Its getting to that time of year when the Government once again explains to the nation, with tears in their eyes, why they cant raise the minimum wage to keep up with inflation. And its always the same excuse: employers cant 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, theyd better be sure theyre right. Of all the reasons Ive 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 doesnt explain why they turned to the Right instead of the Left, but thats an issue for another time.
They are sure theyre right, of course. In fact, to the National Partys way of thinking its dangerously over-generous to have a minimum wage at all. Its basic economics (and middle-level economics as well, come to that). A minimum wage is what economists call a price distortion. Heres 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 thats 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 Im going to focus on one key one, because without it the entire argument collapses. Thats 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 thats 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? Heres one. Ive never gambled on the stock exchange or anywhere else, but you cant 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 theyre not broking stocks (I wouldnt know). On Saturdays and Sundays they do no broking at all. Same as everybody else, right?
No, not everybody else. Before the National Governments 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. Didnt matter what time of night you walked past it, youd hear motors humming and sparks spitting, and thered be lights in the windows. Factory workers work nights and weekends if theyre told to. Stockbrokers, despite the quadruple profit theyd get by trading all 168 hours of the week instead of just 40, dont.
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 theyre trying to sleep. Or just possibly, and I really think this hypothesis might deserve some consideration, its 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 thats 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 dont because they dont 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 havent got much money cant buy your stuff. Pretty basic principle, Id 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 peoples 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 wont save us here.
Government intervention might if we had a government that could be bothered to stand up to the employers. National obviously cant, but theres an election coming up in September. Just putting that out there.