistently been higher than the UK since the NMW.

Take a look at this comparative table. At the end of 1997, Italy's rate stood at 12,2% vs 6,8% in the UK.

The rate went down in both countries throughout the Noughties. Italy reached its best moment in 2007-8 at 6.1%, its levels though still higher than the UK, where the joblessness rate remained consistently under 5 per cent between 2003 and 2006.

It's also worth noting that, in 2003, Italy adopted labour laws that are amongst the most "flexible" in Europe. While casualisation sky-rocketed and it became fantastically easy and cheap for employers to hire and fire, this did little to stem the massive downturn when it hit in 2008.

Again, Italy's unemployment went back up. As of March 2010, it stands at 8,6%. Though at their worst since the early Nineties, Britain's rates - currently 7,8% - are still lower than Italy's.

Britain has a mimimum wage, Italy doesn't. Would that be enough to explain the different performances if we were to follow Worstall's logical fallacy?

If that wasn't enough, we could look at other variables. Focusing on Britain alone, we can return to this table. Look at how high unemployment was in the pre-minimum wage days, through both the 1980s and the 1990s.

Or we can look at the United States, instead. Like Robert E. Prasch wrote in his In Defense of the Minimum Wage, "[B]etween 1981 and 1990, government policy allowed inflation to erode the value of the federally mandated minimum wage".

The neo-liberals in the Reagan and Bush Sr administration promised that a total freeze in the minimum wage
would induce businesses to hire and provide experience to more unskilled workers. Compare the joblessness figures of 1979 (5,8%) with 1990 (5.6%). Like Prasch notes, "the structural reduction in unemployment simply failed to happen".

If anything (see this), US unemployment peaked in the 1980s and went down consistently throughout the 1990s, when the minimum wage was raised repeatedly for the first time since the 1970s.


Tim Worstall said...

"Incidentally, it is so low that virtually all Danish workers are paid above the minimum rate anyway."

Quite, a point I've often made. When and whether there are significant effects from a minimum wage depends on the ratio between that min wage and the average wage.

Note the importance of the word "significant" there.

asquith said...

I must say that I appreciate my own contributions to that Lib Con thread. I am generally much more economically liberal than you, & anti-statist, but I have argued in favour of the minimum wage, I'd like to hope reasonably well.

"If the minimum wage were done away with, people wouldn’t jump for joy that they had been “liberated”. They would claim means-tested benefits immediately, as wages of £1 or £2 per hour are not enough to live on. It would cost the government a fortune make the tax credits system look like a triumph of administration & forward planning. Plus, you’d get your pocket money workers (such as mothers whose husbands earn enough to live on but who want a bit more spare cage) leaving the workforce in droves.

Maybe in a libertopia where there as a CBI etc etc, it might work. But no such thing is on the horizon."

"Worstall & his pals have still not addressed my point, which is that in the real world, if there were no minimum wage low-paid workers would be claiming means-tested benefits in order to make ends meet, which no one would view as a good outcome. Maybe having no minimum wage would work if various other factors were in place, but no remotely electable party proposes them.

Also that those who are not in dire need of the money from their earnings might not bother to work because their jobs were just a supplement to the household income rather than a necessilty, which would of course lead to fewer workers in the workplace."

When you get people like Chris Dillow etc coming out with their arguments, they are essentially not dealing with things as they are. The fact is that we do not have a level playing field, equality of opportunity & meritocracy are just slogans, & we have to wake up in the morning in that stuation.

We have also to consider electoral politics & the simple fact that you can't just decide to bring in the Swedish/Singapore/Mongolian model because you've read in a book that it's a good idea.

You know, one of my formative experiences was volunteering in a CAB, it was more than a year ago but I remember it. It made me take a dim view of means-testing, & actually become somewhat less "left-wing", but I think I developed a closer understanding of life at the sharp end.

So I suppose I could do with having more of a wonkish job because, thus, I could really learn what it's all about at work. But I automatically run any ideas through the mental equivalent ofthe "Quick Benefit Calculator" I used to enter clients' details onto.

the patriot said...

Three things...Hoping that you don't censor this comment.

You write that the min wage is a tool for redistribution that doesnt affect the tax system. It's not true. The only person bearing the financial burden for fighting poverty is the business owner who has to pay his workers minimum wage.

The min wage contributes to inflation. If a businessman is suddenly forced to pay his workers £7.25 an hour instead of £6.55 an hour, he needs to raise the price of his product to make up for the costs.

most minimum wage workers provide second or third sources of income to a household and are often middle-class kids working thru university or summer jobs.

Newmania said...

Either x people are prepared to offer their Labour below the minimum or they are not. If they are not there is no point in having it .If they are , then, assuming these people are not deliberately earning less than they could, a fixed tarrif will distort the market by preventing them from obtaining employment.

How could that possibly not be true ?

asquith said...

"most minimum wage workers provide second or third sources of income to a household and are often middle-class kids working thru university or summer jobs."

You're right, I pointed this out, but I used it in support of my argument rather than yours.

These people wouldn't be destitute if they stopped work, they'd just be a bit inconvenienced by having a bit less beer money. So it is that if, in a libertarian utopia, their wages were slashed they might just not bother to come in tomorrow, leaving economically fairly useful jobs undone.

I think it's a lot more complicated than just saying "Yes, but others will take their place". There are all sorts of reasons why students, married women, older people close to retirement who are slowing down but still do a bit of work, etc. are more desirable to employers than the local jobless.

As we saw in the 1980s, sometimes people can't get jobs however low wage rates are, & this would be the case if there were no minimum wage.

I still maintain that the likes of Worstall are speaking of their ideal world, in which a series of factors are in place, but they aren't & are unlikely to appear in any electable government's programme.

No one has yet addressed how the people who support families etc. whose income has been slashed are meant to support themselves. In the real world it would be through means-tested benefits, whose ill effects we surely know about by now, & whose extension under Labour I slag off as grossly inefficient & containing perverse disincentives.

Ben E said...

I see Newmania and the Patriot have never had the market liberated experience of actually working in minimum wage jobs. Based on personal experience and a rudimentary grasp of economic theory I can assure you that their argument holds about as much water as a paper hat.

It is true that if it is not economically viable to employ people at a rate where the business can make a profit, then the it is unlikely the business will get off the ground. This is not a bad thing! It drives entrepreneurs to create businesses that provide for economic stability by encouraging a voluntarily loyal workforce. It discourages the type of enterprise where the margins are so low as to be riddled with risk. So I should blame employees because I have to spend time creating a business plan that isn't predicated on exploitation? Woe is me!

The idea that because it's all part time students then it's ok to exploit is just utter nonsense. Notwithstanding the lack of evidence that it is mostly students (and my personal experience is that is isn't), it still doesn't justify paying pisspoor wages. So we should increase levels of student debt then tax the bollocks off them to repay their student loans? Brilliant! That'll lift the lower classes out of poverty!

Fact: every employer I ever did minimum wage work for was a wanker. Get rid of the minimum wage and it's just state-sanctioned wankerism. If that's the kind of society you want to live in then piss off to Detroit.

claude said...

Of course, I'm with asquith and Ben E all the way.

Let me just say that, unless I've been struck by amazing coincidence, it is NOT TRUE that only (or mainly) students do minimum wage jobs. There were a load of "adults", with or without families, whose life had been unkind enough to force them to look for shitty, sweaty, nasty work that was barely paying above dole rates.

I remember those days. 1999 and, by being on a staggering, greedy £3-60 an hour, me and other cleaners, bar staff and waiters were definitely sabotaging the employment rate and distorting the market.

Unlike, of course, the buy-to-rent lobby, the speculators, the City people and the banks who topped up the entire population's wages with loans, plastic and 110% mortgages. They didn't distort the market. No.

Daniel Hoffmann-Gill said...


A libertarian cherry picking ideas from non-liberatarian regimes in order to try and fail to prove a point?

What next?

A concession that libertarianism is unworkable, unpopular tosh?

Quantum Moon said...

Well done to asquith for suggesting married women basically work for beer money, you've just set back feminism by 50 years.

Sadly we haven't got past thinking of men as breadwinners, so its easy to dismiss those on minimum wage as the majority is female. But not all women have a man to look after them, and those who do shouldn't be forced to stay by economic necessity as they don't earn much themselves. Saying people on low wage don't need it anyway may make people feel better about paying degrading wages, but it does ignore the reality for millions of people living in poverty.