Why is this wrong?

When the minimum wage change was being debated, I saw this tweet pop up from Duncan Garner.

Simon Bridges admits WINZ is there as a backstop if wages are too low. Can you believe it?

After the tweet follows a range of comments about corporate welfare etc etc.

This is all well and good, however I’m not sure I agree.  As I have said previously, I don’t agree with the minimum wage being used as a way of ensuring income adequacy (*,*,*).  If our true goal is to help those that are the “worst off” in society, than a direct minimum income – something that would be provided by WINZ – is the most direct means of doing this.  It sounds to me that Simon Bridges may have also been making that point (although we can argue about the degree and level of any said minimum income).

Now here is the kicker, people want to differentiate between the deserving and “undeserving” poor by using a minimum wage instead of transfering across a minimum income.  If we have to admit that transparently, does that seem fair, does that seem just?  These are the sort of question we should be asking ourselves, and society more generally, but they seem to have been missed in this situation – with people just looking for a reason to attack Simon Bridges.  Disappointing.

Note:  Via Economist’s View, Christina Romer on minimum wages.  The favoured solution over there tends to focus a lot more on the labour supply response than a strict minimum income/negative income tax would – and this is because it involves a broader set of redistributionary policies, rather than just the existence of a security net.  As you know, my focus tends to be on the security net issues with a pointer towards broader restribution given the rising potential for labour saving technolgy (*,*,*) – something that the Economist had a good piece on recently.  Remember, “potential parteo improvements” require redistribution for no-one to be worse off, there is no mystical tendency.

  • The administration savings from a guaranteed minimum income would be too much for the public sector to handle.
    At ~9500 FTE and $650M in annual personnel expenses, average compensation at MSD is ~$67k.
    The average beneficiary receives between $10k and $20k.
    Closing that gap would be untenable politically – you wouldn’t need 9500 FTE to administer all of the benefits would you?

  • Bridges is right. We shouldn’t use prices to solve income problems. And if you want to have the deserving/undeserving separation, you run EITC.

  • Hi Matt

    I had given up on commenting on your reply to my previous post on your $19 Living Wage WTF thread, just the time lag thing through busyness, but since you have linked to that post here I thought I might run a couple of thoughts past you on the topic on the minimum/living wage issue, with reference to your reply to me over there.

    You opened your reply to me with the thought that a minimum wage may be justified in some circumstances, although you then qualified that statement so stringently that I struggle to see much relevance to the modern world – at least, as regards advanced economies. Be that as it may, you then baldly stated that a minimum wage of $18-20 would cost jobs. I struggle with that statement, especially given my real world experience.

    In my view, and I could be wrong, the main concern of a small, open economy should be to be a competitive exporter. The internal price level matters little if those exporters are not dependent on low wages – China, Bangladesh, etc currently exist for those industries.

    But I don’t believe we, NZ, have any exporters of note who rely on low wages. And I would suggest that the exchange rate effect overwhelms the local wage level in any significant NZ export industry, anyway. Wages are surely a pretty minor component of export prices in an economy like ours, and we should aim to keep it that way, ie highly skilled.

    So a lift in the minimum wage, properly introduced as a positive contribution to societal welfare, and not to be used as an increase in pay through the relativity process – although I shudder to think of what major luminaries like Duncan Garner and Rodney Hide would make of it – would result in a minor, once only lift in the price level, much as an increase in GST does. And similar to an increase in our holiday entitlements from three weeks to four.

    Then you mention that our tax system already incorporates provision for a minimum income, but it doesn’t because so many are excluded by especially, but not exclusively, right wing governments. WFF is a prime example of what you discuss about the deserving and undeserving poor, and like you, I think, I’m aghast at the narrow view of the nature of humanity that allows that concept to remain in our societal consciousness – but it does a have long ancestral antecedent!

    And as Gareth Morgan points out, our income based progressive tax system would struggle to handle a minimum income system.

    Then in reply to my comment that minimum wages have happily coexisted with near-full employment, in economists terms, at least, you said only with “large monopsony employers and homogenous labour – but the world has been changing :)”. Fair enough but I was talking about the last term or so of the government immediately preceding out current bunch!

    Has the world changed that much already? 😉

    • Hey Luc,

      Sorry about the delay replying – been super duper busy 😛

      “You opened your reply to me with the thought that a minimum wage may
      be justified in some circumstances, although you then qualified that
      statement so stringently that I struggle to see much relevance to the
      modern world – at least, as regards advanced economies. Be that as it
      may, you then baldly stated that a minimum wage of $18-20 would cost
      jobs. I struggle with that statement, especially given my real world
      experience.

      In my view, and I could be wrong, the main concern of a small, open economy should be to be a competitive exporter.”

      There were so many conditions because it is such an indirect measure it requires a large number of assumptions to get the required result 😉

      The minimum wage at $18-20 an hour, for a full 40 hour week, would be a lot closer to the average wage than what we currently have. This implies that there are a number of jobs that either won’t be created, will be destroyed, or will merely have lower hours simply because the relative price of increasing output through labour (rather than capital) is so high.

      This has nothing to do with exporters in of itself, this simply has to do with the inherent margin for this type of work. A lot of this work is service work, the type of working that appears to be becoming more substitutable by capital.

      The fact is, we are increasing the relative price of one of the inputs to production if the minimum wage is binding – this will lead to lower output, and at a high level such as has been mentioned it is inconceivable that it will not also reduce employment and hours. Now there may be reasons why we want to do this – but if our goal is to ensure a certain “minimum income” a minimum wage is not a particularly good tool.

      “Then you mention that our tax system already incorporates provision for a
      minimum income, but it doesn’t because so many are excluded by
      especially, but not exclusively, right wing governments.”

      Think of it this way. In NZ and Aussie we have an unemployment benefit with no minimum time. Overseas they have unemployment insurance – with a minimum time and tied to your prior wage.

      The NZ-Aussie way of doing things sounds like a minimum income. The question needs to be whether it is set at the right level!

      “Fair enough but I was talking about the last term or so of the government immediately preceding out current bunch!”

      I was saying that the minimum wage seemed to make some sense in a social contract sense back in the 1950s here – any criticism I have of the concept will hold just as strongly for any one of our recent governments 😉

      • Luc Hansen

        I just caught this reply.

        And thanks Matt, I appreciate the time you put into this.

        My only question is, how do we know if the minimum wage is binding until we hike it to a level where any deleterious effect is obvious in the statistics?

        Anyway, we have now commenced a natural experiment with youth rates: deja vu again! It will be interesting times…

        • Sure we don’t know about the elasticity, and the impact, unless we do the policy and can measure the other covariates. But, I’m not sure if that’s the direction the burden of proof should lie.

          Caplan did a good post on this here:

          http://econlog.econlib.org/archives/2013/03/the_vice_of_sel.html

          Note that they are talking about much lower levels of the minimum wage relative to average income (so less of a distortion if you think of a distribution of employment opportunities), and he is a little more generous about the result than I would be (as there needs to be a distinction between long-run and short-run impact).