Raising The Minimum Wage

It is fascinating when 2 highly respected, internationally known economic science professors at London universities (LSE as well as UCL) disagree close a policy on which they are both experts. The policy is the increase inward the national minimum wage (NMW) contained inward the final Osborne budget. The disagreement is non the i you lot powerfulness expect, as well as nor do I hollo back it reflects underlying differences (if any) inward the politics of the 2 individuals. 

The debate is oft betwixt those who appeal to criterion theory that says raising the NMW must trim back employment, as well as those who appeal to the evidence which says this hardly happens. But inward this instance the theorist, Alan Manning, is arguing for the policy of a higher NMW, piece it is the empiricist, Steve Machin, who disapproves of the policy.

Let’s outset amongst Machin. As good every bit having published locomote on the acquit upon of minimum wages, he too sits on the Low Pay Commission (LPC) which earlier the budget was responsible for setting the minimum wage. In a alphabetic lineament to the FT, together amongst to a greater extent than or less other academic fellow member of the LPC Robert Elliot, he writes:

“The path of the NMW has until directly been determined past times careful as well as considered recourse to the evidence. The chancellor has at a stroke removed the rationale for the LPC as well as ensured that the path of the NMW volition survive determined past times the priorities of whichever political party forms a government.”

Although the declaration hither is essentially close the politicisation of setting the NMW, you lot could fence that he is too implicitly suggesting that past times setting a NMW substantially higher upward levels recommended past times the LPC Osborne volition do to a greater extent than terms than good.

Alan Manning is a pioneer of the theory of monopsony applied to the labour market. The persuasion hither is that the employer has considerable ability over the employee. The illustration usually given is that of a large employer inward a modest town, where the opportunities to the employee to observe choice locomote are express or real costly. However Manning argues that monopsony is to a greater extent than mostly applicable. In his book on the dependent plain he writes

“The beingness of [labour market] frictions gives employers potential marketplace ability over their workers. The supposition that firms laid upward payoff agency that they truly exercise this power.”

The form of frictions he has inward take heed are the time, attempt as well as costs involved inward finding a novel job. Of course of written report the employer faces similar costs, but Manning argues they affair to a greater extent than to the worker than to the firm. This agency that payoff tin survive higher upward or below the grade they would survive nether perfect contest amongst no frictions, as well as the greater ability of the trouble solid agency that inward practise they volition survive below. As a result, the exterior imposition of a higher wage volition non necessarily atomic number 82 to lower employment, but may only modify the way the ‘rent’ caused past times labour marketplace frictions is separate betwixt employee as well as employer. [1]

This theory does not, of course, propose that minimum payoff tin survive laid upward without limit, but Alan Manning is suggesting that the evidence is non strong plenty to tell that Osborne’s proposal goes beyond those limits. He does non pretend to know that the LPC has been incorrect to laid upward a lower NMW. Instead he argues that sometimes it is goodness to experiment. He writes:

“Evidence-based policymaking does ask experimentation amongst policies whose effects are unknown otherwise i only preserves the condition quo. It is every bit of import to assay novel policies that i thinks conduct maintain benefits every bit to conduct maintain stringent ex-post analysis of those policies. I hollo back the novel policy is i good worth trying but I don’t pretend to know that at that topographic point volition survive no substantial adverse effects.”

He argues that this experiment volition laissez passer on the LPC a novel lease of life every bit it evaluates the results of the experiment.

I conduct maintain no clear persuasion who is right. However nosotros tin brand to a greater extent than or less progress past times looking at which industries employ most on depression pay. James Plunkett has a prissy diagram here, as well as he argues that most sectors tin easily afford to pay higher payoff without reducing job (or to a greater extent than precisely, that at the minute the rents that come upward from labour marketplace frictions are mostly taken past times the employer): sectors similar retail or nutrient as well as drinkable services. An exception is residential care, but every bit he as well as Manning note, the cost for these is largely determined past times the government.

I concord amongst Machin that it is goodness to delegate complex economical issues similar setting the NMW to practiced bodies similar the LPC. However it is too hard to imagine such institutions e'er maxim why don’t nosotros conduct maintain a jeopardy as well as do an experiment. It is too meaning that the political intervention inward this instance does non tally the natural inclinations of the political political party inward power. In this instance who turns out to survive correct volition depend on whether this intervention is a i off or becomes a habit, as well as the reaction of whoever is Chancellor if the LPC judges the experiment to conduct maintain failed.  

[1] An choice declaration is that both employer as well as employee volition reap benefits from higher wages, because these volition encourage higher retentiveness as well as productivity. These efficiency wage arguments are discussed past times Ben Chu.