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Guest Post: Labour hail the Minimum Wage

September 29th, 2009 Posted in Economics, UK Politics by

labour2It seems Nu-Labour are just desperate to remind us of all their ‘good’ policies. Probably because there is an election coming up and they’ve destroyed the economy, public finances, Iraq, Afghanistan, the Education system…

Anyway, one of the ‘good’ policies they wish to remind us of is the minimum wage. Which was recently promoted by Jack Scott on Labour List

Next week, the minimum wage will rise to £5.80. Since it was first introduced in the teeth of Conservative opposition, the minimum wage has risen by 81.25%, far outstripping a decade of low inflation. Does anyone believe the Tories would have raised it above inflation so consistently?

Since its introduction, Labour has also legislated to ensure tips do not count towards the minimum wage and that there are the toughest powers in Europe for rogue employers who break the law. The

Conservatives voted against the introduction of the minimum wage and its strengthening, which went through Parliament last year.

In addition, David Cameron opposed longer maternity and paternity leave and flexible working – so much for Cameron’s compassionate conservatism.

Only a Labour government can truly protect workers’ rights. The minimum wage remains one of Labour’s most powerful expressions of our values in action. I am immensely proud of the difference it makes to the lives of the UK’s million lowest paid workers.

For socialists and Nu-Labour the minimum wage is a traditional, social good. It takes profits from evil capitalists and shares it among the workers. Hurrah!

However, in reality it is debatable whether the minimum wage is a social good. In fact I would argue it isn’t. And they’re are two main reasons for this.

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. And this is an important point. Because while it may seem that there are lots of evil capitalists out their making huge sums of money by exploiting workers the truth is very different. The majority of businesses are SMEs which make very small profits. So whenever costs of business go up these businesses are under threat as their profit margins are much smaller than the ones enjoyed by the Tescos of this world. And of course this therefore puts many jobs at risk.

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. Or at least it’s not possible to do this for very long. The reasons for this should be obvious. It is because the factors that influence value — such as supply/demand — don’t actually change simply because of some government declaration.

For example imagine it was decided that bakers were the most important part of our economy and that they were being underpaid for their fine work. The government therefore sets a National Minimum Bread Price of £3 per loaf. Sounds great for the bakers. But this action is unlikely to make bakers better-off or happy. Instead it will probably cause people to buy less bread. Because in real terms the bread has become no more valuable — so why will people pay more for it?

And the same rules apply for the value of labour. One of the main consequences of the minimum wage is it makes low skilled workers less employable. Because unless your skills/labour are worth £5.80ph or above, who will employ you? No-one. You’d have to be a very poor business man to employ someone who’s work was not worth the money you paid them.

People should be very hesitant to support the minimum wage. Because while it sounds nice on the surface it has a number of drawbacks. It jeopardises business profitability — which risks jobs. And it makes many of the low skilled unemployable. Which means they may never acquire the experience or skills that will help them gain higher wages in the future.

Ultimately if people want to improve the lot of the lower paid it can only be achieved by generating more wealth. And that cannot be achieved by placing undue burdens on business or creating limitations to employment. So if you are a Nu-Labour supporter I think you need to search a little harder for those ‘good’ policies that you are trying to remind us of.

Rob Waller sits on the NCC of the Libertarian Party and regularly posts for the LPUK South East Blog.

14 Responses to “Guest Post: Labour hail the Minimum Wage”

  1. Julian Harris Says:

    Largely agree, especially the benefit this grants to large businesses who can easily cope with higher wages and burdensome regulations, thus giving them an advantage over SMEs.

    However, isn’t bread supposed to be a Giffen good? Although it’s quite possible that this has now changed (ie. we have more carb-substitutes).

  2. Tom Papworth Says:

    First, the minimum wage:

    The minimum wage, like any other centrally mandated price, affects supply and demand. Set a minimum on a price and one creates an excess of supply; in this case, lots of unemployed people.

    What advocates of the minimum wage fail to realise (or rather, accept) is that the alternative to paying a low-skilled worker £5/hour is not paying a low-skilled worker £6/hour; the3 alternative is not to pay them at all. If the worker can only produce £5.50-worth of outputs an hour then a minimum wage of £6/hour renders them unemployable. With 2.5m currently out of work and wages actually falling in many industries, the minimum wage is aggravating the problem.

    Part of the problem is that socialistically minded people tended to view “value” in terms of human dignity rather than in material output. They argue that a person is “worth” no less than (in the case of the UK) £5.80/hour, because that is the price of human dignity. However, the would-be employer would argue that the employee is worth only what they can produce, and so chooses not to employ them.

    I suspect that the minimum wage is the reason why, even during Labour’s artificial boom, unemployment never fell much below 1m and employment never rose above 80%.

    One final note: the sole means of pushing up wages is to increase the productivity of labour. This is best achieved through capital investment in machinery, training and process improvements. Thus attempts to tax profits and wealth are also harmful to workers.

    Second, Giffen Goods:

    I don’t think that bread is a pure Giffen Good. One quickly reaches a maximum level of consumption with bread (and other foods) where the increase in demand is reflected in quality rather than quantity.

    That’s why our affluent societies devote wealth to allowing chickens more room to move and will buy organic foods even though the yields-per-acre are lower.

    That is also why the proportion of our outgoings devoted to subsistence (i.e. basic foods) has dropped so dramatically over the past century.

    Thirdly, “Nu-Labour”:

    Can we please stop referring to the Labour Party as Nu-Labour. Firstly, it was New Labour; the prefix “Nu” was used to emphasise the fact that it was an artificial marketing ploy. This may have had some saliency in 1999 but by 2009 it looks redundant.

    Secondly, Labour dropped the “New” some time ago along with many of New Labour’s champions (though one of the main ones is back).

    Finally, rather than drawing old Labour supporters away from Labour (which it may have done ten years ago) it now makes it sound like all Labour needs to do is ditch its Nu-ness and all will be well. The problems we are facing are the age-old problems of Labour government. Labour intervenes; it goes wrong; we end up with wrecked public finances and 3m unemployed. That is the Labour story, old and new.

  3. Matt Says:

    This all depends on the price elasticity of demand for labour. Increasing the price of labour doesn’t necessarily mean that employers will cut jobs sufficiently to ensure they’re spending the same on labour. I’ve no idea what the figures are though, so that’s as far as I’ll take it.

    Regarding Giffen goods, I thought it was well established that there are very few, if any, in existence. The only ones that I remember from my undergrad economics lectures are staples that make up a significant proportion of a household’s expenditure. They need to be inferior goods, and the household needs to be in extreme poverty. The ones I can think of are rice in certain communities in south east Asia. Bread certainly doesn’t apply here.

  4. Charlie Says:

    The problem we have in the UK is the large percentage of the population , probably 30-40% who only have the literacy and numeracy for un and semi-skilled jobs which limits their earnings. Germany has a large manufacturing capability because it has a large population of highly skilled craftsmen, technicians, scientists and engineers. We can only increase the size of the high value manufacturing and media sectors if we increase the size of our skilled workforce: this Labour has failed to achieved.

  5. RobW Says:

    Tom I agree with your first point absolutely. And If I had had more time would have made your point about the surplus of labour during the ‘boom’ years.

  6. Thomas Byrne Says:

    I wrote about this myself as a reply to a girl I know who made a speech at the Labour Conference demanding the youth minimum wage be brought up over here.

    As for the minimum wage generally, I think there’s a lot more things that need to be reformed that cause unemployment before moving onto the placebo that the NMW is.

  7. David Heigham Says:

    Aren’t we wasting powder and shot on the minimum wage? At the levels thatapply, it has minimal effect; and is therefore one of Labour’s less damaging policies.

    Several of the comments bove point to Labour’s grosser failings.

  8. RobW Says:

    I’m not sure about that David. As Tom suggests it plays a very important role in the benefits trap problem we have in this country.

  9. Why I, a liberal economist, like the Minimum Wage « Freethinking Economist Says:

    […] Theoretical musings. Tagged: Liberal Vision, Libertarianism, Minimum wage. Leave a Comment Liberal Vision have hosted a post by Rob Waller of the Libertarian Party on the Minimum Wage (he usually blogs […]

  10. Michael C Feltham Says:

    Before the much heralded Minimum Wage (MW) was introduced, a statutory mechanism was already in place to defeat serious exploitation of traditionally low paid workers: mainly in the hotel, pub and catering trades.

    Thus the concept was nothing new: just rolled out universally.

    The highly erudite economic arguments all omit what is the most critical aspects of this nonsense: the simple reality that anyone trying to survive on MW is invariably then Benefit-Dependent.

    Thus the state and more critically, the taxpayer, suffers once again, the cost and clumsy reality of Multi-Level Bureaucracy.

    Even more insane is the fact that a worker on MW will suffer the impact of National Insurance and Income Tax!

    And then the state has to give back a raft of benefits including Housing Benefit, as the MW Worker cannot afford to live!

    Which makes no sense whatsoever.

    Britain is well overdue for complete Fiscal Reform: and politicians who for once and at last understand truly Real Wealth Creation and thus Real Fresh new Long Term Job Creation.

    And when the real economy grows, then payrates self-solve, with no necessary governmental intervention: as Supply and Demand take over and employers must like all capitalists, bid for a scarce resource: workers.

    I wholeheartedly agree with Charlie’s earlier comment about Germany: economic success and longevity will and can only emerge from primarily education: and thereafter Government establishing a cogent economic base which rewards genuine wealth creational activities: and punishes speculation.

    An economy built on the twin illusions of Financial Services and property price Booms will eventually fail everytime: as it did in Heath-Barber’s Boom-Bust; Thatcher-Lawson’s Boom-Bust and now the even less regulated Blair-Brown Boom-Bust.

    Yet now, rather too late, Brown, Mandelson and Darling Darling et al suddenly hail industry as the key to their and the state’s salvation!

    In their dreams!

    Rafts of grads with worthless and pointless “Degrees” from ersatz “Universities” are pretty useless at designing satellites, silicon chips and computers.

    Here are my analysis and conclusions:

  11. Tim Leunig Says:

    Those of you who subscribe to Prospect magazine may be interested in a related article that I wrote for them recently:

  12. Labour’s Minimum Wage and Work Trials « Though Cowards Flinch Says:

    […] but I think there a few other significant details which were not evinced to full effect. In all the triumphalism on the part of Labour about the minimum wage, that this Work Trials programme awards less than the […]

  13. financial literacy for children Says:

    Monetary literacy is such an significant skill to educate the youth. It’s a shame that they don’t show it in schools.

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