Why the minimum wage trade-off is important for the left and right

When it comes to conclusions about the broad labour market that are accepted world wide, the idea that a higher minimum wage leads to lower levels of total employment is one of the most accepted.

That is why it was interesting to see Patrick Gower suggest that Treasury didn’t believe this was the case – and use this as justification to push for a $15 minimum wage.  However, I would argue that we need to be more careful interpreting the evidence he has put forward – and that it is in the interest of both the left and the right (and of course society) to not significantly increase the minimum wage.

Update:  Eric Crampton at Offsetting behaviour raises good points here and here.  Interestingly he calls me too kind – I’m not used to that, from others I usually hear arrogant, narrowminded, or ignorant ;)

Update 2:  In the Dom, they are calling the opinion in a letter a “Treasury report”.  Seriously, is our media this bad all the time, or do they just save it for elections …

The evidence

There are two things put forward in the email that is linked to.

  1. The paper by the department of labour discussing the increase in the youth minimum wage
  2. An officials opinion that minimum wages haven’t lead to lower employment

The first point has been discussed here already – the paper showed that, when the minimum wage increased for that group, employment fell and kids stayed in school.  As a result the unemployment rate was unchanged.  This is far from an “aggregate labour market” type result – and stems from the specifics of the 16-17 labour market.

The second point was just an individuals opinion – not the opinion of Treasury.  I would gladly have a discussion about it with the person involved – but in terms of the email, this is just an off-hand comment not a solid piece of researched evidence.

In this context, the idea that there will be fewer jobs available due to a higher minimum wage is indeed still likely – in fact the author assumes that later on, and just points out that it will be through lower hiring rather than people getting fired.  I would like to point out here that this is still a number of people who get excluded from the labour market due to the minimum wage – so it is still a very bad thing.

Why minimum wages are the wrong tool for all

And this is the crux of the issue, the minimum wage is the wrong tool for assuming that people have a minimum standard of living.

By accepting the trade-off between employment and a minimum wage (which is true), we can recognise that setting a minimum wage so that people can live at a certain level does not help poverty – it just means that people who are lucky enough to get work (work that has been made artificially scarce by the high cost) can live comfortably, while those who are unemployed can’t.  This is a prime example of reducing equality of opportunity and creating injustice.

No, the only way to ensure that people have a minimum standard of living is to give people a minimum level of income.  Once that income level is set there is no need for a minimum wage – and the decision to work for an employer will not be based on desperation, but on the desire to better their living standards and their life.

The left and right will disagree on the level of the minimum income – but the existence of it, and removal of minimum wages, will be preferable to both.

The only time you would prefer to have a minimum wage and not a minimum income is when you believe that people who do not work do not deserve an income – but people who do work deserve at least a certain level of income.  But even if you do believe in the “deserving” and “undeserving” poor, just remember that the higher the minimum wage is, the more of the “deserving” poor will be destitute – that is the truth of the policy of lifting the minimum wage substantially.

  • http://www.sustento.org.nz Raf

    Finally something we agree on :-)

    A Universal Participatory Income plus open market for wages is definitely something to consider.

    Making sure people’s basic needs are met is the key, regardless of whether they are in paid employment or not. Then on top of that we will see a thriving, dynamic economy with people free to explore their talents within a wide range of areas without the indignity of being regarded as “unemployed” or a “beneficiary”.

    Innovation will flourish, parenting and caring will be more valued and communities will prosper. I’m not saying it will be easy to construct (shifting the tax base around etc) but it will be super efficient way of creating a just society. No more WINZ, Superannuation, means testing, tiny IRD…and so on.

    It’s certainly something to think about.  

    • http://www.tvhe.co.nz Matt Nolan

      We’ve agreed on this issue before I believe ;)

      I just think society needs to be clear – do we want a society with a minimum living standard, or do we want a society where we punitively punish people who do not work.  Are people who are not working part of our social contract, or are they excluded from it.  Society should decide which one it wants – but as an individual I know which I’d prefer.

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