Yes, yes, we know that neoclassical economics is just so out of style these days but the Marginalist Revolution was indeed correct - stuff happens at the margins:
It will cost jobs. It will harm the UK’s competitiveness. It will make the labour market less flexible. For those with long enough memories, the push back against Labour’s plans for a new deal for workers has a familiar ring to it. The same arguments were wheeled out before the national minimum wage was introduced a quarter of a century ago. All proved groundless.
Confounding the doomsters and gloomsters of the late 1990s, the minimum wage has raised the pay of millions of Britain’s lowest-paid workers by an average of £6,000 a year without lengthening dole queues. It has been described by one thinktank as the most successful economic policy in a generation.
It does rather depends upon the definition of success. As Chris Dillow pointed out back in 2005:
Tony Blair today announced plans to cut the jobs and hours of low-paid workers.
He’s going to raise the minimum wage, from £4.85 an hour to £5.05 in October. This as the Low Pay Commission recommends in its report today; it also recommends a rise to £5.35 in 2006.
The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.
The Low Pay Commission pretends this won’t happen. Its chairman Adair Turner says: “Our analysis suggests that previous upratings [to the minimum wage] have largely been absorbed without adverse effects.”
Can I give Mr Turner some advice? Try reading your own report matey.
Now the effect is small at that labour price - the wage set back then might have cost perhaps 13,000 jobs, another estimate maybe 30,000.
Now, I’m not denying that some people will benefit from the higher minimum wage. Those who keep their jobs and hours will do so, at least marginally. And tax-payers will have a lower tax credit bill. But these gains come at a cost – of lower hours and jobs for some of the low-paid, and lower profits for many small businesses.
There’s no such thing as a free lunch. To pretend otherwise is either dishonest or economic illiteracy.
Now, perhaps that trade off is worth it to you - possibly less so to the 13,000 to 30,000 - but that’s an ethical matter and we can’t determine those for you.
The thing about those things that happen at the margins, those trade offs. At some point the balance swings to the deal being, on balance, more bad than good. The government went out and hired a respected minimum wage advocate - Arindrajit Dube - to tell them when this would be so with the rate of the minimum wage. That report is here. The answer is that when the minimum wage rises over 55% of median wage - and it’s the blended median, of full and part timers together - then on balance that rate is detrimental. No, not just detrimental to those poorest and least trained who are those who don’t get a job but detrimental to the society as a whole.
The current plan is to push the minimum wage up over 60% of the full time only median wage - very much higher than even advocates of higher minimum wages think optimal.
To adapt a commonly used metaphor - the government’s noted that jumping out of a ground floor window doesn't cause that much grief so they’ve decided to try it from the tenth.