The NHS is meant to be for patients, not staff

Jeremy Hunt has annoyed people today by refusing to give NHS workers a blanket 1% pay rise on top of the incremental pay rise they were already supposed getting. That’s hardly a surprise: the NHS is a religion, and Hunt’s decision is the equivalent of giving the finger to the Pope. But he’s got a point.

According to the BBC’s Nick Triggle, “all NHS staff will be getting at least a 1% pay rise. Just over half receive incremental pay rises each year – determined by their length of service and performance. Those whose incremental increase is less will have their pay rise made up to 1%, but many will get more. Last year, the average incremental pay rise was 3.5%.”

In other words, today’s announcement means that NHS staff won’t be getting an additional 1% pay rise over their existing agreed pay increases. That’s a real terms drop, but lots of the coverage I’ve seen has suggested that this means that nurses won’t be getting any rise at all.

Remember that real private sector wages have fallen every year since 2010. Public sector workers already have greater job security than private sector workers, so it’s difficult to see why they should be regarded as being automatically entitled to pay rises that most private sector workers aren’t getting.

Obviously, there’s no ex-ante reason NHS staff should get a pay rise. The point of the NHS is to provide care for patients, not to provide welfare to NHS staff. Since the NHS’s budget is limited, a pay rise to staff means foregone spending elsewhere.

It’s worth noting that, at least according to the government, this pay rise would be equivalent to 6,000 nurses. Now, I don’t know how the NHS should spend its money – it may well be the case that NHS patients are better served by additional staff or more investment in medical equipment than they would be by this wage increase. Maybe a pay rise is the best way to improve patients’ outcomes, maybe not.

I’m left wondering why NHS pay should be a political issue at all. In the end, this story just underlines the need for devolution of pay bargaining to NHS trusts. National pay bargaining makes little sense given differing labour markets and patient needs across the country. In other words, a pay rise that makes sense for patients in Suffolk may not make sense for patients in Sunderland. We don’t want Whitehall to determine supplies of medical equipment or the allocation of labour hours between staff. Why should pay negotiations be any different?

There’s no such thing as a free minimum wage hike

Paul Kirby, who was head of the No. 10 Policy Unit until last year, has a long post calling for a “dramatic, historic increase” to the minimum wage, bringing the levels from the current £6.10/hour to £10/hour in London and £8/hour in the rest of the country. It’s a bold post, but ultimately most of his arguments fail. In this post I try to address the key points he makes in favour of a hike.

Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage.

Even though nobody can switch to a cheaper hairdresser in India, they can get their hair cut less often, or have their homes cleaned less frequently, or send their children to creches with fewer minders per child or their parents to care homes with fewer carers. Kirby is assuming that demand for domestic services is inelastic – that is, it does not change much according to price. Obviously, this may differ between different services, but in without evidence to the contrary (Kirby gives none) it does not seem reasonable to assume that people’s demand for services will stay the same even if the prices of those services rise.

Bear in mind that a minimum wage increase would only affect the bottom of the market, where you would expect customers to be the most price-sensitive. The economic evidence suggests that increases in the minimum wage lead to slower job growth, particularly for young workers and in industries with a high proportion of low-paid staff.

Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need.

Employers do not try to ‘keep the wage bill constant’. They try to make a profit on the labour they hire. If hiring an extra manager led to extra profits, it wouldn’t matter that doing so also increased the overall wage bill. A minimum wage imposes a price floor on labour, so any worker whose total productivity is less than the minimum wage floor represents a net loss to their employer – which a profit-maximising firm will respond to by firing the worker. It makes no difference whether or not that firm has ‘restrained pay growth’ for its other workers: if an employee is loss-making at the lowest wage a firm can pay them, a profit-maximising firm will fire them. (Or simply not hire additional workers who would be loss making on net.) Even if firms can only tell the average productivity of their workers, because of information problems, they will demand less labour in total.

On the possibility of raising prices to make the worker profitable, see the previous point: if demand for the service is price inelastic, this might work, but it’s quite a claim to say that this is the case for most minimum wage-supplied labour.

Wages are not the only cost of labour to firms, either. Firms may reduce costs in response to minimum wage increases by cutting back on perks like lunch breaks and sick leave, as Starbucks did after it agreed to pay additional corporation tax in 2012.

Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggest sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants.

Is a 2.1% increase in costs for labour-intensive firms not something to be concerned about? The fact that ‘most businesses’ would not be affected seems beside the point. (The reverse of this is true too: if Kirby’s other points were correct, would his suggested minimum wage hike be a bad idea because it would affect “only” 17% of workers?)

There is no real evidence of any minimum wages in the world adversely effecting employment levels.

This is totally wrong. In 2006 Neumark and Wascher reviewed over one hundred existing studies of the employment impact of the minimum wage. Of these, two-thirds showed a relatively consistent indication that minimum wage increases cause increases in unemployment. Of the thirty-three strongest studies, 85 per cent showed unemployment effects. And “when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects seems especially strong”.

Few people stay on low-wage jobs for their whole lives: minimum wage work is usually a stepping-stone to something better where employees can acquire human capital. There is evidence that suggests that minimum wages deter young workers from acquiring these skills that allow them to get better jobs in the long run. Note also that minimum wages have been used explicitly to kick away the ladder for minorities: by whites in pre-Apartheid South Africa; by anti-Hispanic campaigner Ron Unz in California; and by, er, Polly Toynbee in a recent Guardian column.

Tyler Cowen reminds us to make sure our views of sticky wages and minimum wages are consistent: if “worker-imposed minimum wages” (sticky wages) lead to unemployment, as most Keynesians (among others, including me) believe, why would “state-imposed minimum wages” not also do so? (“Have you no respect for the law (of demand)?”, asks Will Wilkinson.)

Given that we know that minimum wage increases usually cause some unemployment, why take this chance when we could just give money to poor people directly? As we’ve been saying for years, the difference between the current pre-tax minimum wage and the post-tax “living wage” is roughly as much as a minimum wage worker pays in income tax and national insurance: in other words, if that worker didn’t pay tax, they would be earning a living wage. It looks as if the personal allowance will soon rise to the minimum wage level, but the national insurance contribution threshold needs to rise too.

But let’s go even further: if we replaced the tax credit and welfare systems with a Negative Income Tax (or Basic Income – call it whatever you want), we would top-up the wages of low-paid workers directly. Jeremy Warner calls for this in the Telegraph today, and I outlined something similar a few weeks ago. Yes, I’d like all the standard supply-side deregulations as well, but a Negative Income Tax would act as an insurance policy against the potential down-sides of such deregulations, strengthening workers’ bargaining power and addressing the fears of those who worry that deregulations will hurt some workers.

I understand that many Conservatives are coming to see a minimum wage hike as a political ‘free lunch’ – a popular and surprising way of showing an interest in the welfare of the poor that does not affect the government’s balance sheet. I hope this is not true. Contrary to Kirby’s claims, there are good empirical and theoretical reasons to think that raising the floor on the price of labour will cause more unemployment. And unemployment destroys lives. There are lots of things we can and should do to help the poor right now. Raising the minimum wage isn’t one of them.

Old Economy Steven would have been better off now

An interesting essay from Chris Maisano over at Jacobin Magazine drifts over many topics—full employment, growth since the 1970s and neoliberalism, worker activism and the 40-hour week. Its essential case is that full employment is important, because it makes workers better off in lots of ways, including giving them more leisure time. There are some interesting points in the piece, and I agree that full-ish employment is an important goal, but overall I think it rests on a huge number of misconceptions—indeed data is used in very weird ways, with what I see as obvious questions left entirely uninterrogated.

Maisano points to the “Old Economy Steven” meme, which looks back to an idealised post-war era:

Steven pays his yearly tuition at a state college—with his savings from his summer job! He graduates with a liberal arts degree—and actually finds suitable entry-level employment! … But Steven doesn’t just enjoy the material comforts of Old Economy abundance. He possesses a degree of everyday power scarcely imaginable by working people today. Steven can tell his boss to shove it, walk out and get hired at the factory across the street.

The contrast with popular views about today’s economy, at least since the recession, is obvious. But full employment policies have been demoted—indeed since the late 1970s and especially since central bank independence most developed countries have centred their macroeconomic policies around stable inflation, not high employment. In fact, central banks now see a Non-Accelerating-Inflation Rate of Unemployment (NAIRU) as the optimal situation. But is this an “ideological response” as Maisano suggests?

There will always be some unemployment, from the numerous supply side restrictions on labour, and from job switching, especially with sectoral shifts. Inducing unexpected inflation can temporarily take unemployment below this “natural” level, for example through money illusion—where workers think nominal pay is actually real pay—but it is unsustainable. Once unions and individual workers compute this level of demand growth into their calculations the natural rate will return and the monetary authorities will need to push inflation yet higher to subvert this equilibrium.

Many economists, including Milton Friedman, argue that something like this caused the rampant, out of control inflation of the 1970s, something that was only reigned in by harsh recessions in both the UK and USA (attempting to control wages and prices was an abject failure everywhere). Acknowledging this means acknowledging that aiming for unemployment as close as possible to zero is a bad idea; it is better to aim for the lowest level of unemployment achievable without acceleration inflation. It’s certainly possible to argue that monetary policymakers have failed to do this—but it hardly seems like a specifically ideological development, more like progress in economics.

A second sticking point is how growth has declined since neo-liberalism replaced the post-war consensus as the dominant political framework in at least the US and UK. This is true. But it’s also true that every developed country saw a growth slowdown in the 80s and 90s relative to the post-war era. Economic historians are divided on the causes but since the most neo-liberal countries grew much faster than the more left-leaning states, one’d be hard placed to see that as a key cause. But even though growth has slowed down it has not stopped—and despite a few bumps we are much much richer today than in the 1970s. Just think, if had the opportunity to be whizzed to the 1970s to have the same standard of living as someone in your income percentile did then, would you?

My third disagreement is on hours worked. Maisano heavily implies that the consistently looser labour markets since the 1960s and 1970s have resulted in workers forced to work longer hours. He’s clearly looked at the numbers, since he compares the US’s average 1,778 in 2010 (1,742 on the FRED numbers I’ve seen) worked unfavourably to “continental European and the Scandinavian social democracies”. But is that a germane comparison? To me it seems like the best way to compare the wellbeing of workers now, following decades of neo-liberalism and below-full-employment, and workers then, is to directly compare them. On average, during the 1970s, an employed person worked 1,859 hours (in 1970 it was 1,912 hours), in the ten years up to and including 2011 the average was 1,772.9. Maybe Maisano believes that with a greater focus on full employment incomes would have grown even more and hours would have fallen even faster—but if he thought that maybe he should say it.

The ideal welfare system is a basic income

The British government spends more on welfare than it does on anything else apart from healthcare. The benefits system is arcane and unwieldy, a mish-mash of disparate attempts to address different social problems in a piecemeal fashion. It creates perverse incentives for those on it, such as people stuck in a ‘benefits trap’ where they lose almost as much money in benefits by working as they are earning, and distorts entire markets by inflating prices, as housing benefit does to the housing market.

Most people agree that the system is broken, though solutions differ. The Universal Credit is a fundamentally good idea that is failing because of the difficulty of implementing successful piecemeal reforms to a system as complicated as benefits in the UK, and will ultimately probably not succeed in the way its architects intend because it doesn’t go far enough. Other aspects of the government’s welfare policies, like the work programme, are completely wrong-headed – telling other people how to live their lives is a bad idea because the government is extremely ignorant. That ignorance doesn’t change just because the person being told what to do is on benefits.

The ideal welfare system is a basic income, replacing the existing anti-poverty programmes the government carries out (tax credits and most of what the Department for Work and Pensions does besides pensions and child benefit). This would guarantee a certain income to people who have no earnings from work at all, and would gradually be tapered out according to earnings for people who do have an income until the tax-free allowance point, at which point they would begin to be taxed.

For example, we could set a basic income of £10,000/year by using a cut-off point of £20,000/year, and withdrawal rate of 50%. The basic income supplement would be equal to 50% of the difference between someone’s earnings from work and the £20,000 cut-off point. A person with no earnings would get a basic income of £10,000/year; a person who earned £10,000/year would get a supplementary income of £5,000; a person on £15,000/year would get a supplementary income of £2,500; and a person on £20,000 would get nothing (and begin paying tax on the next pound they earned).

These numbers are representative: no need to tell me that £10,000 is too low or too high. What matters is the mechanism.

This has also been called a Negative Income Tax, usually by advocates on the right like Milton Friedman, but language aside the concepts are basically the same. As a side-note, I think basic incomes that are not tapered out are a complete waste of money, redistributing lots of money to people on high and middle incomes unnecessarily. It amazes me that this anti-progressive approach seems to be popular among some on the left. The exception would be if this flat-rate payment replaced the entire welfare state, as Tim Harford mentions in his column today and Charles Murray proposed some time ago.

Like the current benefits system, this would provide a safety net. But ‘benefits traps’, where people lose as much in benefits as they earn from work, would be eliminated. A basic income system like this would be at least as clear as the PAYE income tax system is, and substantially clearer than the current benefits system. The dog’s breakfast of welfare schemes that currently exist – all to address the symptoms of poverty, rather than the root – would be abolished, and with it the jumble of unanticipated and often undiscernable interactions between schemes that lead to perverse outcomes.

Best of all, a basic income is the least paternalistic welfare scheme possible. Instead of pushing would-be computer programmers into work as Poundland assistants, a scheme like this would leave decisions entirely up to the individuals involved. The discovery process that each of us is engaged in would continue, and now without mass decision-making by a central state authority.

I don’t know what amount a basic income like this should actually be set at. That would be an interesting and useful debate — what do we need for a basic standard of living? What appeals to me is the principle. Ditching most of the DWP, creating a welfare system that never discourages work, and letting people live their lives as they choose? Now that’s a welfare programme I could get behind.