First published in the Financial Times on the 4th February 2014.
An increase in the national rate will hurt the very people the measure is intended to benefit
The hue and cry has gone up on both sides of the Atlantic among the righteous: raise the minimum wage! This ideological chant is considered an answer to poverty, inequality and even the route to productivity growth. But it is none of them: it is populist politics and bad economics.
If the price of labour rises, demand is likely to fall. That means fewer jobs. In the 21 EU countries with a minimum wage, unemployment is on average almost 50 per cent higher than in the seven countries without such legislation. Obliging business to pay staff more does not increase economic activity; it is merely redistribution but with added collateral damage.
Fantasists and fanatics believe that across-the-board pay increases suddenly improve staff productivity. Sadly it is not the case – employees are doing the same job, just being paid more. Minimum wage increases are not performance-related – so why would anyone work harder if given a fixed, statutory increase?
When wages at the bottom rise, they push pay up through the entire system because employees want to keep differentials. Sharp wage increases lead to inflation. This all pushes up costs for companies, without higher sales or profits. Since returns must fall, these actions discourage investment. Through the downturn I invested to develop companies and help to create jobs. A large increase in the minimum wage in the UK would immediately freeze our hiring plans and cast doubt on future investments.
One of the tragedies of the minimum wage is that it is a tax on those companies that are large employers of the least well educated and those who do not possess scarce skills. Citizens at the bottom are further squeezed out of the market because they have become more expensive. It is a form of punishment for that cohort. Minimum wage increases positively encourage companies to seek alternatives to labour, such as outsourcing or automation. Even restaurants can move in this direction. If restaurateurs are obliged to pay more, then watch them adopt technology such as computerised ordering and buy more ready- prepared dishes made in industrial plants with lots of machines.
The cheerleaders for minimum wage rises are typically academic economists. Most of them receive salaries from the taxpayer, directly or indirectly, and have never built a business or met a payroll. Their chief worries are publishing arcane papers; many can be wrong all their lives and never lose a penny of their own money. By contrast, entrepreneurs are the job creators and are the ones who go bust or give up if costs go up too much. They know that the answer to being stuck in a low-paid job is not coercion of the employer by the government to pay more but improved education for workers. Of course, that is a difficult and lengthy task to undertake: whereas a simple jump in the minimum wage seems quick and easy policy – but it actually undermines overall prosperity.
In Britain we have the nonsense of a national minimum wage, which means the same price for labour despite vast regional differentials in the cost of living, unemployment levels and so forth. The supposed science of a precise minimum wage is entirely undermined by this unfortunate truth. Implementing various minimum wages would be complicated – but it is ever thus when arbitrary regulations interrupt voluntary market exchanges.
It sounds a lovely gesture to raise low pay. Impractical romantics see it as the moral thing to do. Who could possibly object, save a rapacious capitalist? What such theorists fail to realise is that it restricts opportunities, fuels inflation, discourages investment and promotes labour substitution. If governments are so keen on the idea, then they should exempt more low-income citizens from all income and payroll taxes. That would help make work more rewarding and make it more attractive to work than claim welfare. Working almost invariably offers more dignity and superior health outcomes than a life on benefits – which is why it is so important to defeat unemployment and support job creation, rather than hinder it.
Raising minimum wages would hit the unskilled poor and inexperienced young hardest by killing job opportunities. How does that reduce inequality?