Why I, a liberal economist, like the Minimum Wage

Liberal Vision have hosted a post by Rob Waller of the Libertarian Party on the Minimum Wage (he usually blogs here).

Now you might remember from comments below this post about the absence of good right wing economics sites that I am sceptical of libertarianism for being simple minded.  It ticks the box of Econ 101 thinking perfectly: the supply and demand graphs are given, the historical/path-dependent, dynamic aspects of economics are missing or buried, and the real world evidence that things do not always meet neatly at the cross of the S and D is somehow ignored.

Sadly this post does nothing to disabuse me of this belief. Here are the objections to paying above the Min W:

The first and most obvious is that it raises the cost of business — unnecessarily — as businesses are forced to raise the wages of low skilled employees . . . The second — and most important — reason is that the minimum wage will never actually raise the value of labour. It is impossible to raise an asset’s value by simply declaring it has a greater value.

A mighty big straw man is knocked over right there.  The intention of the minimum wage is not, surely, to tell people blindly what labour is worth.

It is to change the incentives for businessmen.  Being skin-deep, libertarian economics can only look at the first-order question: given my existing markets, levels of capital, technology and so on, what would putting a floor under a wage level produce? And then, yes, the answer is obvious.   Higher W, lower Q of Labour.  Easy.  Vote Libertarian.

But there are other decisions.  When a business makes decisions, it also decides what mix of capital (K) and labour (L) to work with.  In France, for example, the (overly) restrictive laws on hiring and firing put a large cost on hiring labour.  So decisions are biased in favour of K.  So each unit of L has more K to work with and – hey presto! – France also comes out as a more productive economy.

But France botches it, in my view.  It produces a sort of two-tier economy – one where there are a number of high-value jobs, secure and life -long, but then a lower employment rate.  The UK economy has 31 million employed, the French just 28million. Same population.

Would the minimum wage produce the same result for the UK?  I don’t think so.  It is a floor, not a general levy on all labour at whatever level.  What it does is, in effect, say to businesses:

‘If you are looking to found productive enterprises, you must do so on the basis of relatively valuable labour.  Why?  Well, if you start running businesses that are so unproductive per capita that you can only make profits when paying 3 pounds per hour you will:

• be passing on many of the social costs of low-waged labour onto society in general (tax credits etc).   That is clearly ineffecient, or wrong.
• be contributing to the UK being on the wrong economic model. ‘

What does the last point mean? Recall the massive debate about why Europe pulled ahead of China (from Right to Left).   In a nutshell, human society breaks free of drudgery and gets into  prosperity when it starts becoming more productive per head of labour.  There is a compelling case for saying that Europe pulled ahead because its starting conditions tended it towards being more productive per head: and therefore, towards having a big incentive to creating labour-saving machines.  Whereas the Japanese, for example, were geniuses at finding ways of being more productive per acre: they could get so much rice out of a paddy field, it was silly.

Trouble is, this implied a massive, continuous use of low-paid labour.  Weeding continuously.

The minimum wage is good because it skews British incentives towards doing things that ultimately increase the productivity of each person, as opposed to finding any way possible to make economic value, even if that means getting teams of adolescents to do lots of low value things.  It says ‘below here, we will not go’.   Ultimately, inequality is solved by increasing the productive potential of individuals, through education and higher capital per head.

Investment, education, rather than trapping people in low-learning zero potential jobs just because it suits the sort of simple minded economics that only libertarians fall for.

(BTW, if the minimum wage were 10 quid, I could see the point.  But 5.80?  jeez).