So, I’m against minimum wage laws. That said, I’m open minded, and willing to have a valid debate about it. But my GOD it’s hard to have that debate.
It’s hard because when I try to have it, a lot of people would much rather have a different conversation with me instead. One about who is a cuddly, warm-hearted person, and who is an evil blood sucker who enjoys making poor people miserable. It’s a fun conversation for them, because everyone thinks they’re the former, and people who disagree with them are the latter, and we all love to feel morally superior. Unfortunately it’s a comic book view of the world, and the feelings of anger it tends to stimulate prevent clear thinking.
There was an instance of this sort of thing last week, when a junior UK government minister, Lord Freud, said for some disabled people the minimum wage law should be replaced with a minimum income. Partly because of what was either ignorant or cynical reporting, lots of people got very upset and shouty (here’s an example basically picked at random). I agreed with Freud (with a caveat, of which more later), and some of the Very Upset And Shouty People got very upset and shouty with me, too.
Now I can’t see in their brain, so I don’t know for sure what their thought process was. But after some discussions with them, I think it was a bit like: “I like disabled people. Freud proposed something which would hurt disabled people. Therefore he dislikes disabled people, and if you agree with him, you do too. So I dislike you. GRRRRRRR”. The problem with this is I think the second statement is false, which invalidates the conclusion.
There are three steps to deciding your position on a policy. Understanding what it says, predicting what effects it will have, and deciding whether the resulting benefits to the people it helps outweigh the costs to the people it hurts. When faced with a disagreement over a policy, people often jump to the third as the source of it, mistakenly assuming agreement on the first two. I believe that the Very Upset People didn’t understand Freud’s proposal, or what its effects would be, so when it came to the weighing of the costs and benefits they were looking at different calculations to me.
Actually, I don’t think they understand the existing minimum wage law at all, or else – given their undoubtedly noble intentions – they would likely be as appalled by it as I am. It’s not the case that the poor and disabled benefit from a minimum wage law and opponents like me begrudge them that in favour of rich corporate fat cats – the poor don’t benefit. In fact, in a perfectly competitive labour market, literally nobody benefits from a minimum wage law at all.
Minimum wage laws are not rules that require employers to employ people at a certain wage. They are rules that prevent employers from employing people at below that wage. They contain no legal obligations for anyone to actively do anything; only legal restrictions stopping them doing some things. They should probably be renamed “low-skilled employment bans”.
A wage is the price an employer pays an employee for their labour, which they do because it helps them to produce something which they can then sell. In a competitive market that price will tend to reflect the portion of the proceeds of the sale of the product that the employee’s labour is used to produce in preference to their competitors – known as their “marginal product”. If the employer offers any higher they will make losses and ultimately go out of business; offer less and the employee will find someone to outbid them. Similarly, if the employee demands more they will be ignored in favour of their cheaper peers; any less and they undercut themselves.
This is what Freud meant when he said that some disabled people “weren’t worth the minimum wage” – that what they can produce for employers cannot be sold for enough for the employers to be able to afford to pay them it and remain profitable.
So what is the effect of a minimum wage law in this idealised market? People whose marginal product was worth more than the new minimum are unaffected – they remain employed and earn the same. The only contracts that are affected are those involving people whose marginal product is worth less than it – i.e. the least skilled, the poorest, the most vulnerable – their previously available contracts are now illegal. Fearing jail, people won’t enter into them.
This sucks for the employers – they wanted to use this labour to produce more. And it sucks for the consumers – they wanted the option of buying those additional products. But most of all it sucks for those low skilled workers, who are no longer workers, they’re unemployed. And as bad as £2 an hour might sound to some of those Very Upset And Shouty People, it’s better than zero per hour. Again: literally everybody is worse off.
Now before I get accused of being a “naïve neoliberal” or something, let’s be clear that this perfectly competitive market is a fictitious model that does not describe everything in the world accurately. Competition is imperfect; information is scarce; and lots of things that exist in the real world don’t in the model: profit, and corporations, for a couple of obvious examples. The study of real market processes and co-ordination is a vibrant area of economics, in fact the one that I work in. So I’m not naïve.
But the example is important because it makes it clear that to the extent that there are any arguments in favour of a minimum wage, they must be based on evidence of imperfect competition in the labour market, and explain how this imperfect competition makes somebody benefit from a minimum wage at a cost to someone else that is acceptable. This is that “valid debate” I was talking about.
For instance, some macroeconomists, who tend to view the world in terms of aggregated statistics, may believe they have some knowledge about the sensitivity of the UK labour market to external changes. Other studies of real world data from the introduction of minimum wages claim that it’s hard to find bad effects, at least.
I and others counter that those macroeconomic models hide far too much of the complexity of the labour market to be convincing, and that looking at data from a complex evolving system before and after introducing some policy is not the same as comparing otherwise identical treatment and control groups, as they do in real science. But it’s worth talking about.
It seems likely to me that, if anything, imperfect competition would actually act to make the effects of the minimum wage law even worse. The biggest driver of imperfect competition is in the limited information of market participants, and it’s hard to see how outlawing some voluntarily entered contracts – by definition the best options the two parties can find – could improve their information.
But one plausible qualitative argument for who might benefit – and for the political reasons the laws persist – is that competing with the lowest skilled means that some more highly skilled (or unionised) workers are prevented from finding employers to pay them their marginal product, and so have to accept a wage below their labour’s market value. A minimum wage law could then potentially take some of that competition out, and make it easier for the more highly skilled to find those higher offers and raise their wages, at the expense of the now unemployed lowest skilled (as well as the employers and consumers).
So here’s the absolute best thing that I think can be said about a minimum wage law: some sort of econometric super being – one whose knowledge and abilities far outstrip the current experts – might be able to set a minimum wage law at such a level that with adequate certainty some of the richest parts of the poor do slightly better, while everybody else does worse. In this case, of those who are worse off, the poorest are most worse off.
A minimum income is better for (almost) everybody
I think that is a tough sell, especially compared to what Freud was proposing. To understand it we have to remember that what matters to a person’s standard of living is their income, not their wage. What he said was that some disabled people were languishing on unemployment benefits, because they were outlawed from employment by the minimum wage law. He claimed it would be better if the law were changed to allow them to work for what they can get, then have the state pay the difference between that and the minimum wage.
So: who benefits, and who pays? Start with the disabled people most pertinent to the question. If they can find someone to offer them, say £2 an hour, they can take that job and the state will pay them an extra £4.50 an hour – taking their income up to the minimum wage – instead of their current benefit rate. If it’s more, then they do that; if not they stay on benefits. Either way, they’re better off. Employers and consumers are also better off from the extra labour and available products, but probably not by as much as are the lowest skilled disabled people.
The only people who might not benefit are the general taxpayers. If the sum of the extra payments to top up wages exceeds the sum of current benefit payments, they will face a cost of that amount. Some of those won’t be either disabled, a potential employer of the disabled, or a potential consumer of the products of those disabled people, and they will be objectively worse off. I suspect there’s a level at which I – and Milton Friedman – would consider the cost acceptable to improve all those other people’s lives, but it’s a subjective question. And, of course, the new payments could be less than current benefits expenditure in which case literally everyone’s a winner.
So we can disagree, but on this basis, please. You are entitled to your own opinion, but not your own facts, as they say. I’ve presented my reading of those facts, and it’s entirely possible that I’m wrong. If so, please explain why. Do not assume you can see into my brain and decide who I care about. Even if it makes you feel all awesome and superior.
But there is that one caveat about Freud’s policy I mentioned. And it’s this: what’s so special about disabled low-skilled people that they should benefit from this policy? What have the able-bodied low-skilled workers done to deserve their punishment by the minimum wage law? I want to abolish it for everybody, and replace it with a minimum income. If you are a cuddly, warm hearted person, you should too.