14 July 2015

Iain Martin is wrong on the living wage

By Philip Booth

Iain Martin argues not just that George Osborne was right to raise the minimum wage but that: “It must feel good to be pure. While others make messy compromises, the hardened ideologue, convinced he or she at all times has unique insight into a central universal truth, can sigh and shake their head at the supposed idiocy of those who think the world is a shade more complicated than that.”

It would surely be better if those who support this policy tried to make coherent arguments for it rather than attempted to belittle those who honestly disagree with them. It does not feel good to say to people that it would be better if their wage were not raised by statute. It does not feel good to swim against the tide making arguments one believes are right because we believe it is important to do so to protect the weakest in society. And it does not feel good to have to put intellectual energy into these kinds of arguments when we could be making the case for genuine reforms of the welfare system or of the planning system which really would help the poor without the fallout that this policy might generate. How much better it must feel to believe one can suspend the laws of economics and simply legislate for a pay increase. How much simpler the world must look through the eyes of somebody who believes this is possible.

Those who support Osborne’s policy on the minimum wage tend to argue that the current minimum wage has not caused a rise in unemployment and therefore we can raise it further. It is, perhaps, a tribute to the competence of the Low Pay Commission that they have walked the tightrope given to them by the Blair government with a degree of success. This does not mean that there have been no side effects (see below), but aggregate employment has certainly performed well. If, however, you entirely change the philosophy of how the minimum wage is set, we can expect to get a different result.

It was so easy for George Osborne to gloss over the employment effects in the Budget. He passed over the 60,000 people who would not have jobs as if we were just talking about a number rather than 60,000 people. Who will those 60,000 be? Firstly, it will be those at the margins of the labour market. Secondly, it will be those who are already unemployed – short-term unemployment will turn into long-term unemployment as skills deteriorate and people find it difficult to reach the productivity levels that justify employment at the new minimum wage. Thirdly, it will be older people, perhaps those who wish to work for social reasons rather than to enhance their income. In addition, there will be many people who end up in insecure jobs or self-employed. Government officials – and clearly many commentators – like to think of unemployment as being a statistic. It isn’t. It is the aggregate of many statistics relating to sub-markets and each of those 60,000 people have families to feed. By way of example, although the minimum wage does not seem to have damaged employment overall, whether it is causal or not, there has been a huge rise in youth unemployment relative to overall unemployment that corresponded with the introduction of the minimum wage in 1999. To put it bluntly, our youth employment market now looks rather like the French youth employment market.

The response to reasoned arguments against the rise in the minimum wage does not consist of reasoned arguments but assertions. Iain argues that QE has enriched the rich. So what? Does this somehow reduce the employment effects of the minimum wage? He argues that opponents of George Osborne would be “perfectly relaxed” about wages falling to £1 an hour. Really? Who has said this? The argument we make is entirely different. If somebody’s productivity only justifies a wage of £1 an hour, then it is better for them to have a job and for the government to top up their incomes than for them not to have a job. Does Iain honestly believe that somebody whose productivity is so low that, in a free market, they could only earn £1 an hour will be employed by a firm for £9 an hour simply because the state says they cannot be paid any less? Will they not be one of the 60,000 sad cases who perhaps never work again?

Iain also says: “It is of course fine to say that thrusting young types will be happy to get paid miserable wages, because they are just passing through on their way to running exciting businesses and making bigger money later in life.” Once again, I have never heard anybody making that argument. We simply argue that, if people are to be paid more, then productivity must increase. Why do arguments that are not being made have to be invented? There are plenty of arguments opponents of the higher minimum wage are actually making.

We hear, over and over again, the argument that the government subsidies wages through the tax credits system. Iain believes that his arguments take account of the complexity of the world, but sadly they don’t. There is no theoretical model or empirical evidence put forward for this claim. Its proponents never even refer to the fact that 40 per cent of those paid the minimum wage come from households at the higher end of the income spectrum. By arguing that the reforms to tax credits (which will, independently, reduce the incomes of the poor directly and make it much more difficult for them to enter work) are compensated by “forcing companies to pay workers a little more” it is Iain who is refusing to engage with the complex reality.

Finally, Iain ends by arguing that the living wage will create “security” for workers. Again, please can we have reasoned argument and not assertion? For all its faults (and I would tear up the system and start again), the tax credits system provided security. The current minimum wage would ensure that nearly all could obtain work and the government would top up incomes for those who lived in households which did not have enough to live on. How does raising the minimum wage to a level which will not be determined by employment conditions create security? Has Iain, and the other proponents of this policy, thought about the consequences of an economic downturn with the level of the minimum wage being set in a highly charged political forum? Has he thought about the fact that 20 per cent of people will have their wages determined by the government without reference to their productivity? The one thing that continental Europe teaches us is that labour market regulation does not bring security.

A good economist is one who can understand both the “seen” and the “unseen” consequences of policy. It is the proponents of this policy who are ignoring the complexities of the issue. “Britain deserves a pay rise, let’s give it one” is hardly the height of sophistication when it comes to economic and political analysis.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham.