Even if the minimum wage doesn't hit jobs it hurts the poor

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There is a big debate over whether minimum wage increases cause unemployment. A majority of papers say it does, and a bigger majority of the best papers, but there is also lots of evidence that it doesn't always. And we must bear in mind that bodies like the Low Pay Commission are well aware that big hikes are dangerous so they intentionally advise for smaller ones, with the disemployment effect firmly in mind. The debate rages mainly because the minimum wage is such a live political issue. Its proponents see it as an anti-poverty mechanism without the potential stigma of benefits. Its opponents think it risks jobs; better to be employed with a low wage than not employed at all.

But what if that's a false dichotomy. Let's assume it doesn't hurt jobs—let's assume that all of the minimum wage is instead passed along to consumers. Does the benefit from higher wages outweigh the cost from higher prices? A new paper (pdf, up-to-date gated) says 'no':

Low-wage families are typically not low-income families. The increased earnings received by the poorest families is only marginally higher than by the wealthiest. One in four families in the top fifth of the income distribution has a low-wage worker, which is the same share as in the bottom fifth. Virtually as much money goes to the highest-income families as to the lowest.

While advocates compare the wage levels to the poverty threshold for a family to make the case for raising the minimum wage, less than $1 in $5 of the additional earnings goes to families with children that rely on low-wage earnings as their primary source of income. Moreover, as a pretax increase, 22% of the incremental earnings are taxed away as Social Security contributions and state and federal income taxes. The message of these findings is clear: raising wages wastefully targets the poor contrary to conventional wisdom.

Turning to who pays the costs of an increase in the federal minimum wage through higher prices, the analysis reveals that the richest fifth of families do pay a much larger share (three times more) than those in the poorest fifth. This outcome reflects the fact that the wealthier families simply consume much more. 34 However, when viewed as a percentage of expenditures, the picture looks far less appealing. Expressed as a percentage of families’ total nondurable consumption, the extra costs from higher prices are slightly above 0.5% for families at large.

The picture worsen further when one considers costs as a percentage of the types of consumption normally included in the calculation of state sales taxes, which excludes a number of necessities such as food and health care. Here, the implied costs approximately double as a percentage of expenditure. More important, the minimum-wage costs as a share of “taxable” annual expenditures monotonically falls with families’ income. In other words, the costs imposed by the minimum wage are paid in a way that is more regressive than a sales tax.

That is: most of those on the minimum wage are not earners for poor families; the goods produced by minimum wage workers make up a large fraction of poor households' budgets; raising the minimum wage, even if it doesn't cut jobs, hurts the poor more than it helps them.

What joy in The Guardian letters page

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Mark Lynas exaggerates a little but is generally correct here:

Climate change is real, caused almost entirely by humans, and presents a potentially existential threat to human civilisation. Solving climate change does not mean rolling back capitalism, suspending the free market or stopping economic growth.

That "potentially existential" is the exaggeration. It's something between not a problem and a large problem. Meaning that yes, we probably would like to do something about it even if only on the grounds of insuring ourselves. Very much the Matt Ridley point in fact (not surprisingly, as the Good Viscount has informed us on the matter and we have been able to inform him on certain points).

Then we come to the Guardian letters page in response to Lynas. Much spluttering that of course capitalism must be defeated etc. And we're also set a challenge:

Immense changes to the economic system must be made over the next few years, and the blame game gets us nowhere. If Klein’s belief that “corporate capitalism must be dismantled’” is wrong, it is up to the right to show how the new measures required can work under the present system.

OK, how's this for a plan?

We carry on rather as we did in the 20th century. Roughly the same rate of economic growth, roughly the same demographics (we need the growth rate to reduce fertility and thus get the demographics), roughly the same rate of globalisation and increase in international trade, roughly the same rate of increases in energy efficiency, reduction in costs of solar and so on and on. There's also that insurance bit and as we've got to get tax revenue from somewhere let's have a carbon tax and reduce the taxes on a good thing. Say, increase the allowance before paying payroll taxes (national insurance for the UK, FICA for the US etc). This will in fact solve the problem. (Maybe we might try to miss out the communism and the two world wars bit though.)

No, really, it will. For what we've described there is A1T, one of the scenarios that the IPCC itself uses to forecast climate change. And A1T really is just a straight line projection of the trends of the last century across the next. The carbon tax is simply adding the major recommendation of the Stern Review to our mix as that insurance policy. Under A1T climate change is not an existential problem, it's not even a major problem. In fact, by the end of the century it's not even a problem at all.

Now, we're generally believed to be on the right so perhaps that answers the letter writer's question? Or perhaps, because this isn't actually an answer from the right but is one from the climate establishment it doesn't qualify?

Or, of course, there's the possibility that all of those shouting about climate change and the necessity of deconstructing capitalism and markets either have not read or have failed to understand the basic documents that lay out the concerns in the first place. That would be something of a pity, of course it would, but it wouldn't be the first time various lefties have decided to ignore reality.

Economic Nonsense: 29. The economy should be based on co-operation rather than competition

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It is competition that makes the economy work. Producers compete with each other to supply consumers, and consumers bid against each other to decide who buys. When goods are in short supply consumers bid up prices, sending a signal to producers to produce more and thereby redress the shortage. Competition allocates resources efficiently. The same steel that makes a bridge cannot also make a ship, and resources are allocated where they achieve most value and where they command the highest prices. Competition for workers drives up wages. It is competition throughout the economy that motivates people and sends the signals that tell people how to improve their circumstances.

If people attempted to base an economy on co-operation, it is difficult to see how they would know what to. Without the signals sent by competition in prices and resource allocation, they would not know what to produce, in what varieties and to what standard. The experiment with the socialist economies of the Soviet Union and its satellite states was an attempt to plan by co-operation instead of competition, and it failed miserably. State factories were inefficient and outdated and they produced shoddy goods. Shortages were a feature of everyday life.

State officials attempted to estimate needs and to instruct factories to produce goods accordingly. They had no knowledge of what people actually wanted. In a competitive economy, producers vie with each other to guess what the public will want, so that they can profit by producing it. In a co-operative economy they do not compete with each other, so some official or committee has to make the decision, with little at stake if they got it wrong, which they often did.

There is nothing wrong with competition. Misguided ideologues tried at one stage to eliminate it from schools, and some still do. In fact competition spurs people to improvement. It is usually friendly, with people looking to the achievements of others to see how they might improve their own lives. It is a fact of nature just as much as is the empathy we show towards others. Competition works, and it is a force that improves lives. In an economy it is essential.

The minimum wage is too high, much too high

We've the sad news that the minimum wage is being raised yet again:

The national minimum wage will increase by 20p an hour to £6.70 from October, the government has announced.

The changes will benefit more than 1.4 million workers.

And will disbenefit some unknown number of workers who will lose their jobs. True, a modest rise will leave only a modest number losing their jobs but as they therefore lose 100% of their income that's still quite a large effect. However, we also have another report today:

The number of young people from ethnic minority backgrounds who have been unemployed for more than a year has risen by almost 50% since the coalition came to power, according to figures released by the Labour party.

There are now 41,000 16- to 24-year-olds from black, asian and minority ethnic [BAME] communities who are long-term unemployed – a 49% rise from 2010, according to an analysis of official figures by the House of Commons Library.

The effects of a minimum wage will be hardest felt where that minimum wage actually binds. Among the young and untrained and among those who are unfavoured for any other reason (like, here, perhaps ethnicity for all that we would desire that there is no such discrimination). Which make this news about the new minimum wage even worse:

The hourly rate for younger workers will also rise, and for apprentices it will go up by 20% - or 57p - to £3.30 an hour.

Yes, of course the correct minimum wage is a rate of zero. But we're unlikely to win that argument but at least we can argue for a rate that doesn't do so much damn damage to the least favoured portions of our society. The minimum wage discriminates against those black, asian and minority ethnic youths. Indeed, such discrimination was a stated reason for the introduction of the minimum wage in the United States back in the times of Jim Crow. It's actually a racist government policy. We should therefore end it.

Economic Nonsense: 28. Capitalism brought about the financial crisis and should be replaced

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Opinions differ on the causes of the financial crisis; some economists suggest it happened because of a combination of several causes. In the US sub-prime mortgages were involved, in that mortgages had been given to some who were poor repayment risks. When these were bundled into other securities, an unknown risk was being marketed, with some institutions heavily over-extended with potentially bad debts. It should be pointed out that it was US government policy to extend home ownership to low income people. The two agencies Freddie Mac and Fannie Mae were both encouraged to do this. The process of 'red-lining,' drawing lines around city zones inside which no mortgages would be given, was outlawed. It might also be noted that most of those who received mortgages, including low income people, continued to pay their mortgages payments and successfully became home owners. Only a tiny proportion were defaulters. It was the unquantifiable nature of the risk that caused problems.

Others have pointed out that the Federal Reserve Bank made a policy of cheap credit. They did this to weather crises and prevent economic downturns. The Bank of England did some of the same. When money was cheap, so was risk, and the message encouraged financial institutions to undertake riskier ventures. It was as if all the traffic lights were stuck on green, and everyone pressed ahead at speed.

The lesson is that governments and central banks were at fault, as were reckless traders taking huge risks to bring greater returns. It was not capitalism itself that brought about the crisis, but rather the inappropriate behaviour of some of the parties involved, including government. Neither was it regulation. With the possible exception of the pharmaceutical industry, the financial sector was among the most tightly regulated in the world. It was unsuitable regulation that sent the wrong messages and brought about wrong behaviour.

Capitalism has not been replaced and almost certainly will not be replaced, in that no-one has found a better way of generating wealth or of improving living standards over the long term. It experiences shocks and crises from time to time, and it is partly a learning process. After each crisis it is modified to prevent the same happening again. But there may well be new and different crises in the future, and new ways will have to be found to deal with them.

One tax hike I'll be hoping for in the Budget (and some cuts as well)

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Back home in Ireland, it’s said that asking for directions will often get you the reply, “I wouldn’t start from here.” We might say the same thing about the UK’s tax code. Nobody drawing up a tax system for the country would create anything like what we have right now, and when it comes to reform – well, I wouldn’t start from here. One example, which I talked about on the Today Programme this morning, is VAT. VAT is usually considered to be one of the least bad taxes around: in theory, it doesn’t discourage production, it isn’t very regressive, and it doesn’t distort the economy.

I say “in theory” because in practice the UK’s VAT system is a mess. It is riddled with exemptions (I am including zero-rated and reduced-rated goods in this) that distort people’s spending, which means that resources are being wasted, because people are buying relatively more of the untaxed goods and less of the taxed ones than they would be if the playing field was level.

The usual argument for these exemptions is that they are needed to reduce the burden on the poor. This is a powerful argument but it is wrong.

Many of the exempted items are unlikely to benefit the poor anyway – financial services, the construction of new dwellings, domestic passenger transport – but even for things like children’s clothes and food the argument is wrong. Although poor people spend a greater fraction of their budgets on exempted items like these, total spending on these goods rises with income, so most of the forgone revenue is actually from the rich.

The extra money raised could easily offset the extra cost to the poor by reducing income taxes on them (including national insurance contributions) or by raising the Universal Credit payment level. We could actually offset the extra cost to almost everyone, but except for people on low pay I think there are better taxes we could cut with the money left over.

The IFS estimated in 2010 that scrapping all VAT exemptions would raise an extra £26-28bn, based on 2010-11 numbers. Conservatively, rounding that up to £30bn to account for the larger economy, and spending half on boosting the incomes of the poor, we have £15bn left to play with. We’ve suggested scrapping capital gains tax to boost investment and using the rest to reduce the deficit.

In simplifying VAT we can make one important tax much less destructive without hurting the poor and use the money left over to cut taxes that are even worse.

Politically, this might not deliver good headlines, but if it was done at the start of the next Parliament the boost to people’s living standards by the next election could, improbably, make raising taxes on food and children’s clothes a real winner.

We might not want to start from here to get our sensible tax system, but this is one reform that could be a good step in the right direction.

The dark history of the minimum wage

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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

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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

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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.