Sunday, 5 March 2017

Jobs or wages: pick one

It’s getting to that time of year when the Government once again explains to the nation, with tears in their eyes, why they can’t raise the minimum wage to keep up with inflation. And it’s always the same excuse: employers can’t pay a cent more than they already do, so if the wage goes up there will be less jobs. Geez, you guys, you want steady jobs and livable wages? What rabbit do you want us to pull out of our hats next? Affordable education?

Well, they’d better be sure they’re right. Of all the reasons I’ve seen for why so much of the American working class voted for Donald Trump, the most convincing is that they were sick of the established order and Trump was a handy sledgehammer to bash it with, and the reason they were sick of the established order was that it kept telling them they had to choose between wages and jobs. Which doesn’t explain why they turned to the Right instead of the Left, but that’s an issue for another time.

They are sure they’re right, of course. In fact, to the National Party’s way of thinking it’s dangerously over-generous to have a minimum wage at all. It’s basic economics (and middle-level economics as well, come to that). A minimum wage is what economists call a “price distortion”. Here’s the theory. If the government sets a minimum price for any product which is above the natural market price of that product, some buyers can no longer pay for it – that’s what the natural market price is – so people buy less of it, the sellers have to compete to attract customers, and everybody ends up worse than before. Actually, in an economics class, any time the government lifts a finger you can pretty much jump straight to “everybody ends up worse than before”. And of course to economists labour is just another product, sold by the worker and bought by the employer.

There are several questionable assumptions here, but I’m going to focus on one key one, because without it the entire argument collapses. That’s the assumption that the employers are paying as much as they possibly can. This only follows if the workers have just as much power to turn down work as the employers have to set wages. If that’s not true, then the market will shift in the employers’ favour. By economic logic that would be a price distortion, which would reduce the wage below its natural market value.

So how good is that assumption? What indications might we look for? Here’s one. I’ve never gambled on the stock exchange or anywhere else, but you can’t sit through three semesters of finance lectures and not become familiar with the phrase “close of trading”. That basically means 5pm every weekday, local time, after which the stockbrokers all go home and do whatever stockbrokers do when they’re not broking stocks (I wouldn’t know). On Saturdays and Sundays they do no broking at all. Same as everybody else, right?

No, not everybody else. Before the National Government’s bold, exciting new job-creating economic policies forced it to close, the railway-carriage factory near my house was always busy. And I mean always. Didn’t matter what time of night you walked past it, you’d hear motors humming and sparks spitting, and there’d be lights in the windows. Factory workers work nights and weekends if they’re told to. Stockbrokers, despite the quadruple profit they’d get by trading all 168 hours of the week instead of just 40, don’t.

There are several possible explanations for this discrepancy. The one any economist will think of first is that factory work pays much better than stockbroking, with better bonuses and holidays, to encourage people to work nights and weekends. Or perhaps factory work attracts a demographic of people who love darkness and cold and closed shops during their free time, and sunlight and traffic noise when they’re trying to sleep. Or just possibly, and I really think this hypothesis might deserve some consideration, it’s that stockbrokers have more power than factory workers to determine their pay and conditions.

Now if some people have more power to influence the labour market than others, it necessarily follows that the less powerful people will end up getting less benefits than the more powerful people. If that’s the case, then the economic objection to raising the minimum wage is false. There is some slack in the rope. Employers could pay more than they do and still employ just as many people. They don’t because they don’t want to. The workers put up with it or lose their jobs.

In such a case the government would be well-advised to iron out the distortion, because not paying people enough is bad for the economy. Henry Ford (no friend to anything smelling of unions or socialism) paid his employees well and gave them the whole weekend off because he understood that they were also his customers. People who haven’t got much money can’t buy your stuff. Pretty basic principle, I’d have thought. Unlike the free-market apologetics above, I have yet to hear about it in an economics lecture.

The trouble with this is of course the free-rider problem. In an economy with lots of employers, each one can bet that nearly all their customers are other people’s employees, and pay their own ones less than anybody else. The first employer to do this will get big savings in labour costs and minimal loss of revenue. As more and more pile on, the whole system will go down the drain. But no matter how bad it gets, it will always be cheaper for any one person to pay just that little bit less. Rational self-interest won’t save us here.

Government intervention might – if we had a government that could be bothered to stand up to the employers. National obviously can’t, but there’s an election coming up in September. Just putting that out there.

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