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Is the Minimum Wage a Threat?

by Drew J Jones Sat Nov 18th, 2006 at 01:56:54 PM EST

Last month The Economist published a story on the minimum wage in the UK, which, on October 1st, reached £5.35 per hour, or, at the time, $10.08.  (The dollar figure has probably risen since then, given sterling's small gains since the Bank raised rates to 5% last week, as well as the fact that the UK is now nearly doubling America on GDP growth, but I haven't checked the exchange rates in a few days.)  As an American, this is, of course, a stunning figure to me, even more so given Britain's moderate, albeit rising, unemployment rate.

The staff at the magazine are now worried about the potential impact of the floor, which has risen 49% since 1999, next to average wage rises of 32%.  The recent increase marked a 6% jump, compared with the still-quite-respectable 4.4% growth in average wages.  So the question is obvious: Should we be worried?


Now economists are constantly being criticized on the minimum wage, largely because the public assumes our answer rather than simply asking for it.  (Their assumption is almost always wrong, but such is the world of conventional wisdom.)  The truth is that research in recent years has produced little evidence to support the traditional Classicalist view that minimum wages will make much more severe the jobless rate for low-skill workers.  Will it have an impact?  Probably.  But not a great one, because, after all, somebody's got to flip the burgers and run the cash registers, or McDonald's goes bust.

That is not to say that we should raise it to £25/hr, as this would, I'll guarantee, be disastrous.  But the "centrist view," as Paul Krugman has called it, seems to be that, while perhaps, cet par, having a slightly negative impact, typical increases in the minimum wage will be swamped by other factors, good or bad.  The American floor was raised under Clinton, and, despite Republicans attempts to stoke fears of rapidly rising unemployment among workers lacking skills, the economy continued to scream.  The same has been true of Britain.

Britain's £5.35 floor stands is sharp contrast to America's $5.15 federal floor.  (As always, America, being a collection of states, should not be judged solely on federal policies.  States also set their own minimums.  Washington -- the state, not DC -- requires, if I'm not mistaken, a wage in excess of $9.00.)  Think about this with the exchange rates in mind.  The sterling-dollar ratio currently sits at roughly £.53 per greenback -- that is, a pound is worth a lot more than a dollar at the market rates, although Miguel and I would, of course, be happy to point out that it doesn't work out this way when you actually go to buy something, because Britain is about as strong with microeconomics as it is with bureaucracy.  Britons actually get a shitty deal on prices compared with Americans, but that's another issue.  (According to The Economist's Intelligence Unit, adjustment for purchasing power parity shaves about $4,500 from the average Briton's annual income compared with the market exchange rates.)  It's still true that pounds are worth quite a bit more than dollars when you (say) hit the grocery store.

Anyway, my answer to the question I posed above the fold is quite simple and, I'm sure, predictable: No.  Britain's growth, unlike that of the US, is accelerating from last year's anemic 1.75% to perhaps 2.8% or even 3% this year.  The Low Pay Commission suggests that the era of rapid increases is probably over, and this may well be a good thing, since it should give the government time to gauge the impact.  But, on the whole, October 1st's increase should not be seen as a threat to the fifteen-year-long expansion the UK continues to enjoy.  If anything, Labour chose the timing of it's rapid rises perfectly, corresponding with some of the strongest years in the cycle, in which business was most able to absorb the change.  The doomsayers were wrong.  At least here in Notts, Britons earning the minimum can actually pay the rent and keep the lights turned on.

Congress would be wise to look across the Atlantic this January.

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Chris Dillow's take looks different than yours.

About larger than "reasonable" minimum wage increases, is there any natural experiment around?

by Laurent GUERBY on Sat Nov 18th, 2006 at 02:41:08 PM EST
is there any natural experiment around?

Yes - New Zealand. We've hiked the minimum wage from NZ$7 / hour in 2000 to NZ$10.25 / hr now (UKP2.50 to UKP3.50; US$4.65 to US$6.80).  And the current coalition is promising that it will be NZ$12 by the end of the Parliamentary term in 2008.  Our local right wailed and gnashed its teeth and promised job losses, but during that time, unemployment has fallen significantly, to 25 year lows (it was around 6% in 1999, dropped to 3.4%, and has now risen to 3.8%.  In the new, neoliberal market this is called a "labour shortage").

This has basically been a question of good timing - the NZ government has used a period of strong economic growth to raise the wage floor, which in turn has helped slowly push up wages elsewhere in the market as well. In NZ, the minimum wage is being used as a redistributional tool as well as setting a basic price for the indignity of work.

by IdiotSavant on Sat Nov 18th, 2006 at 06:18:49 PM EST
[ Parent ]
Ok thanks. I guess another piece of needed data would be the number of workers distribution around the minimum wage.

I'm still wondering why economists keep showing their price/quantity graph when talking about the work market and minimum wage raises...

by Laurent GUERBY on Sun Nov 19th, 2006 at 10:51:24 AM EST
[ Parent ]
From America.



And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Nov 18th, 2006 at 05:52:18 PM EST
Note that many states have moved to an indexed wage which inhibits the erosion of the minimum wages value through the passage of time.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sat Nov 18th, 2006 at 05:54:01 PM EST
[ Parent ]
Blue states, mostly. Any evidence of higher unemployment? Doesn't seem likely given the states we're talking about. It looks like it might have something to do with higher cost of living outside of the boonies.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sun Nov 19th, 2006 at 07:14:34 PM EST
[ Parent ]
No, not really.



And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Nov 20th, 2006 at 05:31:09 AM EST
[ Parent ]
over 6 years was a quid had about the same purchasing power as a dollar.  Brits get so ripped on clothes etc and that embedded high VAT rate makes the posted prices look terrible vs our gotcha at the end sales tax.  So a L5.35 min still is pretty awful.  To me, where the anti min tax crowd fall down is forgetting the odious Henry Ford's theory that he wanted his workers to be able to buy his products.  No market, no products needed.

I know it's a lot better in the UK countryside and smaller towns/cities as real estate is so much cheaper.  My wife's rent in rural Derbyshire for a small 2-3 bed house was equal to my rent in a tiny 2 bed flat in central london.  Except that she got a month for what I paid for a week.  Food too as you say.

Out here in the Pacific you can't get anyone to do anything for less than double the Federal min.  Why should anyone work for $5-6/hr when you can get paid $15 to stand around at the airport digging through people's underwear working for TSA?  About the only qualification for that job is being drug free.

by HiD on Sat Nov 18th, 2006 at 06:21:14 PM EST
maximum salaries?

You can't be me, I'm taken
by Sven Triloqvist on Sun Nov 19th, 2006 at 03:20:16 PM EST
Britain's £5.35 floor stands is sharp contrast to America's $5.15 federal floor.

No, it doesn't. I don't know what the standard PPP conversion factor is, but for a  number of years it has seemed to me that pretty much $1 = €1 = £1, which makes the official exchange rates a scandal (especially that of the pound).

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sun Nov 19th, 2006 at 07:12:30 PM EST
Keeping up appearances.
by Trond Ove on Tue Nov 21st, 2006 at 01:37:55 AM EST
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