Raising the minimum wage does cost jobs


We've been told, as with the more ludicrous tales from the US, that raising the minimum wage doesn't cost any jobs. No Siree! we can just increase the price of labour and no one's going to start employing less of it as a result. Well, isn't that nice? Except when people start to tell us how this is going to happen that explanation just falls apart:

The government must focus on unloved sectors such as hospitality and retail, if it is to tackle Britain’s lamentable productivity record, according to a new analysis by thinktank the Institute for Public Policy Research.

Tony Dolphin, the IPPR’s chief economist, said that while the government tends to target support at the highly skilled workers in advanced manufacturing, it is the low-paid staff behind bars and checkouts whose performance may be critical to sustaining Britain’s recovery.

Well, OK, this is from IPPR, so we'll not expect them to understand the economics of what they're saying, will we? But here's their adaptation mechanism:

But Dolphin said the chancellor’s bold decision to raise the minimum wage to £9 by 2020 could help, by giving firms an incentive to invest in technology and training to get more out of their lower-paid staff, who will gradually become more costly to employ.

“Provided that it does not lead to rising prices, this welcome move will put pressure on firms to boost productivity in order to maintain their profit margins,” the report said.

We'll just raise productivity instead!

Well, yes, except consider what raising productivity means. In order to make 100 sandwiches the deli requires 10 workers. Now we raise the productivity of sandwich makers so that we only need 5 workers to make 100 sandwiches. Well, great: but note what has happened: to make 100 sandwiches we only need 5 workers, not 10. That's a loss of jobs, isn't it?

Sure, it's also equally true that our original 10 workers could now produce 200 sandwiches: but what's the demand for sandwiches going to be? We all eat more because labour has become more productive? We think not really.

It's entirely true that increased labour productivity is the key to increased lifestyles for us all: it's almost the definition of us all getting collectively richer. But increased labour productivity also means, by definition, less demand for labour in that first stage.

To argue that an increased minimum wage will be dealt with by increased productivity is to insist that there will be unemployment effects from this increased minimum wage.

Out of their own mouths and all that, eh?