Thursday, 10 March 2011

On the minimum wage and unemployment

Late last month, youth unemployment reached a record high. This event in particular has led to the resurgence of one of the right's favourite economic arguments: that the minimum wage needs to be scrapped.

The basic reasoning, as articulated by the Adam Smith Institute, is this;
Youth unemployment – and the same is true of immigrants and other minority groups – is always worst when times are hard. Employers keep the best workers and shed the labour they do not value so much. And the fact is that young people are just not worth as much to employers as older workers. They may have no marketable skills. They will have little or no experience of how workplaces operate. They might, after a decade and a half of state education, even lack basic life skills.

And yet government regulation forces employers to pay not less than £4.92 per hour for 18 to 20-year-olds and £5.93 for those 21 and above. It is plain that many employers think a large proportion of young people are just not worth that amount of money to them. Particularly when other employment legislation adds to their costs even more, and makes it almost impossible to get rid of workers they find they don't need. No wonder they aren't hiring.

It's time to scrap the minimum wage for young people. It just prices them out of jobs, so does them no good at all. For them, low-paid work is a way of building up some human capital that will make it easier to find a better job. But we stop them even getting that work at all – and all in the name of protecting workers.
This theory is based on the basic concept of supply and demand. Thus, without any intervening forces, an increase in supply (workers looking for employment) or a decrease in demand (jobs on offer) deflates wages, whilst a supply decrease or demand increase has the opposite effect.

But, even presuming that artificial wage increases are the only artificial intrusion on this model (they aren't, as I'll come to later), the basic presumption isn't a set in stone fact. In the US, for instance, a Fiscal Policy Institute study (PDF) found that "employment and payrolls in small businesses grew faster in the states with minimum wages above the federal level than in the remaining states where the $5.15 an hour federal minimum wage prevailed."

In Britain, before the recession, it was found that the minimum wage had no discernible impact on employment levels. There is an argument that the minimum wage motivated an increase in prices in affected sectors (PDF) and other adjustments in order to compensate, however this is a separate point.

Because, of course, employment and wages cannot be looked at as a simple supply and demand model operating without interference. It isn't. The minimum wage is one artificial adjustment to the model, sure, but it is hardly the only one. Of far more importance is the notion of a "natural rate of unemployment," to use Friedman's term, or the "reserve army of labour," to use Marx's.

As I argued previously in The role of unemployment in capitalism, this "natural rate" is in fact a result of manipulation and collusion by the ruling class in order to ensure that the balance between supply and demand favours employers. This is simply because, as the same Adam Smith from whom the ASI take their name put it, just as workers "are disposed to combine in order to raise" wages, bosses are equally disposed to combine "in order to lower the wages of labour." But "the masters can hold out much longer" than the workers if unemployment ceases, and survive "upon the stocks which they have already acquired" from the labour of others.

By comparison, the effect of the minimum wage upon the labour market has been negligible. Not least because employers have been able to offset it with reduced staff hours, increased prices, and measures to increase productivity - as the Low Pay Commission reported in 2005 (PDF).

This is not to mention that wages paid no longer have any reflection on workers' needs. Smith posited that there was "a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour" because "wages must at least be sufficient to maintain" the workforce.

But the Joseph Rowntree Foundation (PDF) estimated last year that "a couple with two children needs [to earn] £29,200" in order "to afford a basic but acceptable standard of living." At current minimum wage levels, even ignoring the significant price rises that have occurred since, that leaves both working 46-and-a-half hour weeks just to get by. The minimum wage is thus actually below the rate for Smith's "lowest species of labour."

With the steady casualisation of work, this is only getting worse; and it is clear that those commentators urging that even the paltry protections of the minimum wage be removed are salivating at the prospect of speeding up that race to the bottom. This has to be resisted.