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March 24, 2005

Bad, Bad Minimum Wage.

So the introduction of the minimum wage is one of the glories of Nu Labour’s management of the economy eh? Raising the incomes of the working poor with no ill effects eh? As we were reminded by Mr. S&M, this is not quite true:

Tony Blair today announced plans to cut the jobs and hours of low-paid workers.

He’s going to raise the minimum wage, from £4.85 an hour to £5.05 in October. This as the Low Pay Commission recommends in its report today; it also recommends a rise to £5.35 in 2006.

The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.

That’s what theory says should happen, what about what actually did happen?

The introduction of the minimum wage led to employers cutting the number of hours that staff worked, new research showed yesterday.
In a paper presented at the annual conference of the Royal Economic Society, Professors Mark Stewart and Joanna Swaffield claim that paid working hours have fallen by between one and two hours a week for low-income staff.

My, my, what a terrible surprise that is, economic theory and empirical evidence actually agreeing with each other! Remember, too, that this cut in hours occured at the same time as unemployment fell to 25, 30 year lows, many companies screaming about the difficulty of finding  labour.

Let’s all clap hands and believe in fairies shall we, our Lords and Masters in Nu Labour apparently having as much knowledge of the science of economics as Tinkerbell herself.

March 24, 2005 in Economics | Permalink


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» Wages up, employment down? from Web of Contradictions
Objecting to my welcome of the recent rise in the minimum wage, Tim Worstall affirmed it was bad idea because, as we all know, raising the minimum wage will, other things being equal, reduce the demand for labour thus incr... [Read More]

Tracked on Oct 8, 2005 8:29:50 PM


From the article, "about one quarter of the increase in basic weekly earnings of minimum wage workers was clawed back by the estimated reduction in basic hours" - so mimimum wage workers were left better-off by 3%, instead of the 4% that would have been the case had the wage increase had no impact.

They also had to work fewer hours - no bad thing, given that most minimum wage jobs are not quite up there with vet or engine driver on the job-you-do-for-the-love-of-it stakes.

Overall, the study shows that raising the minimum wage has increased the standard of living of Britain's poorest workers...

Posted by: john b | Mar 24, 2005 10:32:46 AM

Sorry, my percentages are nonsense - should be an income rise of 26% instead of 35%.

Tim adds: there is also, as MrS&M points out, the effect on those who do not get jobs at all at the higher wage.

Posted by: john b | Mar 24, 2005 10:34:36 AM

And over the water in Froggy French France they have just repealed the 35 hour week - because even Chirac forced to admit it was a total disaster. Labour market restrictions suck - the stupider they are the worse they suck.

Posted by: Patrick W | Mar 24, 2005 11:13:41 AM

there is also, as MrS&M points out, the effect on those who do not get jobs at all at the higher wage

Hard to make this case with the unemployment rate as low as it is.

By the way, your commenter Patrick W appears to be unaware that Chirac's party campaigned long and hard against Jospin's introduction of the 35 hour work week and have been trying to get rid of it ever since they took hold of the Parliament. This is rather like saying "I see that the British have abandoned Clause 28 on teaching homosexuality in schools because even Peter Mandelson could see it was a disaster".

Tim adds: Tsk, Tsk, Mr Davies. The test is not whether we have a high or low unemployment rate, but would it be higher or lower in the presence or absence of a minimum wage.

Posted by: dsquared | Mar 24, 2005 11:39:18 AM

I believe in a Minimum Wage, however I also believe that it should be set at the level that means the State isn't required to supplement it, (and no higher).

After all, if benefit payments pick up part of the wages tab for employers paying poverty wages then this is an unfair and hidden subsidy to these bad employers.

Posted by: David Wildgoose | Mar 24, 2005 12:56:48 PM

Surely, at the very least a minimum wage will impair employment where (1) there are local unemployed who are thus forbidden to price themselves back into work, or when (2) a country, or locality, is trying to recover from its next recession? It's just the usual vote-buying trick isn't it: you who are in work may reward me with your vote for your higher pay rate, while those of you whom I have cast out of work, or restrained from returning to work, won't know enough to blame me and punish me at the polls.

Posted by: dearieme | Mar 24, 2005 3:36:24 PM

Since the unemployment rate is currently 4.7% and can't realistically be any lower than 1-2%, it is, as I say above, hard to argue that it would be that much lower without a minimum wage. Whatever one thinks about "those who do not get jobs at all because of the minimum wage", there can't be all that many of them because total unemployment is only 1.41m.

Posted by: dsquared | Mar 24, 2005 5:32:34 PM

That would be a more convincing argument if anyone thought that the unemployment numbers measured unemployment. Once they omit the discouraged, the fake disabled, etc, they lose a bit of explanatory power, do they not?

Posted by: dearieme | Mar 24, 2005 6:59:12 PM

i think that a minimum wage should not be imposed in the UAE

Posted by: Abdulla | Mar 25, 2007 4:58:02 PM