November 10, 2012

Minimum wage and “living wage”

Filed under: Britain, Business, Economics — Tags: , , , — Nicholas @ 10:47

Tim Harford discusses the image and reality of Britain’s campaign for “living wages”:

Living wage?

The minimum wage, £6.19 an hour for those 21 and over, is a legal obligation. The living wage, £8.55 an hour in London and £7.45 an hour elsewhere, is the result of a very successful publicity campaign and can count Ed Miliband and Boris Johnson among its advocates. There are no legal sanctions for paying less than the living wage, although Mr Miliband did announce plans to “name and shame” those companies who didn’t. Apparently that is helpful, because “name” rhymes with “shame”.

Why do campaigners say that you can’t live on the minimum wage?

Try living on £6.19 an hour and see how you get on.

For an economist you’re getting very high-minded all of a sudden.

I think it’s perfectly reasonable to point out that £6.19 an hour isn’t a lot of money. £8.55 an hour isn’t a lot of money, either, but a lot of people have to get by on less. Unfortunately we economists have to ask awkward questions — for instance, whether these campaigns are likely to help people without much income.

[. . .]

Perhaps we should just raise the legal minimum wage to the same level as the living wage.

Perhaps. Perhaps we should raise the legal minimum wage to a £100m an hour. I think if we did we’d find unemployment might rise. A minimum wage does two things. It will shift money from employers in an imperfectly competitive market to low-paid workers and it will induce some employers to sack workers, even if both employer and employee would prefer a deal struck at an illegally-low wage rate. There’s a case that for the good of low-paid workers, there should be no minimum wage at all. There should be one but it needs to be modest if it isn’t to cause too much unemployment.

Is there any evidence on the right level?

There’s lots, and it is mixed, but on balance it’s in favour of the idea that if you raise the cost of employing people, fewer people will be employed. It is worth bearing in mind that, for a lowly paid worker shifting from job to job, having less work available but at a high hourly rate, isn’t a bad deal. The concern has to be that certain types of people — especially young unskilled workers — will be shut out completely and denied the chance to learn on the job.

1 Comment

  1. You hear this argument here in Canada too. What people forget is that minimum wage is the minimum starting wage for folks. Most companies know that they will wind up paying more if there is any skill involved, and they invest in training people. Usually that means giving raises after 3 or 6 months. Also, minimum wage is fair compensation for unskilled labour, jobs that can be done by anyone with 2 feet and a heart beat, so to speak. So if someone doesn’t like it they can find other work or quit, the company can hire more people at the same rate anyway. If people can’t live on that, well, no surprise to me. Many households require 2 incomes to run, and depending on your tastes and desires, minimum wage can’t pay all the bills.

    Of course, if the “progressives” had their way the “rich” business owners would have to pay. Somehow they think that the business owners wouldn’t pass on the cost to consumers but would take it out of their own profits. It is almost as if the “progressives” think that business owners start these businesses to make other people money, but nothing for themselves. It is easy for “progressives” to tell other people how to spend their money, as they have no skin in the game. I have always said I would love to see some of these “progressives” start a business where they give away the farm… see how long they actually stay solvent.

    Comment by Dwayne — November 10, 2012 @ 16:21

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