Originally posted on CreativeDeduction.com
In April, 1.8 million British residents got a pay rise when the National Living Wage, the new name for the minimum wage in the United Kingdom, went up by the most ever, a whopping 4.9%. It marked 20 years since Tony Blair’s government introduced a minimum wage and the occasion was widely celebrated. Huffington Post called the policy a ‘remarkable success story’ and the Economist pointed out that even though the wage has risen from 45% of the median wage when introduced to reach 59% after the latest increase, unemployment is at historic lows. But while the left-wing press was predictably uncritical in its praise, the Economist warned that there is a limit to how far the policy can be pushed. More and more workers are earning the minimum wage or slightly above it and so the “prophecies of doom made in the 1990 [could] come true”. Those prophecies were that minimum wages would push up unemployment and hurt the weakest workers first. According to the Economist, so far those fears have not come to pass. But is that really true?
The unemployment rate measures the proportion of embers of the workforce who are not employed but it does not tell the full story as it does not take into account those who are outside the workforce. That is measured by the employment rate, the proportion of people aged from 16 to 64 years who are in work. In July 2018 that rate was 75.5%, also a historic high. So yes, from up high the UK labour market is doing well.
But that the introduction of the minimum wage has not been accompanied by rising unemployment is no proof in itself that the policy has had no detrimental effects on employment. Economics doesn’t work that way. It is not possible to do a lab test with and without minimum wage and compare the results.
Instead, we must rely on logical analysis. Austrian economics is based on praxeology, the notion that human action is based on rational and purposeful behaviour. From an Austrian perspective the question is not what happens with unemployment on a macro level but the predictable effects minimum wages have on human action. What we do know is that higher prices lead to lower demand and that higher production costs lead to higher consumer prices.
Anecdotal evidence is of course not difficult to find. The automation of minimum wage jobs, most prominently at the McDonald’s counter, is one example. But the personal stories are often overlooked. One such story comes from Canada, where the mother of a handicapped man who lost his job in the wake of a hike in the minimum wage, says “My son is 37. He can’t read or write. He’s not worth $14 an hour, but he is worth something”. It is perfectly possible that Canadian unemployment levels will not show the effects of a higher minimum wage, but that doesn’t give a handicapped man his job back. Workers are paid what they are worth. And if you raise the price of labour by decree, the least productive workers will no longer be worth employing.
Now, there may be cases where the special circumstances lead to workers being paid less than their market value. But minimum wages are a blunt tool to address such individual situations. As Henry Hazlitt points out in his brilliant book ‘Economics in one lesson’, those special cases where workers are paid under market value could be “remedied just as effectively, more flexibly and with far less potential harm, by unionization”. Indeed, minimum wages were not always popular on the left, as they were seen to undermine the case for unionisation.
Minimum wages legislation is a feel-good headline policy, which allows politicians to claim the glory for higher pay. But the policy is bound to hurt those at the bottom of the labour market and lower overall employment. This is not a question of statistics, but a question of logic; it what a praxeological approach tells us. It is the truth. The truth is also that higher pay can only be sustainably supported by higher productivity, something not in the gift of politicians.
This is a guest post by CreativeDeduction.com. Creative Deduction is a blog promoting the libertarian values of private property, personal freedom and the principle of non-aggression