The dark history of the minimum wage

minimum.jpg

We read today that the national minimum wage will increase by 20p an hour to £6.70 from October, and that this will benefit more than 1.4 million workers. What we hardly ever hear from politicians is how many people will feel the costs of this increase, in addition to the people who are already being hurt by having a minimum wage law in the first place. The problem with state-enforced minimum wage laws is pretty standard economic text book stuff: the minimum wage makes it harder for low-skilled workers to get a foot on the labour market ladder, it unfairly loads the burden on firms that employ low-wage earners (a burden that could be avoided by simply reducing the tax low-earners pay, or taking them out of tax altogether), and as a result it often causes inflation of prices and reduction in staff as firms try to recoup their losses.

With the announcement today, and with the Budget looming, I was very interested to stumble upon an article this week by Jeffrey Tucker about a Eugenics Plot Behind the Minimum Wage, in which we find out that in the early 20th century some eugenicists tried to introduce the minimum wage as a means of getting some of the lesser able people out of the employment market. Here are some relevant quotes that are bound to shock:

A careful look at its history shows that the minimum wage was originally conceived as part of a eugenics strategy — an attempt to engineer a master race through public policy designed to cleanse the citizenry of undesirables. To that end, the state would have to bring about the isolation, sterilization, and extermination of nonprivileged populations.

It was during this period and for this reason that we saw the first trial runs of the minimum wage in Massachusetts in 1912. The new law pertained only to women and children as a measure to disemploy them and other “social dependents” from the labor force. Even though the measure was small and not well enforced, it did indeed reduce employment among the targeted groups.

Leonard documents an alarming series of academic articles and books appearing between the 1890s and the 1920s that were remarkably explicit about a variety of legislative attempts to squeeze people out of the work force. These articles were not written by marginal figures or radicals but by the leaders of the profession, the authors of the great textbooks, and the opinion leaders who shaped public policy.

“Progressive economists, like their neoclassical critics,” Leonard explains, “believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’”

So when we hear politicians make minimum wage commitments in the run-up to the election, bear in mind that those that preceded them were always fully aware that wage floors precluded people from the labour market, and that they were once deliberately implemented to expunge the demographic landscape of those they thought inferior citizens that were unworthy of earning a living. That they so readily endorse a policy that places a barrier to employment for so many people tells you just about all you need to know about the extent to which winning votes matters far more than aiding people’s job prospects.

I hope that, in my lifetime, politicians and social commentators begin to get the simple message that if you artificially remove the lower rungs on the labour ladder, you make it difficult (often impossible) for people to climb it, or in some cases, get on it at all.

Everything is consistent with the gender difference model

gender.jpg

I think science works by proposing models and checking if data falsifies them. A popular model of gender in labour markets is that women and men are on average the same, but that they face discriminatory institutions and employers which lead to them having different outcomes.

Lots of data, on its face, seems to contradict this model: papers suggest that a man and a woman with the same job have the same pay; women earn (very slightly) more than men aged 20-40; women get promoted more aggressively than men if they don't leave the workforce; that women don't seem to rate discrimination the most important thing blocking their progress themselves.

But the model can be modified: let's say men and women are cultured by society into doing different jobs, that qualified women aren't promoted equally; that women earn more but only because they do more education; that so many women are pressured out that the ones remaining are actually much better than the remaining men so they are still under-promoted; that women don't want to speak out or that discrimination is hidden so they don't notice it.

But I wonder whether the model can contort itself enough to fit around these stylised facts:

  • Srivastava & Sherman (2015) find that employees working under female managers do not experience smaller gender wage gaps.
  • Charles (2011) finds that more gender egalitarian countries often have more sex-segregated occupations.
  • Cech (2013) finds that both men and women enter fields that fit with their self-expressed characteristics, net of their beliefs about gender (i.e. even after taking those beliefs into account and controlling for them).
  • Charles & Bradley (2009) found that people's curricular field choices are more sex-typed in more developed, egalitarian countries.
  • Ceci, Ginther, Kahn & Williams (2014) found (among a huge number of other things) that the higher the average quantitative GRE score in a field, the fewer women were awarded PhDs in it.
  • A 2015 ILO report found that women rate direct firm discrimination among the least important barriers in the way of their success in management.
  • Gagliarducci & Paserman (2014) found that female-managed firms did worse on practically every measure, but that this was just because they managed different kinds of firms to men.
  • Lippa, Collaer & Peters (2010) found that the more gender equal a country, the bigger the gap in mental rotational tasks (a key measure of visuospatial skills) between girls and boys.
  • McGee, McGee & Pan (2014) found that male-female differences in competitiveness explain more of the gender wage gap in the NLSY97 (national longitudinal survey of youth that started in 1997) than in the NLSY79.
  • Bertrand, Black, Jensen & Lleras-Muney (2014) found that the Norwegian law requiring all publicly traded firms' boards to be 40% or more female had no knock-on effects for women in general.
  • Finally Schmitt, Realo, Voracek & Alli (2008) found that men and women differ across the world in personality, but most in developed countries where women have more rights and freedoms.

I bet you can make a model that fits, but that doesn't make it plausible.

The problem with Owen Jones

owenjones.jpg

Young Owen is telling us all that we only mock the more idiot lefties because such mockery obscures the very important message that said lefties are trying to get over. Presumably that one about the necessity of smashing capitalism and sticking it to the man. Sadly he doesn't quite make his case: for he's sadly bereft of a basic understanding of how the media works. Yes, it's entirely true that everyone's screaming with laughter while discussing two kitchens Ed. But this isn't because the capitalist media pig dogs are pushing the story:

It is Vine who initiated this latest assault on Ed’s character. The drab kitchen was apparently sufficient grounds to suggest he and his wife are like “aliens”; Justine is compared to “the late Mr Spock”. But then Ed’s ever helpful friend Jenni Russell revealed that it was in fact, just a “functional kitchenette ... for tea and quick snacks”. And so the kitchen – sink and all – was thrown at Ed, or “two kitchens” Miliband as he is now to be known.

Why do I bother. Why do any of us bother. Try saying “political debate in Britain” without sniggering. It’s not about issues or people and their needs. It’s a mixture of the privileged scapegoating the largely voiceless – immigrants, people in poverty generally – and puerile character assassination.

The modus operandi of the right is to target anyone vaguely leftish and make the debate about them, rather than what they believe. I’ve written this before, but if you believe in social justice, they will find any reason to trash you. If you’re too poor, they’ll accuse you of envy; too rich, of hypocrisy; too young, of naivety; too old, of being a dinosaur. Above all, the right obsessively hunts anything that can be twisted into hypocrisy. If you think poverty is basically a bad thing and something needs to be done about it, then you have to live in a shed and forage for berries, otherwise you are a hypocritical champagne socialist.

In a market economy (no, this is nothing at all to do with capitalism or any other form of ism) an organisation prospers by delivering what its customers want. They therefore spend quite a lot of time and effort trying to divine what said customers want: so that they can offer it, of course. And with newspapers and the media more generally what people want (sa numerous academic studies have confirmed) is to have their extant prejudices stroked.

Purely hypothetically, if the working class of this country were possessed of some robustly conservative views on sex, gender and immigration, just as examples you understand, then the newspaper (s) that attempted to appeal to the working class of the country would have robustly conservative views on sex, gender and immigration. The newspaper do not form such views, they chase them.

And one of the things that we British do truly hate is hypocrisy. Thus the newspapers point to and urge us to laugh at examples of it, for we enjoy doing so. This isn't a right/left issue: it's just how a market works.

Which is why the newspapers are making hay with two kitchens Ed. Because we care very little about "the issues or people and their needs" and hugely about mocking the would be ruling class. And if you don't in fact know this about the media, that they chase prejudices not form them, then it really might be a good idea not to write about this subject that one is ill informed upon.

Economic Nonsense: 27. Outsourcing harms the economy

foxy.jpg

Outsourcing involves the contracting out of a business process to an outside party, and usually involves something that the business could do, and maybe previously did do, in house. Far from harming the economy, it is usually beneficial, sometimes to an extraordinary degree. It can be domestic outsourcing where firms within the same country provide services to a business under contract, or offshore outsourcing, where part of the activities of a business are performed abroad.

Domestic outsourcing has many advantages. It enables greater specialization, in that it allows a firm to concentrate on its core function, and to have certain functions performed by outside firms that specialize in those areas. By specializing they often acquire the expertise to perform the activity better than the firm could have done itself, and at a competitive price. The firm itself need not meet the capital and overhead costs of performing the activity in-house, but simply pay for the services from others.

Offshore outsourcing is usually done to achieve cost savings. It enables a firm to employ lower cost foreign labour, and thus achieve lower prices for its own products. Many electronic devices such as mobile phones and music players have their assembly outsourced to cheaper countries. This enables the goods to be sold more cheaply in advanced economies, saving customers money to spend on other things. It thus boosts economic activity and makes both countries richer. The poorer country has its workers enter the global labour market and be paid wages, while the richer country receives lower cost goods.

Outsourcing can be beneficial to government when it uses the services of outside contractors to perform some of its functions. Ministers and civil servants are not necessarily (and not usually) particularly good at business, so it can make sense to hire outsiders who are better at it and who have a record of experience at it.

High top tax rates drive away inventors

There are plenty of reasons we might want moderately high top tax rates. If we do them cleverly (e.g. taxing consumption, not income, and definitely not capital or transactions) they can raise the revenue we may need for redistribution and goods everyone seems to believe only the government can provide, while not causing too many efficiency costs.

But there are also lots of reasons we might not want tax rates to go up too high. Eventually we pass the top of the Laffer Curve (it probably peaks when marginal rates + national insurance + benefit withdrawal + the tax rate effects of VAT + so on are roughly 60%, so about now) so we can cut rates and raise revenue—everyone benefits. Higher taxes means lower growth.

Another is that today's top 1% most skilled people are less rooted than ever before, and seem willing to work in Hong Kong, New York, Geneva, Paris, Los Angeles or wherever things are better. This means that changes in top tax rates can have substantial impacts. A new paper shows that this applies not just to bankers (witness the flood of French financiers to London) but also to top inventors.

"Taxation and the International Mobility of Inventors" (pdf), from Ufuk Akcigit, Salom Baslandze and Stefanie Stantcheva, finds that:

This paper studies the effect of top tax rates on inventors’ mobility since 1977. We put special emphasis on “superstar” inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors’ locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors’ counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate.

The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.

The paper comes with some fascinating charts, showing just how many useful patents come from the most productive inventors.

It seems pretty reasonable that there are benefits to the UK of having productive inventors in the UK rather than elsewhere—although it may not come out as a net benefit to the world unless there are network benefits to the kinds of big agglomerations of research activity that are building up around Oxford, Cambridge, Manchester and London. But even if that isn't true, it goes to show that people really do respond to incentives.

Re-examining London's misnamed green belt

green.jpg

The momentum is building up for a change in London's housing policy after the election. The ASI published "The Green Noose" by Tom Papworth in January, showing that over a third of protected Green Belt land is devoted to intensive farming, by no means pretty to look at or environmentally friendly, and which in fact generates net environmental costs. In February London First published "The Green Belt - A Place for Londoners?" giving the facts and figures on London's land, and showing that only 26% of London's Green Belt consists of environmentally protected land, parks, and public access land. They similarly showed that only 27.6% of London is covered by buildings, roads, paths and railways.

In today's City AM Mark Boleat, policy chairman at the City of London Corporation, makes similar points, quoting the London First report, and pointing out that "a full 60% of the Green Belt is private agricultural land."

The research done by bodies such as the Adam Smith Institute and London First contradicts the popular image of the Green Belt as green and pleasant land. Far from the daisy-strewn meadows and woods teeming with wildlife that the term suggests, much Green Belt land is farmland, with monoculture fields by no means friendly to wildlife or accessible to people.

The first step in re-evaluation might be to classify Green Belt land into the different types that comprise it. There is genuinely green land, the fields and woods that everyone likes. There is damaged or brownfield land, partly made up of abandoned buildings, gravel pits and the like. And there is farmland, much of which is not environmentally friendly.

The government that takes office after May's election could take the initiative to redress a chronic shortage of housing where it is needed by allowing building to take place on land of types two and three, while leaving the genuinely green land preserved. The opposition will be much diminished if it is understood that only damaged, distressed or intensively farmed land will be affected. And more to the point, the extra houses will bring down the costs of housing and make it available to more people.

ASI's Budget 2015 wishlist: A tax code that actually makes sense

UK-TAX-codes.jpg

Nobody designing the UK’s tax code from scratch would come up with one like the system we have now. Our taxes are complicated and inefficient and divert capital away from productive investments that would boost economic growth. This year, we’re hoping for a Budget that reforms the tax code in line with the best economics out there, reforming the worst taxes and cutting the tax burden on investment and the working poor: VAT: broaden the base and use the money to help the poor

The huge number of exemptions to VAT make the tax so inefficient that if we raised the rate to 20% on every good we could compensate every household and still have a few billion pounds left over. If, instead, we raised every good to the 20% flat rate, but compensated only households earning less than median income, we'd have billions left over to reduce the deficit. The money raised should be given back to people on low pay through tax credits and to create a higher national insurance contributions threshold, which would increase the incentive to work on the other end.

Capital Gains Tax: abolish it outright to boost growth

Capital Gains Tax (CGT) is an extremely inefficient tax on capital that reduces overall investment and raises just £5bn annually. CGT reduces investment, 'locks-in' capital to less productive investments and can be avoided by not investing in assets that will rise in price, so it is distortionary and ends up directing investment away from riskier assets like start-up business debt. Scrapping CGT would not cost a lot (and could be paid for with the money left over from the VAT broadening, above), and would boost investment and growth, boosting wages across the board.

Business rates & council tax: revalue with a view to eventually merge

Business rates & council tax are in theory some of the least bad taxes on the books. As long as the values they are levied on are kept up-to-date, they reduce economic activity much less than most taxes. But in the modern world house prices and land prices move rapidly and not uniformly. The North is currently being hammered—paying business rates far higher than their property deserves—the South is winning out with unfairly cheap payments. Council tax is even worse: the band system is out-of-date and should be replaced with a fluid penny in the pound system like rates, while the revaluation long postponed from 1993 should be done now and then kept constantly up-to-date. If Zoopla can get good estimates of property values then surely HMT can too. Eventually the two systems should be merged at the same rate, so that housing and business both go where they are most in demand.

For further comments or to arrange an interview, contact Kate Andrews, Head of Communications, at kate@old.adamsmith.org | 07584 778207.

Government grants always end up doing this: so let's not have government grants

innovateuk.png

We don't share the reason why these people are outraged but we do share the outrage:

Snack food and confectionery companies, including Nestlé and PepsiCo, are paid substantial government subsidies to help them make products that will damage the nation’s health, according to charities involved in heart attack prevention and obesity.

Mondelez, which split from Kraft and owns the Cadbury’s brand, was given nearly £638,000 by Innovate UK – formerly known as the Technology Strategy Board – from 2013 to 2015 to help the multinational giant develop a process to distribute nuts and raisins more regularly in its chocolate bars.

Nestlé received more than £487,000 to invent an energy-efficient machine for making chocolate, while PepsiCo was awarded £356,000 to help develop new ways of drying potatoes and vegetables to make crisps.

Given that people seem to like chacolate and crisps if taxpayers' money is going to be splurged on food companies then it might as well be on food that the taxpayers enjoy. So, to that particular criticism we offer a heartfelt "Meh".

Our outrage is concentrated upon the splurging and waste of taxpayers' money. Even, perhaps, the illogic of the attempt to defend it:

Innovate UK says the money is to make the companies’ food processes more energy-efficient and reduce their carbon footprint. In the case of Mondelez, for instance, a better way of distributing nuts in chocolate bars would mean that fewer nuts have to be bought by the company, reducing the amount of transportation used.

“The goal of the projects highlighted was to help reduce emissions and water usage in food processing,” said a spokesman. “These large firms produce a lot of food, which uses a lot of energy, so to make a difference we need to work with those large companies to help reduce their carbon footprints.”

The UK does now have a system that largely approxiamtes to a carbon tax. Therefore those carbon emissions are already internalised in the decision to transport or not transport more nuts. What this means is that the provision of a grant is in fact a complete waste of money, a reduction in the general wealth of the human species.

Think it through this way. Reducing the number of nuts purchased and or transported might well reduce the costs to the chocolatier. Against which are the costs of reducing those purchases and transporting. Only if the benefits of less purchasing and transporting outweigh the costs of doing so is the process as a whole value generating and wealth enhancing. The company itself, as a profit making institution, looked at this and decided it was not. Thus the requirement for the subsidy to get them to do this. That is, the very fact that there is a subsidy proves that (because, as above, the emissions costs are already internalised) this is wealth destruction.

The point and purpose of our paying taxes in order to stimulate innovation in the UK is not for the orgainsation spending the money to make us poorer in aggregate. Therefore let us abolish this organisation which is making us all poorer through its actions.

Economic Nonsense: 26. People lack the knowledge and ability to serve their own interests

chooselife.jpg

There is an implicit assumption behind this claim that someone else does have the knowledge and ability to serve people's interests better than they can do so themselves. This is dubious, to say the least. People know more about their own character, about their circumstances and priorities and the things that they value. They also care more, for the most part, than others do. It is true that people are sometimes ignorant of such things as the consequences of their lifestyle choices, but information is freely available in the media. Scarcely a day passes without news items about the various types of food we eat or the benefits of moderate exercise. In newspapers and on TV, radio and the internet, there are stories about diet and drinking, smoking and exercise. People can pay attention to this information if they wish.

Even on more complicated issues such as pensions land life assurance, there is help available from commentators explaining the different options and giving advice. No-one is on their own on such matters because assistance and explanation are freely available from widespread sources.

Sometimes people make choices for short-term gratification at the expense of greater gain in the longer term. In a free country they are allowed to do this. It is possible that some people lack the willpower to sacrifice present comfort for future rewards. This does not give anyone else the authority to take the decisions out of their hands.

Middle class people have notably longer time horizons than their working class counterparts, meaning they are more ready to do things now that will benefit them in the future. They have different priorities, but nothing in this gives them the right to impose their priorities on others. When people make their own decisions about what they do, they are acting as adults, free to take actions and to accept the consequences they bring. When others take those decisions for them and impose their own priorities, they are treating people as children unable to look after themselves.