08 June 2006

Why the neo-cons are wrong about the minimum wage.

Increase the price of labour and the employer's demand for it will fall. Sounds plausible doesn't it? Simple supply and demand economics surely?

Well no, actually, unfortunately for you libertarian neo conservatives, your model is far too simple (and I suspect at least some of you know this).

People are not loaves of bread. If you increase the price of a loaf of bread, it is still the same loaf of bread, so demand will obviously fall (except in giffen good cases etc.).

But increase the price of labour and wonderful things can happen; labour turnover falls, motivation of workers can increase, lazy managers can't get away with ignoring their low paid workforce as better trained and organised staff are needed to justify the higher salaries, and yes, more robotization. All these things increase productivity and are a good thing not just for the added efficiency but also for social cohesion as it reduces inequality.

But, you may ask, surely employers aren't stupid, they will train their workforce better and increase robotization anyway if it improves efficiency? The market will demand it surely?

Afraid not. Any employer that unilaterally decides to do this (unless they have massive reserves of capital and long term foresight which most companies don't have) will in the short term place themselves at significant disadvantage and added risk. Very few (if any) will do this even though it might be in their long term interest.

This is where governments come in to provide a regulatory framework for the market to work properly (all economic miracles UK, US, Japan etc. were based on government support - even initial protectionism, definitely NOT laissez-faire).

When a minimum wage is set, companies have to compete more on innovation of production/service, organisation and training of its staff, which is in the long term interests of all of us.

11 comments:

  1. The efficiency wage hypothesis. Question is: how applicable is it?

    ReplyDelete
  2. Stumbling and Mumbling has pointed out that a Citizen's Basic Income is a better way of increasing incomes of the low waged, and I agree with that.

    But until we get a CBI, a minimum wage is the next best thing.

    I find it incredible that right-wingers have the guile to talk about unemployment after what their policies did to this country.

    The Low Pay Commission say;

    "We found no significant effect, positive or negative, of the minimum wage on productivity. But productivity gains have been made in most low-paying sectors, a trend which started before the minimum wage was introduced."

    Not only has productivity improved, but employment is 2 million HIGHER since the MW was introduced.

    If employment and productivity starts to fall, maybe we can then take the right-wingers a bit more seriously, but remembering the 3m+ unemployment of the Tories is enough for me to be very sceptical of their claims at present.

    ReplyDelete
  3. When a minimum wage is set, companies have to compete more on innovation of production/service, organisation and training of its staff, which is in the long term interests of all of us.

    A question for you. I have just finished designing a moderately sophisticated piece of electronics, and have a choice as to where to manufacture it. One possibility is to manufacture it in this country; the other possibility, which turns out (largely for minimum wage reasons) to be cheaper even for medium volumes, is to outsource to a UK firm which will then outsource to a trusted partner in China.

    Can you explain to me why I should manufacture the board in the UK, even though I will make a smaller profit? Bear in mind that I have a legal duty to my shareholders to obtain the best possible return on capital.

    ReplyDelete
  4. eben,

    You have given Neil a get-out here:

    "Bear in mind that I have a legal duty to my shareholders to obtain the best possible return on capital."

    The qualifier is nothing to with your ROI, it is to do with your competitors. Why should you make the board in the UK, when there is an obviously available choice to do so elsewhere at lower cost and hence lower price than you?

    ReplyDelete
  5. The qualifier is nothing to with your ROI, it is to do with your competitors. Why should you make the board in the UK, when there is an obviously available choice to do so elsewhere at lower cost and hence lower price than you?

    Yes okay. The point stands though, and I'm genuinely interested in answers to this one; it's going to be a hard choice.

    ReplyDelete
  6. Well eben... if it is a flash in the pan invention which you don't know how big it will get, then you are better to keep tight control of it by having it built by a local firm. Most ventures die on the vine after a promising first couple of months, better to have it close so you can tinker with it. This will also limit your expenses of moving off shore. If after a year, marketing indices warrant it, you can try lowering costs by moving it off shore, but be wary...there are expensive problems associated with that move. If the item in question is a fairly common sort of item that can go directly to production (books and cell phones come to mind), then offshore may work. Or it may not. I had stuff made in the Phillipines for years then suddently a volcano goes off, and overnight, pffff! no more factory! I now make them in my own facility close to home.

    When my business has an uptick, I go to hire somebody on. I have done this so many times that I have learned that there are three options. I can hire on 3 barely literate plugs to work on an assembly line. (But then I have to build a flippin' assembly line!) Or for the same wage, I can hire on one hot employee who has the talent to actually accomplish the task. (This puts all the eggs in one basket though!) Or again, for the same pile of cash, I can hire on a medium wage employee and a minimum wage plug to sweep up after him. Most job openings in any industry tend to be of the last variety because it results in the greatest productivity.
    My business is successful because that is the way I do my hiring. Every dollar extra I give the plug has to come out of the lead hand's paycheque.
    Profit sharing and input from my lead hands is MY recipe for success. Increasing or decreasing the minimum wage does not make much difference...I usually pay a couple bucks more than minimum by way of performance bonuses in any case.
    I favor an increase in the minimum wage...and good policing of labour laws and regulations! Any company which cannot handle the extra expense is on the ropes in any case. However, this boot doesn't fit all feet! Taxi drivers, commission salesmen, soldiers, house wives, farmers, doctors, lawyers, and small business owners to name a few professions just do not fit. I am a business owner, and would LOVE to get minimum wage for my time! These account for 80 per cent of jobs in Canada (and I betcha is not much different in the UK!) The regulations you support are for that 20 percent of workers in the "Satanic Mills" that spawned the labour movement in the first place. They won't affect the bloke who runs a garage in the South End!

    ReplyDelete
  7. eben: In terms of low wages, we are never going to be able to compete with China etc, no matter how low we set wages.

    We have to decide what is a minimum standard of living we want for the low waged.

    We pay for it out of our taxes (which hits companies as well) and we get the employer to pay a living wage OR we increase the numbers of homeless and destitute people and the number of people that have to resort to crime. In the long run (and from a moral perspective) I think it is better to set a decent standard of living for those who work.

    As for your business, low wages are not everything to consider. Depending on the size of your operation it is usually easier to keep controls on expenditure and quality if you keep production local.

    If wages make up a large part of that expenditure then exploiting the low wages in Asia is probably better from an economic point of view.

    Of course not all jobs can be done from abroad anyway. Care assistants are generally minimum wage jobs, but they can't be done in China.

    ReplyDelete
  8. "The Low Pay Commission say;

    "We found no significant effect, positive or negative, of the minimum wage on productivity. But productivity gains have been made in most low-paying sectors, a trend which started before the minimum wage was introduced."

    Not only has productivity improved, but employment is 2 million HIGHER since the MW was introduced. "

    Neil, do you have some form of cognitive problem or something? The LPC says that the MW has had no effect on productivity, that it was rising both before and after the imposition (as we would expect it to, of course, technological change alone should mean ever continuing rises in productivity).

    You then claim that this validates your ideas about the MW because you think that the MW will force productivity up.

    ??
    I mean, seriously,
    ??

    ReplyDelete
  9. Tim, if it ok for you to say that it is too early to judge the MW effect on unemployment, I can say the same about productivity can't I?

    ReplyDelete
  10. There's a perfectly clear argument for having a minimum wage: The Single European Act allows free movement of people, giving us a "home" labour force of 450 million, many of whom, particurlarly in eastern europe are unemployed. By coming here, they relieve labour pressures, holding down wage inflation - but you need to place a floor as to how far wages can be pushed down, in the form of a minimum wage. If you had free movement of labour and no minimum wage, unscrupulous employers would not employ Brits and substitute easterners who would work for less than the minimum - our unemployment would go up, so would the welfare bill and taxes to pay for the welfare bill. You could only scrap the minimum wage in a closed economy, where there is no migrant workers, and the short supply of labour itself holds wages up - but closed economies tend to heat up pretty fast causing inflation. Compare the inflation and interest rates of closed economies like Iceland (base rate of 11%) and New Zealand (7.25%) with the UK. Our model is the best - low inflation due to migrant labour, but a floor on how far wages can fall due to the minimum wage, giving UK workers the chance to get employed, leading to virtually full employment and a low welfare bill. It should be obvious to anyone who has thought it through.

    ReplyDelete
  11. I would never employ someone directly in the UK, partially for minimum wage issues (though in truth the great majority of people I deal with are well above that level even overseas), but it is red-tape and regulatory interference that makes me outsource everything (and I do mean everything) overseas.

    To me, a minimum wage is more an indicator of a mindset of a place I do not want to do business rather than an impediment per se.

    ReplyDelete