Fine tuning the minimum wage?

Tim_MontgomerieTim Montgomerie- the big wheel on the Conservative Home web site ( see our British links) had a an interesting piece on “The ( London ) Times” a few days ago. The gist of it was that that the weekly wages of the low paid in Britain have gone down in Britain by £50 a week since the financial crisis- the biggest drop since the 1860s, and that consequently the minimum wage should be increased. Moreover, he goes on to add, a system of fine tuning the minimum wage should be introduced so that it was increased when the economy was doing well and decreased when things got more difficult in order to cut unemployment.

There is obviously a lot here to discuss. Mr Montgomerie is right when he places the problem of poverty at the centre of the Conservative agenda. Contrary to what the our libertarian friends and the left say, there is nothing incompatible between being a Conservative, and wanting to use the power of the state to help those in difficulties. That much at least should be obvious. But in doing so Conservatives should not emulate the egalitarian claptrap of the left. Economic growth is the great enemy of poverty. And economic growth is driven by individual initiative. It is no coincidence that in the late nineteenth century huge new fortunes were createdLynnewood Hall 002c; and at the same time the working class prospered as never before. Poverty can only be alleviated by a general prosperity. Perhaps the most important objections to suggestions such as Montgomerie’s is that they obscure this absolutely critical fact.

Talk about the minimum wage also serves to distract attention from two other conservative suggestions for the relief of poverty. The first is the proposal for a negative income tax, ( an idea always associated with Milton Fiedman)   which would replace all other state benefits with a single subsidy paid directly to those on low incomes. But there are difficulties here. The root of the problem is that as Henry Hazlitt, who originally favoured the idea, pointed out is that a negative income tax which is large enough to do any good, also creates a powerful incentive in those getting it from earning any more money. The lure to laziness of a small unearned is considerable. Ask the rich!  There is also at least the possibility that the negative income tax may be associated with family breakdown, which is, of course, itself closely associated with poverty.

This leads us directly to another conservative “take” on poverty namely that it is caused not by some inherent flaw in the economic system, but by individual failures which are best dealt with individually. And that therefore the granting of benefits from the state should be conditional on the “clients” making changes to their way of life. There is clearly some sense in this. But there are also difficulties. Human behaviour is not easy to change.  Such interventions are certain to be expensive to arrange, and just how effective are they likely to be? Moreover are we really comfortable with the idea of making social welfare payments dependent on, for example not drinking? And how on are we going to enforce such conditions without a veritable army of snoopers? The poor deserve their freedom and their dignity too!

In these matters the prudent policy maker will avoid both complacency and optimism. The current arrangements do not seem to be satisfactory, and they are certainly far too complicated. But it is less easy to see how they might be improved. Fraud must be suppressed. But at the same time we can hardly blame to poor for playing the system in same way that tax payers do! But beyond this we need to realise that there is no administrative “magic bullet”  which is going to “get them off welfare.” But if the system cannot be transformed it can be adjusted, and in such changes the long term goal must be to do everything we can to reward initiative and not sloth. What for example is being done to encourage street trading of all kinds?

But what of Mr. Montgomerie’s proposal to change the minimum wage in the light of macro economic conditions? Well, as may be imagined, I am no fan of price controls. If rent controls are, as has been said, the most effective way of destroying a city except for bombing, imagine what minimum wages do to the labour market. We should never forget that a minimum wage can price those with very low skills out of a job. But that said, there is a case for some minimum wage to prevent people from being grossly exploited. But should the minimum wage rate become a tool of economic management like interest rates, as Mr. Montgomerie proposes? At first sight the idea has some attractions. Shouldn’t we be doing every thing we can to keep people in jobs when the economy gets into difficulty?

Well…yes…but lets do a john Lennon and imagine… Mr. Montgomerie envisages these changes being made by the Low Pay Commission, the statutory body which sets the minimum wages in The United Kingdom. What though he does not see is that if the Commission really started to act in the way he suggests that it would become a kind of shadow central bank, no doubt with its own team of economic forecasters.

Not only would the The Bank of England hardly be likely to applaud the development of an institutional rival, but if the level of the minimum wage really were to become an instrument in the government’s tool box for regulating the economy then, then the decisions taken about the minimum wage  would become highly market sensitive. Put more particularly if, for example, the Low Pay Commission were to cut the minimum wage ( the accelerator that Mr Montgomerie talks of )  then would not the markets begin to think that The Bank was soon likely to cut interest rates. And in that case the Bank might start putting pressure on the Commission if that was not the impression that it did not want given. Perhaps I am missing something, but the idea of an economy being run by what might almost amount to two central banks seems to me to be a recipe for confusion, and an arrangement which would be unlikely to last for long.

0702Alternatively if the decisions about the minimum wage were handed back to the politicians then one has to imagine a minister standing up in the House of Commons, and saying that he was cutting the minimum wage; thus announcing that economic storm clouds were ahead. No politician I have ever met would want to do that…. So No, I DON’T REALLY THINK SO TIM!

 

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