Economic Nonsense: 12. Minimum wage rates raise living standards for the low paid

When minimum wage rates per hour are set by law, it can raise the wages of those already in jobs and who manage to stay in those jobs.  It has a negative effect on those who lose their jobs because firms no longer find them worth employing at the new rates.  It has negative effects, too, on those trying to enter the labour market who do not yet have enough skills to be worth the minimum wage to potential employers.

Firms employ people because they are worth more to the firm than the wages they cost it.  For low-skilled people their value to the firm might be quite low.  Very often it is by starting on low wages and acquiring on-the-job skills that people move up the employment ladder.  Someone who has worked has learned the importance of good time-keeping and following instructions.  They have learned how the firm likes to do things, and are more valuable than an unknown potential employee.  If the minimum wage is set at a level above that of their value to the firm, they find it difficult to secure those starter jobs.

In many countries those with low skills tend to be young people and sometimes those from ethnic minorities, especially if they have not had an adequate education.  When minimum wage rates are increased, there often tends to be increased unemployment among these categories.

When minimum wages were introduced in the UK, the level was initially set sufficiently low that it had a minimal impact on employment.  Subsequent increases are believed to have increased its impact, leading some economists to suggest that a better way of raising the take-home pay of low earners is to stop taking tax off them.  Raising thresholds for income tax and National Insurance increases their wage without it costing employers money and pricing their services out of the market.

To be serious about inequality for a moment

The Office of National Statistics has just released figures on incomes in the UK. Giving us that interesting little chart above. Do note that that is income of those who are in the tax system. And also that it does not include the impact of the benefits system. So this doesn’t include subsidy to housing or anything like that.

And then have a look at the global rich list. Where you can plug in an income and the country to which it refers and see where that income in that country puts you on that global rich list. The reason you must add the source country is because they are calculating using PPP adjusted currency rates. That is, they’re taking account of how much things cost in each country. So this isn’t really a comparison of incomes, it’s a comparison of living standards.

And here’s the astonishing thing. That bottom 1% lifestyle in the UK is still among the top 20% globally. The UK minimum wage puts you well into the top 10% (almost top 5% in fact). And a little over median wage puts you into the global top 1%.

To repeat, this is not assuming that things are cheaper in other countries. This is after we convert to the prices you’re paying at Morrisons.

We’ve nothing at all against those who would campaign about either poverty or inequality. But we would like to take this little opportunity to remind all that by any historical or global standard we here in the UK, yes even the relatively poor by local standards, are living pretty high on that income scale. And that feeds in to what we think is the important point about what we might want to do about inequality or poverty. Let’s concentrate on that global picture, not gaze at our own navels. Encouraging poor country growth wit the aim of abolishing absolute poverty seems to be so much more productive to us than worrying about whatever gap there might be between the top 20%, top 10% and top 1% of the global income distribution.

Cameron’s ‘full employment’ pledge isn’t very convincing

Earlier today in Ipswich, Prime Minister David Cameron pledged to turn Britain into a nation of “full employment”, aiming to overtake Germany for the top percentage of people in work.

From the BBC:

The PM is aiming for Britain to have the highest percentage of people in work of any developed nation.

Labour said the Conservatives’ promises would sound like “empty words” to the unemployed or those on low pay.

Mr Cameron’s goal of “full employment” would involve the UK, currently 72%, overtaking Germany’s 74% in terms of the percentage of people in work, said BBC assistant political editor Norman Smith.

There is no timescale, but it is an “aspiration which he wants to achieve”, he added.

It’s a nice ‘aspiration’ sure, but Labour’s not the only group to think these are ‘empty words’ coming from the PM.

Why?

His pledge to bring full employment to Britons includes measures to increase the number of start-up loans provided by the government, as well as plans to invest in infrastructure, which he hopes will attract business and support new apprenticeships.
But no word about changes to the minimum wage. Not a word about the personal allowance or National Insurance tax.

Research that my colleague Ben recently highlighted shows what a negative effect the minimum wage can have on unemployment – it’s estimated that “minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point(s)” in the United States during the late 2000’s.

What’s more, a job is significantly less valuable to the newly employed if she is still unable to provide for herself and her family. At the same time the PM scraps the minimum wage, he should raise the tax-free personal allowance to the Living Wage, taking the poor out of tax completely. National Insurance tax should also be scrapped for low-earners, as it works as just another form of income tax.

A backtrack on minimum wage increases combined with pegging the personal allowance and NI to a Living Wage would be a serious indication of Cameron’s commitment to ‘full employment.’ But while he continues to spout plans for increased government spending and building, I remain unconvinced.

Minimum wage debate: probably not over

The debate among economists over whether (higher) minimum wages cause (more) unemployment seems to go on forever. Most published results (and an even greater fraction of methodologically sound published results) find that minimum wages reduce employment. But this doesn’t settle the result, and smart, eminent economists like Arindrajit Dube publish papers arguing that with different methodologies and/or correcting for appropriate trends, you cannot find a link.

Though this seems to go against our basic model of the microeconomy, economists argue that employers of the low-skilled are monopsonists—single buyers, the converse of monopolies, single sellers—and may even want more labour when its price rises. Those who do believe that minimum wages put people out of work, when faced with results finding they don’t, suggest that maybe this just a temporary effect; in the long run workers will be replaced with automation a la modern checkouts, or fewer higher-skilled people once they’ve had time to search. Or alternatively, less will be spent on working conditions or other benefits.

Given this morass of disagreement, a new paper from Jeffrey Clemens and Michael Wither is unlikely to change any minds, but it’s still an interesting result. They use nifty controls to establish that binding minimum wages cause unemployment, lower wages from work, and worse work progression for the low-skilled. This dearth of work experience, the authors say, makes them less likely to join the lower middle class. What’s more, because their sample is very broad and spread out across the entire US, they believe their results are uniquely good for extrapolating to the country as a whole.

We estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a “target” group, whose baseline wage rates were directly affected, and a “within-state control” group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation.

Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage’s effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

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Well, isn’t this an early Christmas present?

We here at the ASI have been arguing for many years now that the most absurd part of our income tax system is that people working part time on the minimum wage are inside the income tax system. We’ve been arguing it so loudly that something is about to happen:

None of the four main UK parties are proposing a tax cut package that would predominantly benefit low earners, the Resolution Foundation thinktank said on Monday.

A report analysing the impact of the main tax cuts being proposed by the Conservatives, Labour, the Liberal Democrats and the UK Independence party (Ukip) said they would not benefit nearly 5m low-paid employees who do not pay income tax.

Although it found the Labour and Lib Dem proposals were less regressive than the Conservative and Ukip ones, it said that the poorest 50% of households would only get a quarter of the overall benefits even under the fairer plans. The foundation said a more progressive approach would be to raise the national insurance threshold and to lift the work allowance within universal credit. Even though the government is running a deficit of nearly £100bn, all the main parties will be proposing tax cuts in their election manifestoes.

The Conservaties and the Lib Dems both want to raise the basic rate income tax threshold to £12,500. The Conservatives also want to lift the higher rate threshold to £50,000. Labour wants to introduce a 10p tax band. And Ukip wants to raise the basic rate threshold to £13,500, and to introduce a new 35p tax band for those earning between £47,000 and £61,000.

Three of those four proposals to raise that personal allowance come from us here. No, not directly (in one case, yes directly) necessarily but we can point to the Lib Dem we convinced and the path of the proposal through that party. And of course the Tories are just following on. Hurrah! etc.

That the idea, that if we want the working poor to have more money we should simply stop taxing them so much, has caught on is lovely. That it annoys the Resolution Foundation so much is just icing on the cake.

However, they do make one good point:

Kelly also said it would be fairer to prioritise raising the national insurance threshold, because this would benefit the 1.2m people who earn enough to pay national insurance but not enough to pay income tax (for which the threshold is higher).

Yep, raise that NI limit (including the employers’ part) to again that full time, full year, minimum wage. Sure, it would be “expensive” if you take that horribly statist attitude that all money really belongs to the State and thus that not taxing it off people is a cost. But out here in the real world most people do get the basic idea. If there is some minimum amount that it is righteous and just (an idea we’re not sure about ourselves) that the State insists people are paid then it is equally righteous and just that the State doesn’t dip its fingers into those wallets getting that righteous and just minimum amount.

Or, as we’ve been saying for these long years now. If you want the working poor to have more money then stop taxing them so bloody much.