The labour market and wages

David Farrar has a very good reply to this post from Tane at the Standard.

There are a few points I would like to make as well though. Tane says:

David Farrar made the same fallacy the other day, the minimum wage isn’t there to make us all rich, it’s there to ensure that people on low incomes are able to live their lives with some basic dignity and security

Well, the minimum wage is a poor tool to do this. The best wage to ensure that people have a minimum income is from the state to provide it directly – which they do with the unemployment benefit. In this case everyone has a minimum living standard, but by joining the labour market they can improve on this. Although I believe there is a case for a minimum wage – the case for “increasing” it is much more debatable.

The next section is the bit David discusses:

But in a capitalist system any benefit from productivity increases goes directly into the pockets of business owners. You need a mechanism to translate that into wages. And that mechanism is decent employment protections and a unionised workforce that has the strength to bargain decent wage increases.

There is some truth in the fact that workers can get a larger pay rise when they increase their market power – after all, that is what the union is. However, strong employment laws are not the only way for rising productivity to influence wages.

Think about what increasing productivity does – it means we can make more stuff with the same inputs. Now, if the production process depends on labour (which it almost always does) this (often) implies that current firms receive a greater benefit from using labour. Now if this is the case competition between firms, and entrepreneurs, will ensure that wages get pushed up to some degree.

We only get the situation Tane describes when labour has no market power, and when no additional labour can be coxed into the market by lifting wage rates. This is a very very extreme set of assumptions.

Conclusion

I agree with Tane that the state does have an ability to improve outcomes in the labour market – by changing the structure of negotiations and adjusting bargaining power. But even in the absence of the state, the statements he put forward were too extreme – productivity improvements would go partially to labour.

This is important, as Tane is pushing for “more” government involvement in the labour market – and the justification for this is his extreme view of the way the labour market works. A view that I do not think matches current reality.

  • I must say I agree with the case for sensible minimum wages. Rich countries like the USA and new Zealand can afford to marginally constrain free labor markets by setting minimum standards we expect all employers to honor. And minimum wages are a good idea in my opinion. The USA has fairly low minimum wages (they are increasing something like 25% over 3 or 4 years (I don’t know how far we are into that period now). When the lowest pay rises, what happens?

  • @John Hunter

    There is definitely some scope for minimum wages, whether it be to enforce some belief of “fairness” for peoples work or because the labour market is imperfect. However, I think the case for any given level of a minimum wage must be thought through heavily – I’m not a fan of arbitrarily regulating prices.

  • insider

    “Well, the minimum wage is a poor tool to do this. The best wage to ensure that people have a minimum income is from the state to provide it directly – which they do with the unemployment benefit.”

    Might be true economically but is it the best way socially? aren’t you saying ‘make unemployment a valid choice instead of work’? Does that create the right incentives? if it becomes a tool of policy to use the benefit for a ‘minimum social wage’ mightn’t that firstly risk pushing up unemployment as people make the choice, and secondly drive up the cost as more people with votes push for an even higher minimum social wage without making an economic contribution?

    On productivity, this quote:

    “But in a capitalist system any benefit from productivity increases goes directly into the pockets of business owners.”

    Well if productivity is a ‘good thing’, isn’t this a brilliant way to improve it? Won’t every employer do everything in their power to improve it because of the direct benefit they will receive?

    I suspect the benefits are not quite as clear cut or at least, they are not as direct as Tane is implying. I wonder if he is forgetting the issue of competition, which can erode the financial benefits of improved productivity for some, and instead productivity ends up just helping you stand still.

  • “firstly risk pushing up unemployment as people make the choice, and secondly drive up the cost as more people with votes push for an even higher minimum social wage without making an economic contribution?”

    Indeed that is key. Some people may believe that unemployment is a choice – in fact, some people may believe that as a society we want to provide everyone a given minimum level of income.

    Now there are two issues here:

    1) Society may not want to do that,
    2) Work is an “experience good” (sort of, it is quite a bad analogy actually 😛 ) – so getting people to work may reduce the cost of work in the future, implying that we should try to push more work now.

    If the first issue is true, then that is that. If it is not, and the second issue is true – then it may still be possible to create a scheme with guaranteed income and “government work” – which gets people acquainted with work, and able to join the labour force.

    Either way – I see the minimum wage as a very indirect mechanism.

    “Well if productivity is a ‘good thing’, isn’t this a brilliant way to improve it? Won’t every employer do everything in their power to improve it because of the direct benefit they will receive?”

    That is true – if the business extracts all the surplus then it will do the “socially optimal” amount of investment. However, as a society we may prefer it if some of the surplus went to non-business owners – even if that means a smaller pie.

    Of course, that means admitting that the pie is smaller, and stating that there is some reason for why this redistribution is in our interest – there is no efficiency grounds for it, just personally determined equity grounds.

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