Good, common-sense stuff.

Where did the Tories’ “sunshine and let’s think the best of people rather than the worst” narrative go?

“This isn’t some wild-eyed theory, this is what actually happens in the real world.”

You have made no attempt to control for even a single other factor so I’m calling wild-eyed.

You may be right, but your stats don’t prove it.
Would even more people have been in work in 2009 had benefits not increased?

“You have made no attempt to control for even a single other factor so I’m calling wild-eyed.”

I was writing a blogpost not a book, but happy to explore this in more detail.

What other factors would you like discussed?

The correct way to go about this kind of thing is to make work more attractive, not benefits less attractive.

Anecdotes about 10 kids with flat screen TVs and giant houses aside, living on benefits is a struggle to get by. Anything that improves the lot of the working poor is welcome, Mr Clegg. But anything that craps on the non-working poor is not good.

One that immediately springs to mind is the growth in part time working, particularly for women and they do tend to be left holding the baby.

There are bound to be all sorts of other factors over more than a decade that will have various effects. To be fair its going to be pretty much impossible to account for them all, particularly to do so accurately but some sort of adjustments will ceratinly need to be factored in before you can back up your main statement.

Don,

Not wild-eyed, but the issue was never those who wanted to work or in the main those who were not working (the ‘economically inactive’, a misleading phase if ever I saw one). It is those who prefer to stay on benefits (and there are those – most of us will have met some at some point). You can’t tell me that increasing benefits will not make this a more attractive option?

A couple of other points: firstly, in terms of actual unemployment (apparently by ILO definition) my reading of the graph is that the number of unemployed lone parents (i.e. those actively seeking work, not ‘economically inactive’, which is a seperate category) actually went up, after a fall in the middle of the decade. The same basically happened with the number of single childless people who were in workless households, including the dip in the middle of the decade. My suggestion is that there was something other than just benefits in play to cause the same basic pattern – perhaps the overall pattern of employment.
Secondly, the reduction in economically inactive single mothers may reflect the fact that there were attempts to tighten up on benefit payments during the same period – you need to discount this possibility to prove the point.

So overall, I am not convinced by the evidence presented. I am not sure if the level of benefits is the major (or even a major) factor in most people’s decision to seek work. What we need to see is the relevant figures for long-term benefit claimants and economically inactive people to get an idea of that problem, and your source (oddly for something claiming to be concerned with poverty) does not have that information I can find.

Cutting access to unemployment benefits seemed to work in Sweden:

http://super-economy.blogspot.com/2010/06/fredrik-reinfeldt-and-anders-borg-prove.html

http://super-economy.blogspot.com/2010/04/swedish-labor-market-performed.html

Hi Watchman,

Thoughtful comments, thanks.

“You can’t tell me that increasing benefits will not make this a more attractive option?”

There are always some people who choose to live on benefits rather than work, but it is noteworthy that as benefits increase in value for some groups, more of them go and work, whereas for groups of people who get less benefits, unemployment has gone up. For every person who doesn’t work because they are lazy, there will be others who have got discouraged, lack the confidence to work or whatever – that’s where looking at the data rather than anecdotes is useful.

“in terms of actual unemployment (apparently by ILO definition) my reading of the graph is that the number of unemployed lone parents (i.e. those actively seeking work, not ‘economically inactive’, which is a seperate category) actually went up, after a fall in the middle of the decade.”

That’s true. The big shift has been from those who are “economically inactive who want work” (which fell by 10%) to “employed” (which rose by 12%). That is a partial answer to the question about whether the fall is amongst people affected by the tightening up on benefits – that might be part of it, but the tightening up affected single unemployed people and unemployed lone parents – it is actually amongst the group of people who received benefits and who weren’t required to look for work that we see the biggest numbers going into employment.

There are many more stats (searchable in a relatively user-friendly format) at http://www.poverty.org.uk/summary/uk.htm

Falco – part time working definitely helped, as did the growth in public sector jobs, and more childcare. I’m not saying that increasing benefits is a magic solution which creates full employment on its own, just that the correlation runs higher benefits -> more jobs, not (as the government thinks) higher benefits -> fewer jobs.

You make the link that increasing benefits increases employement, but then give two sets of independent statistics to prove it…..you cannot prove causality, as at best there are many other factors to consider. That yoou argumennt is counter-intuitive and tenuous at best is only my personal opinion.

“If you are a millionaire politician, this might be hard to understand, particularly when it is politically inconvenient to grasp the point.”

And if you’re not a millionaire it’s still difficult too. You’ve identified correlation, not causation. Your only back up is then “But teh evil Toriez must be attacking the working (or in this case the non-working) class, coz that’s what wicked Toriez do ZOMG!!!”

Produce as many flawed statistical analyses as you like, but I doubt anything like a plurality of the British people will concur that in order to get the long-term unemployed back into work, we need to increase benefits. Sure, I’ll agree with you that there are millions of workless chasing about 400,000 jobs and so unemployment cannot be blamed on the unemployed, but I won’t agree that the solution to the problem is increased benefits. Increased benefits may be a palliative, but they won’t get the poor back into work.

Don,

What happened to the supply of childcare between 1996 to 2009? Did the government do anything to help lone parents get back to work by helping to pay for / increasing supply of childcare? I think there are probably quite a lot of other things doing on that need controlling for – did the socioeconomic composition of the group “lone parents” change over the period, for example?

I do find it hard to believe that if you make “not working” more lucrative, relative to working, this doesn’t cause some more people to choose not working. If you doubt that, do you also doubt the role of high marginal effective tax rates for people coming off benefits into work? For example, don’t you think that the prospect of losing housing benefit makes people more reluctant to more from benefits into work?

Some of the mechanisms you cite sound a bit dubious to me. You talk about higher benefits being associated with better health. Is there any evidence that higher benefits are associated either with better nutrition or healthier lifestyles? Why would receiving higher benefits increase people confidence about getting a job?

I don’t mean to disparage all the mechanisms you suggest – perhaps higher benefits reduce stress of various sorts and that does help people look for work. Perhaps it does help pay for study materials, transport etc. I agree that the right-wing “explanation” for long-term unemployment as solely about people choosing to live on welfare rather than work, in woefully incomplete.

The data you give here certainly is food for thought, but I’m not sure it’s enough to conclude that increasing benefits increases the labour supply. There’s a lot of researching finding the opposite, I think. (a survey: http://www.nber.org/papers/w9168 )

oh, you might like this book:

http://lanekenworthy.net/2010/08/25/the-sum-of-all-knowledge-on-the-welfare-state/

@Nick – unemployment benefits in Sweden are far higher than in the UK – the basic insurance is the equivalent of £195 per week!

“I doubt anything like a plurality of the British people will concur that in order to get the long-term unemployed back into work, we need to increase benefits”

I suspect not. I wonder, though, how many people know that there are more lone parents in work than ever before, after a decade of increasing benefits?

Luis:

Childcare supply increased between 1996 and 2009 (though is still inadequate). Of course, one thing about higher benefits is that it allows parents to spend more on childcare, so these aren’t entirely independent.

Raising benefits is not necessarily the same as making not working more lucrative than working – 1996-2009 lone parents got more benefits both if they were not working and if they were working. There is a political consensus that letting low paid workers keep more of their benefits is one way of increasing employment, and I agree that just raising out of work benefits + sky high marginal withdrawal rates are a disincentive to working.

Here’s one of many reports on links between poverty and ill health – http://www.jrf.org.uk/publications/long-term-ill-health-poverty-and-ethnicity

There’s also some interesting research around time horizons (not sure if it has been published yet) – people living on very low incomes tend to focus on day to day, whereas people on higher incomes plan ahead.

There’s more on the theory behind all of this in the Persistence of Poverty, which you might find interesting:

http://don-paskini.blogspot.com/2008/02/persistence-of-poverty.html

ah yes, I am v interested in that Karelis book but haven’t read it yet. I agree there are some interesting ideas there. I’m still reluctant to accept that raising benefits will raise labour supply, but who knows. There is some evidence to the contrary (of reduced labour supply).

Poverty is crippling. It’s very difficult to concentrate on looking for work when your debts are mounting up. Desperate people are more likely to commit benefit fraud. Poverty also fuels depression and drug abuse making people even less work-ready.

Yes, some people will take the piss – but the ballance of evidence is in favour of higher benefits.

#8 cutting benefits in Sweden has resulted in higher crime and a less cohesive and more violent society.

When benefits are cut without job vacancies the result is crime because people still have to live (despite the right preferring they didn’t). Crime figures don’t always reflect this as there has never been a better age in which to be a criminal as so many crimes are nearly impossible to detect thanks to the internet, its only stupid criminals who attempt blue collar crime these days. Even so, I’d rather pay taxes for a decent welfare system than be relieved of my cash at gunpoint or have to keep getting new credit cards

Same old same old right wing theories. The rich need more money as an incentive to work, the poor need less.

Believe it or not, people do like to work – it gives their life meaning. But if you were on the margins of employment, but the only employment is insecure and at minimum wage, work conditions are shit because management have been screwing the workforce down for years, childcare is not available or expensive and public transport is not available or expensive, then there is a rational choice to be made.

Screwing down on benefits can also have a negative effect. The more difficult it is to claim benefits, then the less incentive there is to start a insecure job, because if you lose it, then you have the problem of trying to claim benefits again. Sitting tight becomes a more attractive option.

And that’s before we start talking about 90% marginal tax rates as more and more benefits become means tested …

Sorry, I don’t get it. You’re saying that having no money is a disincentive to find work, and that the best way to encourage someone to find a job is to give them more money when they don’t have one?

If you’re right, then the whole thing is counter-intuitive. That’s not to say you’re wrong, many things in fact are counter-intuitive. But your stats are don’t prove anything because there’s no comparison, and you’re assuming that employment is a function solely of benefits payments when clearly there are other factors that drive what kind of people find work (perhaps lone parents are more driven to try to provide for their children and don’t want to rely on a kind government, just in case an unkind one ever comes in).

It’s an interesting discussion though. I may be a right-winger but I’m just as interested in how we can give the poor the best life possible as anyone else. We just disagree on how we do that.

Ooooh! Oooooh! I see what you’ve done!

Yes, benefits for single parents increased over those years. Benefits for single people didn’t.

But! The great increase in benefits for single parents was in “work related benefits”. The tax credits.

So, if you got a bit of work, a little bit even, your income went up, because you also got those tax credits. Therefore more people went to work because work paid.

Don, in his delightful manner, seems to assume that because benefits for those “in work” went up therefore all benefits went up, for those in and out of work.

Well done, well done.

We’ll take the evidence of in work benefits rising as being proof that raising out of work benefits will work.

Genius Don. Pure friggin’ genius.

Tim,

Out of work benefits for lone parents increased substantially between 1996 and 2009, especially child benefit and child tax credits. So someone who chose not to work was better off. And yet employment increased.

The level of benefits for the work-shy may have already been too high in 1996. It may be that if their benefits had been lower during the period 1996-2009 many more of them would have opted for employment rather than inactivity. After all, there is no doubt that there were plenty of jobs of all skill levels on offer during this period. Millions of them were taken up by migrants from Eastern Europe where the levels of benefits were much lower and the incentive to go out and seek work across Europe were correspondingly higher.

@17 ‘because people still have to live (despite the right preferring they didn’t)’

Is there any chance of stopping pointless bollocks like the above? Just because people dissagree with your methods does not mean they want to set up death camps.

You Sir, are an arse.

@21: “Out of work benefits for lone parents increased substantially between 1996 and 2009, especially child benefit and child tax credits. So someone who chose not to work was better off. And yet employment increased.”

That implicitly assumes there is some sort of causal relationship between just those two variables when the reality is multivariate with lots of instrumental variables changing at the same time – such as the trends in the general rates of unemployment – whether as measured by the monthly claimant counts or by the quarterly ILO surveys – as well as the rate of employment among working age people.

Try this news item from January 2006, well before the financial crisis developed in 2007:

“Work and Pensions Secretary John Hutton has unveiled plans to get one million incapacity benefit claimants back into work, saving £7bn a year.”
http://news.bbc.co.uk/1/hi/uk_politics/4641588.stm

This isn’t some wild-eyed theory, this is what actually happens in the real world.

Come on Don.

I think you know full well the theory you are proposing is batty, even as a tribal manifesto. The higher the level of benefits the deeper the poverty trap and the greater the disincentive to work. You must know this is true.

So what about a genuine discussion of IDS and his rather bold and imaginative proposals to break through the morass? And which entail more money for welfare, not less.

I do sometimes get the impression that there are some on the left who do not want to end deprivation- they see the indolent poor as their natural constituency and many have jobs that depend on the cycles of deprivation continuing to circulate.

#23 Did I touch a nerve.

You are a sad, strange man and you have my pity

“Out of work benefits for lone parents increased substantially between 1996 and 2009, especially child benefit and child tax credits. So someone who chose not to work was better off. And yet employment increased.”

That isn’t the important question though is it?

Compared to 1996 were single parents better off in work in 2009 than not?

Or, did in work benefits increase more than out of work benefits?

Good article Don, and it makes sense to me on a number of levels, being a benefit claimant which I doubt many (if any) of the other commenters are.

It’s a slightly different situation for me because my benefits are given to me because of ill health, however, I can see how raising the standard £60-something/week JSA (for example) would encourage people back to work.

There’s the practical aspects – getting a job involves expense, like writing and printing your CV, posting applications, buying a suit or smart clothes for an interview, transport to the interview, and so on. You might want to start a small home business in which case you’ll need to buy a few tools, for example. Then there’s the financial hit of having your first month back at work without benefit and without any wages yet.

There’s the psychological aspects – living on £60/week is tough, and it’s depressing. Society collectively looks down on you. You can’t afford decent food, to live in a decent area, and so on. What Don said about living day-to-day rather than being able to plan is exactly right. All this has a psychological effect of making a person down, depressed, anxious, unconfident. When you get a letter saying “The government believes £60/week is adequate for you to live on,” you don’t feel that great about yourself I can tell you.

There’s also the fact that most people aren’t as selfish as the Tories assume them to be. Generosity is more often than not rewarded with generosity, as people realise they *are* actually worth something, and feel like making more effort. If JSA was raised then perhaps a minority would take the piss (there are always people who take the piss – in all walks of life, at all levels of social strata – MP’s expenses anyone?) but imo a majority would feel more valued, have higher self esteem, and make more effort. Because most of them do *want to work*.

The idea that left-wingers want to keep people poor is just… bizarre. No-one who’d seen the misery that poverty brings would say that.

If your on JSA you can get all that free from a taxi , to a new suit to getting help with CV free. And I’m on benefits as well. to getting a grant of £2,000 quid if you go self employed, the problem of course is getting an employer to employ somebody who like me uses a wheelchair stinks because he shit himself, or has no control of his bladder.

Why would anyone employ somebody who has a health problem when you have hundreds of fit Polish people waiting at the door.

Interesting facts from Don Paskini.

The comment that finds me in agreement the most, however, is Nick’s @5.

The challenge is to make work more attractive. To make sure, somehow, that workers don’t get paid a pittance (that is, wages that are impossible to live on…to the point that you might as well stay home) while their bosses make obscene amounts (that is, amounts so high that even a 50% reduction would place them amongst the richest in society).

I wonder if the government can come up with tax breaks in favour of companies that would work this way: the higher their wages at the lower end of their pay scale, the more generous the tax breaks.

Example. Say the minimum wage is £5-80.
If a company shows that their lowest paid staff are on £6-00 they receive a certain tax break that would make higher wages worth their while. This “discount” would go up proportionally for companies whose lowest paid people are on £6-20, and more if they’re on £6-50 and so on.

“the higher their wages at the lower end of their pay scale, the more generous the tax breaks.”

One of the Milliboys has just proposed exactly this.

Daft idea but he’s proposed it.

If you want to make work pay, increase the inceoms of low paid workers, why not just stop taxing them?

After all, the difference between hte minimum wage and the living wage everyone’s shouting about is exactly that: the amount of tax and NI the low paid have to fork over.

@30 Claude: “To make sure, somehow, that workers don’t get paid a pittance (that is, wages that are impossible to live on…to the point that you might as well stay home) while their bosses make obscene amounts (that is, amounts so high that even a 50% reduction would place them amongst the richest in society).”

There are two arguments in there.

1. Citizens deserve a decent quality of life.

2. Company owners need to be taxed at the optimal rate that provides for stable businesses and a healthy tax revenue.

We should treat the cases separately. As soon as you try to fix the two together, you create undesirable consequences.

Regarding citizen quality of life, the minimum wage is important. It is also neutral; all companies have to pay the age-related minimum wage for their staff. Let’s keep it that simple or simpler.

Not all workless households claim out of work benefits and many are moving between various packages of benefits. Also as house prices have risen the value of non cash benefits has risen.

There is a case that smoothing the transition between work and benefits would help more people into work, as at the moment if insecure employment dries up it can take weeks to reapply making it quite risky to actually escape the net.

@31 “If you want to make work pay, increase the incomes of low paid workers, why not just stop taxing them?”

Because that is effectively a tax subsidy for employers paying low wages (which is also what tax credits are) – and we wouldn’t want to be handing out taxpayers money willy nilly would we, Tim?

“Because that is effectively a tax subsidy for employers paying low wages”

Eh? Where on earth does that idea come from?

You’re seriously saying that not charging income tax to the poor is a tax subsidy to companies?

All state intervention, from taxation to welfare, benefits employers, ‘subsidy’ it is ,but for concrete thinkers who do not recognize hidden agendas, only the bleeding obvious, a spade will always be a spade and never a tool for digging.

@25 Tim

Can’t you do primary school maths? If you want work to pay more, then pay more for work.

Shifting the responsibility of low pay to the state, either by reducing taxation or, more importantly, getting the state to pay top-up benefits like tax credits or housing benefits is a direct subsidy to low pay employers.

Of course the low paid should be removed from the taxation regime in any case, but that doesn’t detract from those primarily responsible for the poverty of the low paid, and that’s the low payers.

“Shifting the responsibility of low pay to the state, either by reducing taxation or, more importantly, getting the state to pay top-up benefits like tax credits or housing benefits is a direct subsidy to low pay employers.”

Oh Lordy….no, wages are set by the market, not the whim of employers. If you push wages above market clearing level then employers will simply invest more in automation, meaning that there is involuntary unemployment.

Further, at the market clearing price for labour we might well say that, well, we don’t thinki this is fair, people living on so little. Excellent, we now have a choice. We can force a rise in hte price of labour….this will cause unemployment.

Or, we can dig into our pockets and subsidise those we think are earning too little. So, benefits, tax credits etc are a subsidy from us to those we think are earning too little: not a subsidy to companies which pay low wages.

For, if we insist that wages rise then those companies will either close or automate: in either case employing less labour.

Just as an FYI, my local job centre [I don't know about others but I presume it's a national thing] has recently stopped people from claiming travel expenses for travelling to interviews, so yeah higher benefits would help folks get employment simply to pay for the stupidly high fares on public transport.

@35 Tim Worstall: “You’re seriously saying that not charging income tax to the poor is a tax subsidy to companies?”

That’s true but the real world (and industrial relations) are more complicated. When you jiggle the tax/benefit rates, you have unforeseen consequences for the workers around about an income tax threshold and around a few benefit thresholds.

Assume two competing companies; one pays the minimum wage and one pays 50p per hour more (and has higher quality standards). If government jiggles with tax/benefit thresholds, it may create circumstances where it is no longer beneficial to work for the latter company.

I do not argue that the wage market is illogical, but that current tax/benefit structures prevent workers and non-workers from acting rationally.

@38 “Excellent, we now have a choice. We can force a rise in hte price of labour….this will cause unemployment.”

Tosh, Tim. The minimum wage didn’t cause unemployment.

“Tosh, Tim. The minimum wage didn’t cause unemployment.”

Yes, it did. Not much perhaps, not enough that we can see it in the statisitics, but yes, the minimum wage did cause “some” involuntary unemployment. It’s even possible that the amount of unemployment casued was worthwhile for other reasons….that depends upon how you value those other reasons.

You can search Stumbling and Mumbling to see the stats if you’d like.

Any time you raise the price of something above the market clearing rate you will get less of that something demanded and more of it supplied. Now maybe it’s still righteous to do this: I’m entirely happy that the cost of murder is higher than the market clearing rate and that we thus have less murder going on.

But that the use of this effect is sometimes righteous is very different indeed from the gross ignorance that the insistence that this effect doesn’t exist displays.

You can indeed beat markets, change them, shape them, regulate them: but you can never, never ever, make the trade offs that you are making disappear.

To think that you can is simply, well, it’s simply ignorance of the real world.

The trouble is that, because you’re an ideologue, while you talk about the real world, you don’t actually live in it – you live in TimWorld.

38
You may or may not be aware but tax credits are a statutory benefit, we do not observe people earning too little and then decide to subsidize them, people take low paid jobs because they have calculated the wage offered + the tax credit. Without the tax credit it is unlikely that anyone would take-up the job, in which case the employer needs to recalculate the unit cost of the product, if it is impossible to produce a unit without profit, the rational conclusion is that the product in not produced, this is surely how the market works. But we are not talking about markets are we, we are talking about state intervention to ensure that we can continue consuming and I, for one, do not want to pay taxes so that employers can pay low wages but their workers can carry on consuming and, consequently fund a further round of production.
Why – because tax credits and benefits merely plaster over the failure of the economic system, it really doesn’t work, and eventually the gaping irrationalities and contradictions will not be held together by the actions of the state.

I did cast my eyes on Stumbling and Mumbling’s take on the minimum wage.

It contains a link to a Warwick University study showing no link between the minimum wage and unemployment, and quotes the Low Pay Commission showing only a marginal connection … and then ignores them.

No, the Low Pay Commission does not show a “marginal connection”. It shows a “marginal effect”.

As I said above, the effect of the current minimum wage isn’t much (and do note that the LPC figures are for a minimum wage rather lower than the one we have now), but it is still there. As the Low Pay Commission agrees (for the obvious reason that I started with the Low Pay Commission figures before saying that it did have an effect).

The importance is of course that if, at this level of minimum wage, we only have a small effect, what level of minimum wage will have a large such effect?

For if we say “£5.50 didn’t have much effect, therefore £15.50 won’t have much effect” we’re possibly going to screw over the entire system by moving from a small effect to a large one.

Worthwhile Canadian Initiative is the place I’ve seen the research one this. Minimum wages of up to some 45% of median wages tend not to have much effect. Small, there, but not very large. Presumably because not all that many people earn less than 40-45% of median wage.

However, once minimum wages go above that 45 % of median wage then the effects become much larger (this shouldn’t be a surprise. The great lesson of neo-classical economics (no, not neo-liberal, but neo-classical) is that things happen at the margin.)

Current median wage in the UK is, I think, £12 an hour. Might be higher, long time since I looked at it, maybe £14.

Which means that trying to get the minimum wage above £5.40 to £6.30 is going to produce those large effects.

D’ye see what I’m trying to get to?

There’s a huge difference between saying “Minimum wages have no effect” and “low minimum wages have a small effect and large minimum wages have a large effect”. And the latter is the truth and is the thing we need to be taking note of when we try to decide what the minimum wage should be….

46
Neo-classical economics = we don’t want the state to interfere with employers other than when it benefits the employers, and when the economic system begins to show the evidence of its’ failures, irrationalities and glaring inequalities.
We don’t want to pay our taxes to support the masses so we employ accountants to jump through loop-holes, conversly, we want the masses on a statutory tax system, that we control, so they can pay.

Why am I not surprised that your “evidence” shows that while the previous creation of the minimum wage (which, before the fact, was opposed because of the massive unemployment it would create) did not create massive unemployment, a future increase in the minimum wage will?

“Neo-classical economics = we don’t want the state to interfere with employers”

Err, no. Neo-classical economics is a method of analysis, nothing else. It comes from the 1890s, is not prescriptive, only descriptive, and most certainly does not say that “we don’t want the state to interfere”. For example, all of the analysis used to justify carbon taxes right now comes from neo-classical economics.

The whole idea of externalities (ie, the justification for state intervention) comes from Marshall, the founder of neo-classical economics and the solution, taxation as intervention, comes from his successor as Professor of economics at Cambridge, Arthur Pigou. Pigou being, as of course someone as well versed in economics as you will know, being the person who convinced John Maynard Keynes to study economics, not mathematics, indeed gave him his first academic job as an economist.

I’m afraid that you’re getting confused between “neo-classical” and “neo-liberal” here.

“did not create massive unemployment, a future increase in the minimum wage will?”

There’s always the possibility that it’s actually true, isn’t there? And please note, I never said that the minimum wage we did get would lead to massive unemployment. Only that it would lead to some. As the LPC agrees it did.

Try this little thought experiment. Would a minimum wage of £100 an hour have any bad effects? Would a minimum wage of £1 and hour have fewer of those same bad effects?

Good, therefore we can say that the effects of a minimum wage depend upon what rate that minimum wage is set at.

My point, no?

I’m not complaining that your analysis is not correct, merely that it is, shall we say, convenient.

Your arguments about the minimum wage are, sadly, typical. You’re prepared to argue the toss over marginal differences when what we should be looking at is what is significant. Any rise in unemployment due to the minimum wage (if it exists) has been small compared with the unemployment now being imposed on the country due to cuts which are directly caused by the (“free market”) banking collapse.

Economics, from my perspective, is a tool where observations, which are of necessity imprecise, can be used to develop policy.

In your hands it appears to be more a set of iron rules which dictate policy yet, when problems occur, there is always an excuse to avoid responsibility.

“Economics, from my perspective, is a tool where observations, which are of necessity imprecise, can be used to develop policy.”

But I’m doing exactly the same. Just as you would desire.

Assume, just for the sake of this little argument, that the above aqbout minimum wages is correct. That the bad effects of a minimum wage below 45% of median are minimal, but that they get quite expensive over 45% of median. OK, just pretend that this is true for a moment.

So, we do want to increase the incomes, the in pocket incomes, the consumption, of the low paid. But, given this we cannot do it by raising the minimum wage to the “living wage” of £7.60 per hour because of those bad effects.

So, how else could we do this? We could offer working tax credits perhaps. But that has problems with incentives: the combination of income tax, NI, tax credit withdrawal etc means that for many on low incomes they face marginal tax and benefit rates of 70%, 80 % and some even over 100% on their marginal income.

You can see the numbers in hte budget. It’s a couple of hundred thousand people over (I think) 80%, and something like 1.6 million who face rates over 60%.

And yes, we really do think there are disincentives for people to work, whether they’re rich or they’re poor, when marginal tax rates go over about the 50% level.

Hmm, so maybe that’s not all that good an idea.

So, how else could we do it? How else could we “make work pay” and make things so that those working on low wages actually have more cash in their pockets?

Well, we could link, just imagine, the personal alloowance (and the NI allowance) to the minimum wage perhaps. For, the difference in cash in pocket between the current minimum wage of £5.90 an hour and the living wage of £7.60 an hour is precisely and exactly the tax that someone on £7.60 has to pay on their meagre earnings. The difference between the pre tax number the Jospeh Rowntree Trust says is the wage required to not be in poverty and the minimum wage is, umm, the tax someone on that pre tax JRF number has to pay.

So, through economic analysis we’ve found out several things.

1) Raising the minimum wage much from where it is will have lots of bad effects on employment.

2) Raising tax credits or other means tested benefits has bad effects upon incentives.

3) But we still want to increase the cash in pocket incomes of the working poor.

4) Hey, let’s stop taxing them!

Which is why I personally support raising the tax free personal allowance to the same level as the minimum wage, full time, full year. Around £11,500, £12,000. In fact, linking the two together. The personal allowance is the minimum wage, the minimum wage is the personal allowance.

Amazing what you can do with a bit of economic analysis, isn’t it?

49
Interesting post and an excellent attempt at distraction, but I was referring to tax and benefits as an intervention not externalities, unless you count the flawed system which requires the constant intervention of the state to prop it up, as an externality, then I would agree.
Of course the state will intervene with a carbon tax, if industrial production had carried-on in the way it did, the emissions would have killed us all, just like the poluting of water in the 19th century, this is what I mean about the irrationality of capitalism, – an economic system, which is supposted to ensure survival, left alone, would create the opposite.
50 While I agree with the sentiments of your post, I disagree with the notion that there is an iron set of rules, they change in accordance with what benefits employers.

“So, we do want to increase the incomes, the in pocket incomes, the consumption, of the low paid. But, given this we cannot do it by raising the minimum wage to the “living wage” of £7.60 per hour because of those bad effects.”

But, back in the real world, consider what well known anti-business commies KPMG say about the living wage:

• Turnover amongst their cleaning staff has more than halved

• Morale has been raised

• Despite improved sick pay, potential abuse has not materialised

• Productivity has improved; attitudes are more flexible and positive

• Service has improved with their helpdesk receiving far fewer complaints

On top of this their suppliers, the cleaning and catering companies, have reduced training and other overhead costs as employee loyalty has grown.

KPMG say that “it is possible to behave ethically, and pay the Living Wage, while working to earn a profit. It makes sense as a business strategy since it creates goodwill among customers, employees and the community. Trying to increase profits by being unethical or ignoring such concerns will eventually hurt not only those directly impacted, but the business and all its stakeholders”.

http://www.glasgow.gov.uk/en/Residents/LearningEmployment_Training/Glasgow_Living_Wage/KPMGcasestudy.htm

Don, this is what is so annoying about arguing basic economics with you. You don’t have a clue as to what people have been saying about these things.

For example, here is the Nobel Laureate, Paul Krugman, talking about those effects of higher wages:

http://economistsview.typepad.com/economistsview/2006/06/paul_krugman_th_2.html

“They also argue that because there are cases in which companies paying above-market wages reap offsetting gains in the form of lower turnover and greater worker loyalty, raising minimum wages will lead to similar gains. The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily? But in any case there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies” — and that is precisely what mandating an increase in the minimum wage for all companies cannot accomplish. What makes this an odd oversight is that the book contains a lengthy and rather well-done critique of attempts by local governments to create jobs through investment incentives, arguing that they mainly end up in a zero-sum poaching war; how could the authors have failed to notice the parallel? ”

Now when someone much brighter than I am, and with much more knowledge of the subject at hand than I have, tells me an idea, in his field of expertise, is silly, then I tend to take note. What do you do?

His conclusion is also pretty good:

“In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.”

It’s a source of great humour to see supporters of the ‘free-market’ argue in favour of state intervention, or at least, accepting theories that ‘observe’ that it is required, without any comment. Tim W, are you also one of those critics who also point to failures of state intervention as the failure of socialism, I know where I’d edge my bet.

@ 55….you grievously misunderstand my position. I do not, and never have, argue that no state intervention is ever required. I consistently argue that at times, state intervention is very much required.

The only reason I seem to come up with different solutions to you is that I differ about when and where state intervention is required.

Aha:

“So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data.”

The real world does not conform to the theory!

The bit which you will have to explain to me is this:

“there is a fundamental flaw in the argument: Surely the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies””

I don’t see why this should be so (and Krugman doesn’t explain). It seems to imply that high morale is a zero sum game, no?

When I talk to cleaners who get the living wage, the advantages that they cite of a living wage are not based on comparisons with other employers. The gains in productivity, morale, health etc. come from things like being able to afford to travel to work on the tube rather than spend 4 hours a day on the bus, being able to feed their family, pay the rent, cut down from working three to two jobs and so on.

These benefits seem to come from receiving an adequate (or more adequate) income, rather than gaining some sort of advantage compared to other cleaners or employment opportunities. Is there any research to back up this part of Krugman’s argument, or is it just his intuition based on how he thinks that low income workers behave?

@51

“So, through economic analysis we’ve found out several things.”

“OK, just pretend that this is true for a moment.”

No we found out that if you pretend something is true, then it gives the results that you want.

@52

“I disagree with the notion that there is an iron set of rules, they change in accordance with what benefits employers.”

I kind of thought I had that covered with the “avoidance of responsibility” comment (although it was directed more towards the bankers). Rules are iron until they don’t work, then there are diversionary tactics like “look, over there” (aka the Greece bond problem).

@53

Exactly.

@54

“The obvious economist’s reply is, if paying higher wages is such a good idea, why aren’t companies doing it voluntarily?”

There are so many answers to this.

For example, lower wages give an immediate short-term profit – which is generally more attractive to companies – and can help them drive competitors out of business. The better payers might have operated better in the future, but a race to the bottom ensures that this never happens.

I could use the Microsoft argument. Windows is comparatively sh*t. That hasn’t stopped it being successful because of monopoly practices.

But, generally, you’ll find good and bad payers operating side-by-side. Some of either profit or fail. The bad ones might succeed because, although the hotel room is filthy, the hotel is in a convenient place, or is the only one available, or wasn’t even booked by me. I’ll never go back there again, but it doesn’t matter, because there are thousands of others who will go there once as well. The reason being that the market is not perfect. And, guess what, most markets aren’t perfect …

“The real world does not conform to the theory!”

Ahem. Krugman was writing in 1998. The LPC figures were post 1998. Real world confirms theory once again.

“I don’t see why this should be so”

Then you’re playing being dim. Why would you get lower turnover if you paid higher wages for a cleaner than other people were paying for a cleaner? Because the cleaners you have know that if they left to go elsewhere to work as a cleaner then they’d get lower wages.

D’oh!

“Why would you get lower turnover if you paid higher wages for a cleaner than other people were paying for a cleaner? Because the cleaners you have know that if they left to go elsewhere to work as a cleaner then they’d get lower wages.”

But equally, you would get a lower turnover if you paid your cleaners enough money so that they can afford to travel to work and feed their family without getting into debt, rather than if you don’t. And that doesn’t answer the point about morale – is it really the case that high morale is a zero sum game and that staff morale amongst cleaners wouldn’t increase if all cleaners were paid a living wage?

You’ve moved from economic theory (theory where, contra Worstall but in line with the real world, the centrist consensus is that “the effects are small and swamped by other forces”) to anecdotes and question dodging. I can see why you find this discussion annoying.

Tim & Don

so, you have two possible effects.

1. that Tim & Krugman are talking about, works via comparing current job with other jobs. This effect might work at all levels of income.

2. that Don is talking about, works via wage covering certain absolutes (transport, exhaustion). This only works at the lowest levels of income.

It’s not obvious to me that Krugman would deny the existence of 2. They are not mutually exclusive, and the question of which is more powerful in context of workers of low income is an open one. Don, you may believe that the ‘absolute’ mechanism is more powerful when it comes to cleaners, but I think you should accept that a cleaner who knows they are being paid 20% more in current job than in alternative cleaning jobs may also work harder to keep that job. (and Tim, you should accept Don is talking about a distinct, and plausible mechanism that might mean a minimum wage could produce higher productivity). imho, nobody can really claim to know via intuition or anecdote the relative strengths of these mechanisms.

@Tim W

The problem with yr arguments is that we heard them all (and more extreme from the now-government ministers in the Tory party) before the NMW was introduced. And when it was introduced – to the Labour Party’s continuing credit – the predicted unemployment apocolypse simply didn’t happen. Someone else on here on a different thread argued that some jobs that might have been created weren’t, and that was the main impact, (despite rising employment under Labour until the banker-caused recession, cheers guys), but I’d say that it’s better for jobs to be created that are paying people a proper wage rather than a pittance of £2 p/h as was the case sometimes pre-97 (my mum was a checkout worker then and on ~£2.50 p/h IIRC). A job paying bugger-all is not a job worth having if you suffer through the indigity of it – as we discussed elsewhere the kids working in sweatshops are “better” off than their peers who might have to work as prositutes etc but it’s hardly a decent choice. And we live in a country where we can do something about it. Merely beacause a NMW of £1 p/h would increase employment – and we could top it up with tax credits etc – doesn’t make it a good thing at all. People on low wages suffer from low morale and wading through a top-up benefits system doesn’t help that (and not everyone qualifies for tax credits (young single people, etc)). Solution? Have a living wage (=dignity in work) and increase benefits (=make it easier for people to find work). Simples.

Apologies if that’s a bit incoherent but I’m off to a job interview in a bit so mind is elsewhere…

As an off-topic question – you wanna take everyone on the minimum wage out of the tax system, would that not have the impact of employers who pay a little bit more being penalised and causing the poverty trap, I mean if someone is on £10,500 and not being taxed and someone else is on £11,000 and being taxed our latter example is going to be worse off in the long run (yes, I’m aware in the long run we’re all dead, may as well chuck a JMK quote into an economics thread) ? So you’re actually arguing for the abolishment of all income tax..?

“I mean if someone is on £10,500 and not being taxed and someone else is on £11,000 and being taxed our latter example is going to be worse off in the long run”

No, because you only get taxed on hte marginal £500…..

Ah ok a mis-reading on my part. So the Lib Dem policy then?

*runs away as the thread gets sidetracked into that can of worms*

*runs back to clear up the mixed metaphor*

*gives up*

“It’s not obvious to me that Krugman would deny the existence of 2.”

Krugman says that “the benefits of low turnover and high morale in your work force come not from paying a high wage, but from paying a high wage “compared with other companies””

I guess this might be correct, but it doesn’t chime with real world experience where raising wages from below adequate to adequate seems to reduce turnover and improve morale, hence why I asked whether there is any research or theory to support this particular piece of the argument.

I agree, of course, that being paid more than most other people get for doing a similar job also leads to lower turnover and higher morale, and I actually also agree with Tim that people shouldn’t pay income taxes on earnings up to the amount that someone needs for an adequate income.

65

Don, you’re right, he is denying it. I guess he thinks the mechanisms you highlight are not significant in developed economies. In development economics those sorts of idea are well established, usually via nutrition / productivity poverty traps (paid too little to eat, too weak to earn enough to eat).

57. donpaskini

Aha:

“So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data.”

‘ The real world does not conform to the theory! ‘

The problem with showing the effect with data is how do you show with data something a firm would have done but didn’t. The data can’t pick up on the firms who would have created additional jobs but didn’t because the marginal revenue from the jobs was below the marginal cost. Every worker has a marginal revenue and a marginal cost. Unless of course we believe the demand for labour is inelastic and the price of labour does not matter. In that type of world we could triple the NMW without having any effect on the demand for labour.

Even though I know the NMW must have effects at the margin I supported the NMW because there are benefits which you outlined. Moreover, the effects were likely to be minimal when the economy was booming and the government did introduce the NMW at a pretty low level. Some say it was actually below the market wage. The effects that would be expected to show up now the economy is depressed is the levels of unemployment amongst the young. The under twenty fives have a lower marginal revenue compared to experienced workers. Germany does not a NMW and employment appears to be booming there. The UK and US have high youth unemployment and Spain have massive youth unemployment. It maybe is a coincidence but it seems significant to me.

Hey Richard W, with ref. to discussions about QE we had a while back, this might be of interest (by which I mean, it agrees with the argument I was making).

@67

“The effects that would be expected to show up now the economy is depressed is the levels of unemployment amongst the young.”

But you could never show that, as there currently are no jobs, and as you can rely on a steady number of the young coming onto the job market (it’s called getting older) so they are always affected most in a severe downturn in any case.

“Germany does not a NMW and employment appears to be booming there.”

It would be interesting to see some data on why Germany has low youth unemployment, but my expectation would be that it would not be due to the lack of a NMW, more to do with routes into employment and a consensus willingness to support this.

“Germany does not a NMW and employment appears to be booming there.”

Worth noting that Germany has much stronger trade unions and about 70% of the workforce is covered by collective bargaining agreements which set sector-specific minimum wages:

http://www.eurofound.europa.eu/eiro/2005/07/study/tn0507101s.htm

Germany also has much higher out of work benefits, fwiw. But I think their apprenticeship system is probably the main reason for lower unemployment amongst young people.

Cheers Luis Enrique, I will have a look an get back to you.

@ 69. gastro george

‘ But you could never show that, as there currently are no jobs, and as you can rely on a steady number of the young coming onto the job market (it’s called getting older) so they are always affected most in a severe downturn in any case. ‘

Saying that there are no jobs is not really the way to think about the economy, Gastro George. The labour market and the unemployed are not something static. The economy generates millions of jobs each year. Workers are constantly moving in and out of employment. For example, each year in the British economy there are around a third of a million new firms. Moreover, around a third of a million for many reasons no longer exist. Only around 10% of the latter go bust. What happens in a depressed economy is the amount going bust rises but this is not really significant for employment. The significant thing that causes unemployment to rise in a depressed economy is the new start up number falls significantly. That means there are more workers chasing limited employment opportunities. In such circumstances the young will get outcompeted by more experienced workers who have a higher marginal revenue.

Although you might think this is the same as saying there are no jobs it really is different because the effect is coming from a lack of new firms.

70. donpaskini

‘ Worth noting that Germany has much stronger trade unions and about 70% of the workforce is covered by collective bargaining agreements which set sector-specific minimum wages: ‘

Well the effect of collective bargaining over the last 15 years has been to hold down German wages vis-a-vis everyone else. It is a beggar-thy-neighbour policy that has caused severe problems in the euro zone. German collective bargaining has seen the benefits go to capital not workers.

‘ Germany also has much higher out of work benefits, fwiw. But I think their apprenticeship system is probably the main reason for lower unemployment amongst young people. ‘

I agree.

@70

“But I think their apprenticeship system is probably the main reason for lower unemployment amongst young people.”

Agreed. It’s what I meant by “routes to employment”.

@72

Yes, actually I misread your previous post, my bad.

68. Luis Enrique

‘ Hey Richard W, with ref. to discussions about QE we had a while back, this might be of interest (by which I mean, it agrees with the argument I was making). ‘

Maybe we were misunderstanding what each other were saying, Luis. There is not much in it that I would disagree with. Although he does not explain how an inflation targeting central bank would not in fact sterilise the actions of the Treasury. The likes of Prof. Sumner would disagree that the Fed lack the policy instruments. They are stuck in a ‘ liquidity trap ‘ of their own making through their conservatism. Torgeir Hoien who used to be on the executive board of the Norwegian central bank does not believe the UK is still in a liquidity trap. More aggressive actions by the Bank and open mouth operations by Mr King seems to have done the trick.
http://www.realclearmarkets.com/articles/2010/07/09/how_to_exit_liquidity_traps_98563.html

I quite like the ideas of Prof. Farmer for the Bank to use more QE to offset the consequences of Mr. Osborne.
http://blogs.ft.com/economistsforum/2010/08/we-need-more-quantitative-easing-to-create-jobs/#more-11311