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 ...