Confusing social responsibility

I see Brian Rudman suggesting that we make a government remuneration board for workers on low wages.  Some concerns:

  1. This isn’t “society giving people a fair go” – this is one set of people being told to increase the amount they pay for a factor of production, it is put down as their responsibility and it is a cost they respond to.  Does this sound heartless to you?  If so I apologise but I find it heartless that people confuse income adequacy and the value of an individual by what they do for “production” – it is the way we convolute the two that upsets me 😉
  2. You increase this cost, you reduce firms incentive to give people a go and/or they increase prices to consumers.  Before someone says hikes in the minimum wage don’t reduce employment let us note a few things:  It has been shown that the low relative minimum wages in the US, when increased, don’t lead to immediate layoffs.  However, the higher the minimum wage, the more likely layoffs are.  Recent evidence shows that even at this lower level, net job creation does fall over time.  Furthermore, in the long run this leads firms to subsidise away from labour – this is part of the argument for “productivity improvements” and “capital intensity” that people use to justify the “efficiency” impact of the minimum wage … we get the efficiency impact if firms actually cut hiring.  Note:  So may say, excellent, we want substitution!  But do not forget to think in a GE, and open economy, sense – how do we fund this investment in capital, what do the relative margins tell us about the loss in consumption now relative to a potential gain in consumption in the future.  This arguments rely on sets of interactions and spillovers between firms that I find a stretch …
  3. A renumeration board you say.  There are two ways I could see this going:  It is a small board that just sets the minimum wage for everyone, and so is a simple waste of money.  It is an incredibly expensive large board … in which case it sets differential wages and finds ways to extract rents.

He obviously follows the third point when he states:

All of which sounds so fair and reasonable and civilised, that you can’t help wondering why a similar independent body is not also in place to determine poor people’s salaries as well. Or to at least set a base living wage which people can actually live on.

I strongly suspect that Brian has been playing too many computer games recently – the latest Sim City does not give us a good idea about how cities form, let alone the welfare of its residents 😉 .  In reality we do not have the information, or the stability in preferences, desires, technology, and resources through time, to “set prices” through some central board – shifting and experimenting with prices, the process of “price discovery” helps to reveal and aggregate information, and helps people co-ordinate their activities.  The more this is centrally set, the more we lose this.

Sidenote:  You may be surprised to learn that the “sticky prices” in macro aren’t a contradiction of this.  How can you experiment and react if prices don’t change?  Well prices do change, and the evidence suggests they change within short periods of time (recent BOE study with supermarkets – there are piles of these sorts of things around that was just one I looked at recently).  But then how can we call prices “sticky”?  Again it comes back to co-ordination, the stickiness is in relative prices – this can be due to a number of factors (one that is often used as a proxy is that firms change prices at different points in time, another is the signaling value of prices, another is imperfect competition), but this is the driver of the inefficiency.  Hence no, significant, contradiction 🙂

Now if we do just talk about having a independent body that works out the minimum/living wage I am not sure if he really has a point.  Is he trying to say MBIE is not offering free and frank advice, or does he not realise that the department does research and provides recommendations on this?

And what do we have here:

We as a society should not be paying fellow citizens to live in poverty.

Again we have another example of an author writing about these things to make themselves sound progressive – and again the genuine poor and disadvantaged are ignored by their “plans”.  Those unable to work, those who are disadvantaged in some way where the services they specifically require leaves them disadvantaged – they are ignored by this sort of claims.  And people wonder why I’m so cynical 😐

If we have fairness concerns increase taxes, increase benefits, have targeted transfers – and look at the costs and benefits, winners and losers, clearly.  Don’t try to pretend forcing one person to pay someone else more is us meeting our social responsibilities.  Messing around with prices is the wasteful, indirect, and fraught with unintended consequences, way of trying to induce social policy that does represent the broad aims of society – why bother doing this when there is a strictly better option?

Final note:  Yes I saw this.  Fun!  A post is in the works.  No I haven’t watched the inequality doco yet – but I have it bookmarked and ready to go.  I am hoping for this weekend 🙂

  • boristhefrog

    Rudman is a rent seeker par excellence…. No surprise he comes up with this rubbish…