In praise of minimum wages

Minimum wages are having something of a moment. Many cities in the US have started to impose much higher minimum wages, while Germany has overcome its long resistance and set quite a high wage. But the reward for chutzpah goes to UK chancellor George Osborne.

Osborne is not my favourite politician, but you have to admire his political instincts. His recent budget contained much that is obnoxious, notably on housing and inheritance, but he made sure that the headlines concerned his announcement of a radical increase in the minimum wage. This was presented as a generous recognition of hard working people, and it stole the clothes of the opposition labour party, who had fought the election on promises including a smaller increase.

What made this so brilliant was that it was actually a sleight of hand. Osborne’s main budget priority was to reduce the welfare bill, and on this he was hemmed in by promises to pensioners and others. The available target was tax credits, introduced by the Blair government to support working people on low wages. Osborne drastically reduced criteria for tax credits – while to his credit continuing to raise personal allowances. By doing this he made a huge dent in his own budget and transferred responsibility for low-paid workers from the state to their employers. The lower-paid workers will not be better off at all, but the treasury will.

The Economist ran a typically thorough analysis of the arguments for minimum wages and tax credits as alternatives. It acknowledged the need for one or the other in the modern world where supply of labour outstrips demand. It also acknowledged that much research showed that minimum wages did not harm employment, despite being one of those who argued that this would happen when minimum wages first came into fashion around the millennium.

The argument in favour of minimum wages against tax credits is simple. It saves the state money that can be used elsewhere. This argument is especially strong when there is a risk that companies take advantage of tax credits. Why pay staff $10 per hour when you can pay them $7 per hour and the employee gets the other $3 back from the government? The longer tax credits are in place, the more likely such distortions will take place. In times when government resources are limited and where the corporate share of wealth grows ever higher, this is powerful indeed.

The countervailing argument is that minimum wages will eventually reduce employment. Faced with paying $10 per hour out of its own pocket, the employer has a number of options. In short term, it will probably swallow the higher wage and try to pass on the extra costs to customers through higher prices or let profits suffer.

But in the longer term, the business may choose to lay off the employee. Perhaps the company becomes uncompetitive against foreign rivals with lower labour costs. Perhaps it can even offshore labour itself. And perhaps it could replace the labour component with capital alternatives such as technology. The Economist takes the simple example of supermarket checkout staff. When staff are cheaper it pays to have manned lines. But if wages go up the alternative of investing in self-service lines increases.

The Economist concludes that higher minimum wages and minimum wages held for the longer term are unchartered territory, and that surveys so far showing that minimum wages do not harm employment tend to lack the longer term perspective and apply to lower wage floors compared with median wages.

That is fair enough, but for me it misses the main point, which is the human one. Can we really sustain an economy where people are required to work for wages where they can’t live a decent life? Whether mitigated by tax credits or minimum wages, we must have one or the other. And once you draw that conclusion, the answer as to which is clear.

There have been major structural changes to employment models. The potential workforce has expanded, by including women and many older people (some places I go to seem to have no staff under seventy). Automation continues to attack what used to be mainstay jobs, while globalization allows much work to be done anywhere. These trends are not going to reverse any time soon, and the natural consequence is to drive wages down to desperation levels.

Where minimum wages and tax credits are parsimonious, we already see this. People end up doing two or three jobs. Mums continue to work when expecting and having just given birth. Working hours get longer and longer, jobs further from home, vacations vanish, ever worse conditions are accepted. For what is the alternative? Even a tiny wage is better than none at all when there are mouths to feed.

The consequence is not just misery, it is deprivation. Kids are taken out of school or left alone at home. Home is often without heat or somewhere to do homework. Extended families share rooms. Good diet becomes impossible, and healthcare squandered. Debt mounts up to add to fear.

I saw a telling chart two weeks ago, again in the Economist. We have come to expect downward trends in infant and maternal mortality everywhere, indeed that is a global good-news story. But in one country, the trend has decisively turned in the wrong direction over the last twenty years: that country is the USA. I am pretty convinced that the appalling quality of life of the bottom 30% is the root cause of this.

So, maximizing jobs on its own is not a laudable aim, we must maximize decent jobs, those able to sustain a healthy life. Do we want a return to the 19^th century, when kids worked? Regulation has removed some of the most egregious practices and should continue to do so. Companies will get away with whatever they can, so a minimum wage is one of those things that must be regulated, along with fair contracts, maternity benefits and the like.

Tax credits only paper over the problem, indeed they might make it worse if employers exploit them. Minimum wages are a human right.

So should we just accept lower total employment? It is no doubt true that minimum wages speed up automation and offshoring. So be it. Such things benefit consumers and support innovation, as well as global development.

The job of government is not to paper over the cracks with tax credits, though it is good to have a progressive income taxation system. Government must seek to deal with the structural causes. Again, protectionism is no answer, we should not fight the trends. Government should use some of the money saved on tax credits for safety nets, and the rest to try to nudge the economy towards new, decent jobs.

Part of this is about making business easier and improving education, but an even more structural rethink of employment principles may be necessary.

An example - can we not greatly expand the workforce defined as carers? The vulnerable receive inadequate care and most of what they do receive is supplied voluntarily by families. If such work were certified, trained, and paid a living wage (even for our own parents or children) we can achieve many good societal outcomes at once. Everyone’s quality of life can increase, and our lives can become more balanced.

Now Mr. Osborne, that would really be a newsworthy innovation. I fear you have come to a good partial solution for completely bad reasons. By the way, I predict that your move will also increase Britain’s flagging productivity, since this is much more about the portfolio of work in the economy than about how hard people work.

Sadly, I have little expectation that so cynical a politician will use the opportunity he has just created for himself to shape an improved society. Sadly, the other parties in Britain seem set to be peddling even worse remedies.