Tuesday, 22 October 2013

The Minimum Wage Conundrum

The negotiations in Germany between the two largest Parties in the Bundestag (and to an extent between the main players in the various Landestags) is sticking on a couple of issues. One is the vexed question of "tax" which the smaller party wants to raise so it can pay for some of its policy wish list, the other is a 'minimum' wage level. I'll confess to having mixed feelings on both issues.

Tax is necessary to pay for a wide range of services provided by central government, but I also believe it should be kept low. No organisation in the world is as profligate and wasteful as a bunch of politicians and their cronies in the various bureaucracies that support them. The more we give them, the more they waste. The second issue is much more contentious, because there is a strong argument for giving workers a wage commensurate with their effort and with their need to feed and clothe themselves - and keep a roof over their heads, of course. However, the problem with setting a minimum wage level is that it has an enormous impact right across the employment spectrum.

Invariably it will benefit those who are on wages below the minimum as soon as it is imposed, but therein lies the first problem. Some jobs immediately become uneconomical, so employers drop them and either stop doing them, or find other ways to perform the function or task. A good example is fruit picking. The introduction of a minimum wage in the UK has meant that many small scale fruit farmers can no longer employ people to harvest their crop - so most of it goes to waste while the farmer moves into a direct market of "PYO" where the customer picks the fruit, packs it and pays the farmer. Alternatively, the farmer simply cuts down the fruit trees and moves into another crop if possible. It hits folk who used to employ the local teenager to cut the grass, mow the hedge or clear roof gutters - because they can no longer afford the minimum pay now required by law.

In removing the employer/employee negotiation for a 'fair' wage for such piece work, the legislators also remove a wide range of economic activity from the grasp of casual workers who are looking for such work. It impacts every wage and salary earner as well. Raising the floor limit of the wages doesn't automatically benefit everyone. Often it simply raises the lowest paid to the same level is someone who may be better skilled and more productive. One of the more interesting effects is that it often puts someone on a 'minimum' hourly wage in a position of earning more than someone on a full salary. I once calculated what my salary came to in terms of an hourly rate, and it was, on paper, below that of an hourly paid worker. I suspect there will be many people who will discover the same thing if they convert their salaries into hourly units of money.

Plus, when a government then raises the minimum - it puts pressure on every employer to raise all pay packets, which is, of course, compelling employers to award raises where they may be unaffordable or not merited.

A study by German research centre has identified that where there is a 'minimum wage' in force, unemployment tends to be higher than where there is no such limit. Economic growth and activity also tends to be slower or less robust when there is a minimum pay requirement. So that leaves us with a major conundrum. There is a natural desire to ensure that no one struggles to earn enough to keep a place to live, food to eat and clothing to wear, but, but the same token, setting minimum wages drives away jobs, pushes prices up and increases inflationary pressures. Not setting a minimum wage risks leaving vulnerable workers at risk of exploitation. So what is the answer?

Drive out low paid jobs? Reduce the choice of workers and restrict employers ability to set wage levels within their cost brackets? Or let the 'market' set the price? One of the options the Germans are considering would allow some work to be 'free' of the Minimum Wage and allow worker and employer to negotiate a 'fair' deal for it. That seems like a bit of sense to me, and certainly meets some of the problems identified by the research.

I'd suggest there is a third way. Don't set a minimum wage, but give a graduated reduction in 'support' benefits and a 'ladder' table for the payment of tax. At present, if you're employed, you pay tax, and so does the employer. By introducing a graduated scale at the lower end the low paid could be cushioned and eased into full independence gently. That would give greater freedom of choice on all sides and greater incentive to make the effort. The same system could be run with the various 'benefits' we currently provide to everyone out of work. Instead of withdrawing them all in one hit, they could be progressively reduced as the worker's ability to meet their own support costs rises. As I see it, that would be a win-win.

However, I won't hold my breath for such a common sense approach. Whitehall would find a way to screw it up and make it so complicated no one understood it, and politicians wouldn't like it because they couldn't argue that they were 'doing something for the poor'. Oh well, it remains to be seen whether the Germans will fall for the economic suicide route and kill off all casual work, or take a more sensible approach. They are, by and large pragmatists, so there is yet hope ... 


  1. Slim Jim says: I agree with the thrust of the Monk's article. I believe that the minimum wage is yet another burden on business, and should be scrapped. Jobs should be paid what they are worth, not what some politician thinks they ought to be. If we want to improve the lot of the low-paid, then it makes sense to raise the thresholds at which income tax is paid. Also there should be consideration for lowering indirect taxes, but I already hear the cries of ''unfair!'' from the shroud-waving leftists. There is already a great regulatory and tax burden on the wealth creating side of society (thanks mainly to the EUSSR), and as the Monk observes correctly , there is no rush to end that. I am reminded of the quotation from a former American president: ''You don't make the poor rich by making the rich poor.'' Another factor which the Monk does not mention is the impact of immigration on the labour market, and the pernicious effects of a generous welfare system which seems to trap people in poverty. Changing that is the great political challenge of our times.

  2. Tax has long been a thorny issue. It used to be because the war-chest was empty, the first Imperial foul up of the emergent British first empire was taxing the Americans, stamp duty fired it off, the government backed down, but it left the tax on tea and as a result, the first empire lost its North American territories in a bloody war. The second empire came about when Clive had completed the transition from dodgy trader to ruthless war-monger, India ceased to be about spices and cloth, it was about collecting tax revenue.

    In the UK at the moment, exempting all those on less than the national average wage from income tax would add to the unemployment a bit as all of the lower skilled Admin assistants and many of the middle skill Admin Officers and Executive Officers in the HMCR would be redundant, however, the costs could be covered by employing small but highly skilled lawyer to change from tax avoidance income from commerce to a respectable civil service salary as tax collectors, winkling out the fraudulent evasion by some of the current crop of “Mega-Corp” of non tax-paying institutions.

    Minimum wage is a thorny issue too. Morally and ethically it appears to be a sensible notion, in practice it is a complete can opf worms. Rather like Marxism, it seems eminently fair and equitable, but in the modern commercial world, no-one is interested in “economics”, they are only interested in the dividend paid to shareholders. No-one provides a service, they support the paying of said dividends. No dividend and the shareholders sell up, then the FTSE or whichever index you choose, drops in value and the nation becomes bankrupt if you believe the press. Stigg Blomquist uses this as a plot mechanism in “The Girl with the Dragon Tattoo.” His corporations stock falls “The Economy is Broken” cries the press, “Strange” he replies, “Ericsson still seem to be making mobile phones, the Baltic is full of ships carrying iron ore, no, the economy is fine, what is broken is your confidence.” The Paper Tiger rules our economies and we might be better off if it did not.

    Contemporary western society does not appear to have any concept of “worth” or “value”. It can comprehend price and cost, but not worth or value. This perpetuates the paper tiger. Minimum wage is one such situation, the sliding scale must pitch the minimum wage above the maximum benefit level to encourage people into work. However, the people at the bottom of the chain do not wish to work in many cases, those who do would fare better without the set minimum, those who do not will not benefit anyway. Of course, those who really want to work have already taken over some failing business and are coining it in hand over fist by manipulating people, markets, futures, commodities and so on; the paper tiger growls again.

    There is an episode of “The Simpson's” where C Montgomery Burns is made bankrupt, loses the lot, so he picks up litter on the beach, sells the aluminium cans for a penny, buys a nail to tie to a stick to collect more cans and within a short while is back in business, I shall refrain from giving away the end as it is not a very green story, but he gets his nuclear power-plant back.

    The Daily Telegraph has a UK calculator to let you see how many hours a week you would need to work to get your current income if you were on the minimum wage. My Son informs me that he is stuffed as you can't work 200 hours a week without a time-turner! You can find the link here and I refuse to disclose how many Josephus would need to work, but it make the flexi system seem like a holiday!

  3. Sorry, the Hyperlink does not seem to have transferred; http://www.telegraph.co.uk/finance/jobs/10356871/The-new-minimum-wage-how-does-your-salary-compare.html

  4. The Monk likewise refuses to reveal how many hours he would need to work on minimum wage at present. Suffice it to say it would not be very long. His old working week (84 hours) would make him very comfortably off, and his starting week in the fire services would provide luxury!