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June 23, 2006

Minimum Wage

Something for Neil Harding and other economic dunderheads. Like, say, She Who Must Not Be Named For 17 Days Or So.

This opposition by rightist types to a minimum wage is, of course, simply because we rightist types are rightists who want to grind the faces of the poor into the dirt so that we may abuse them further. Obviously there can’t be any other explanation for it.

So, how about a view of the minimum wage from someone who is not a rightist? An economist even? One well up there on the list of potential Nobel nominees? A John Bates Clark Gold Medal winner even? A stalwart of the New York Times editorial page?  Someone who, in more normal times (like when he’s not talking about economics) sends us righties into paroxysms of rage?

Mark Thoma digs out an old Paul Krugman piece (yes, for it is he) on the minimum wage.

Clearly these advocates very much want to believe that the price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.
They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist's reply is, if paying higher wages is such a good idea, why aren't companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage "compared with other companies" -- and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish.

Consider, for example, the effects of "Plan Y" (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500--and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline.

Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which--Card/Krueger notwithstanding--must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?
In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.

Worth reading the whole thing as the saying goes.

May I also just make plain and clear for people like Neil Harding and SWMNBNF17DOS, we rightists don’t oppose a minimum wage because we wish to continue to immiserate the poor, shaft them yet further. We oppose it because it doesn’t bloody work. OK?

June 23, 2006 in Economics | Permalink


As someone whose first very valuable work experience was at the hands of a slave driving, poor paying employer, I also have another reason to oppose it.

Those that do lose their job opportunities due to it, are precisely those who most desperately need to improve their job skills. Without the "curse" of a poorly paid job, their chances of moving up the ladder is zilch.

Oh and many people in this category would be those for whom English (in our case) would be a second language. So we curse them to a life of segregation by our progressive ideas.

Posted by: EU Serf | Jun 23, 2006 11:23:27 AM

Do you have a reference to any academic research on the minimum wage in the UK?


Tim adds: Why? Are the laws of economics different here?

Posted by: james C | Jun 23, 2006 12:10:09 PM

It's rather stating the bleeding obvious, but there are differences between the market for labour and the market for gasoline, which may mean certain types of interference work better in the former than the latter.

Posted by: Matthew | Jun 23, 2006 12:58:04 PM

The minimum wage is a stealth tax on employment. While employers have to pay more, the government shells out less in terms of welfare and even gains income tax where workers do enough hours to break through thresholds. At the same time, as Krugman points out, the low paid workers are little (or no) better off.

A minimum age also further stimulates the black economy. Those most vulnerable to genuine exploitation (eg thouse with poor English etc) have even fewer options.

Posted by: Bruce | Jun 23, 2006 12:59:16 PM

The reason I asked about academic studies of the minimum wage is because I am interested in knowing what actually happened.

I would have thought you might know of some since you have written lots of times on the subject.


Tim adds: Apologies, I thought that was simply a snark. The best place to get links to all those sorts of papers is stumbling and mumbling (in the blogroll). That’s where I get all of mine from anyway.

Posted by: james C | Jun 23, 2006 1:34:19 PM

"I would have thought you might know of some since you have written lots of times on the subject."


Posted by: Jim | Jun 23, 2006 1:38:21 PM

the "laws of economics"?

Sorry - but there's no such thing.

Posted by: rjw | Jun 23, 2006 2:07:54 PM

As for the MW itself, I think any serious investigation has to start by asking who typically gets it, and in which sectors they work, as that makes a difference to the likely effects.

One source of academic research is the following (LSE economists)


Posted by: rjw | Jun 23, 2006 2:19:16 PM

"As for the MW itself, I think any serious investigation has to start by asking who typically gets it"

One area that was hit very hard by the introduction of the minimum wage was the Royal Household, which had been paying servants about £2.50 per hour. It failed to survive the change, and closed down. See, Mr Brown, that's where your sanctimonious egalitarianism gets you.

Posted by: dave heasman | Jun 23, 2006 6:11:12 PM

"In short, what the living wage is really about is not living standards, or even economics, but morality."

So what's wrong with a little morality?

The UK has had a minimum wage since the last century (1999) what's gone wrong because of that? Hasn't the UK received workers from all over Europe and absorbed them and "illegal" workers from other parts of the world?

So other than being "moral" what's wrong with a minimum wage?

Posted by: SteveA | Jun 23, 2006 9:47:51 PM

Back to first principles of Capitalism - survival of the economic fittest.

If an organisation cannot afford to pay a statutory minimum wage then another organisation will take its place that can.

Posted by: Dave | Jun 24, 2006 1:42:52 AM

Some economic points.

1. I have already explained why companies find it difficult to unilaterally pay better wages. It is a SHORT TERM economic disadvantage. It is too risky for most companies unless they have huge resource advantages over their competitors. Like I have explained, it is governments that provide improvements in worker conditions that have LONG TERM benefits. Companies cannot risk long term planning. Without governments, markets collapse. The UK/US/German?Japanese economic miracles occured BECAUSE of regulation and government long term planning/investment NOT because of laissez faire. What Tim is arguing for is ZERO regulation and he is ignoring the monopolistic distortions that occur in the marketplace wage levels. We would be back to subsistence level wages and no health and safety if he had his way.

2. Paying higher wages to staff raises their loyalty and morale regardless of it being a minimum that all companies have to abide by.

3. Where is Tim's conclusive evidence for the MW having a detrimental effect on employment. Employment has gone up since the MW. Whereas the disastrous policies of the right wing caused mass unemployment.

Tim adds: So, you didn’t even read what Krugman said then Neil?

Posted by: Neil Harding | Jun 24, 2006 2:34:45 AM

The UK/US/German?Japanese economic miracles occured BECAUSE of regulation and government long term planning/investment NOT because of laissez faire.

That would be the economic miracle brought about by Thatcher, eh?

Posted by: Tim Newman | Jun 24, 2006 7:04:43 AM

For those that are interested, I have had a quick look on the internet about the UK minimum wage.

There is also an interesting discussion on brad de long's blog sbout the minimum wage in the US.

From what I have seen, there is no evidence that that the UK minimum wage caused the job losses that one would expect if the labour market were competetive-there must be something else going on.

Is this generally accepted to be the case, or are there studies which contradict this?


Tim adds: The general consensus, as far as I can see, is not that the MW should have caused large job losses. It should have caused a small amount (one estimate is `16,000 for the UK), and a larger amount of hours being cut. Which also seems to be what happened.

Posted by: james C | Jun 24, 2006 3:00:59 PM

A Thatcher economic miracle? A few years back I had a look at a set of figures on the Treasury website which showed growth rates for the 70s, 80s and 90s. They showed p.a. growth rates of 2.8% in the 70s and 2.3% in th 80s and 90s (of course the numbers may have been revised now). When was the UK economic miracle? The 50s and 60s I suspect.

Posted by: willia | Jun 24, 2006 7:19:57 PM

Tim Newman, I was thinking C19th British miracle and post-war for the rest.

Tim, I did read the Krugman article; he asks why companies don't raise wages without govt interference if it is in their long term interests. I explain they can't take the risk in the short term.

Krugman also states that morale is only raised when there is a increase in wages 'over' what other companies are paying. This is rubbish! The minimum wage increases low paid workers wages compared to the average, this will obviously increase loyalty and morale.

Krugman doesn't provide any significant evidence that a MW increases unemployment or reduces employment (the opposite in fact).

Of course a CBI is a better way of helping the poor. I have said this before, but until that day...

Posted by: Neil Harding | Jun 25, 2006 1:29:01 AM