Economists’ views on the minimum wage

David Farrar today posted on the minimum wage, noting that, despite the much higher median wage, and much higher GDP per capita in the UK, their minimum wage (just increased) is only 88% of ours.

A regular commenter on Kiwiblog posted a link to a 2006 paper reporting on a (smallish) survey of American economists conducted by Robert Whaples. Among the issues on which the economists were surveyed was the minimum wage.

The Kiwiblog commenter used this quote from the paper in an attempt to highlight the lack of consensus among economists on the efficacy of minimum wages.

The efficacy of the minimum wage continues to divide economists. As Table 3 shows, almost half (46.8%) have concluded that the federal minimum wage should be eliminated, while a slightly smaller number (37.7%) favor increasing it.

First off, I think it is worth noting that 46.8% is not slightly more than 37.7%. It’s a significant difference. Of the 77 economists who responded, 36 thought that minimum wage should be abolished altogether, and 29 thought that it should be increased. That’s a 24% difference. There’s nothing “slight” about it.

Here are the full results.

The federal minimum wage in the U.S. should be:

  • eliminated. 46.8%
  • decreased. 1.3%
  • kept at the current level. 14.3%
  • increased by about 50 cents per hour. 5.2%
  • increased by about $1 per hour. 15.6%
  • increased by more than $1 per hour. 16.9%

At the time of the survey, the federal minimum wage in the US was $5.15 per hour. Only 16.9% of respondents thought that the federal minimum wage should increase by more than $1 per hour.

What that means is that 83.1% thought that minimum wage should be $6.15 per hour or less. As best I can make out, the median personal income in the US in 2006 was a little under US$33,000. The annual income on $6.15 per hour, assuming 2080 hours per year would be about $12,800. So 83.1% of economists opposed lifting the minimum wage above about 39% of the median wage.

It’s also worth noting that in 2006 the US ecomony appeared to be in good shape, and unemployment levels were low.

So, the Kiwiblog commenter has rather helpfully, though entirely inadvertently, highlighted what is actually a clear demonstration of consensus among economists* that the New Zealand minimum wage is too high.

Unfortunately, it’s set to go even higher in a few days.

*To be fair, 77 isn’t a great sample size.


Epic Phail

In the 90’s, I recall it was commonly asserted that there was little real difference between the main parties, and that there was speculation of a ‘grand coalition’ between National and Labour.

Looking back, I suspect that this sentiment was due to the fact that both parties more or less embraced the market economy, and neither was campaigning for a return to any version of New Zealand’s pre-1984 fortress economy/welfare state.

Since 2008, however, the Left have been able to mount attacks on the free market that sound more credible than they have in a long time. The financial crisis has allowed them to piece together a narrative that makes it seem that capitalism has failed, and that the time is ripe to have another go at a planned, socialist economy.

The notion of big government riding in on a white charger to rescue a benighted economy finds fertile ground in the imaginings of some of New Zealand’s under 40s, who never participated in a planned economy, or among those over 40s for whom the pain of reform dulled their recollections of what preceded it.

And so it is that in 2011 around 40 per cent of voters favour a return to state control over the economy to a degree not seen since 1984. It is true that National doesn’t wholeheartedly embrace the free market, and that Labour are not proposing full-throated socialism, but it was with some surprise that I found Bryce Edwards still arguing that the two parties’ policies were almost identical.

This argument seems to me to be a little like arguing that there are no important differences between humans and chimpanzees, since we share 96 per cent of our genome.

Where Labour’s policies differ from National’s this year, with one exception they would slow economic growth and/or further increase national debt. The heroic exception is their proposal to lift the age of entitlement to national super, which is eminently sensible.

National under John Key are dominating the centre ground, and are being careful to alienate as few voters as possible. As such, to a large extent it is Labour’s ineptitude and irresponsibility that make the difference: National’s incrementalist approach being safe but not earth-shattering.

Labour’s key platforms in this election are:

· increasing the minimum wage to $15 per hour
· the reintroduction of compulsory unionism by stealth
· increasing the incomes of beneficiaries
· a capital gains tax
· removing GST from fruit and veges
· a higher top income tax bracket
· opposition to asset sales

National’s campaign has focussed on maintaining the status quo, balancing the books sooner and debt reduction. Its only significant economic announcement was its welfare reform policy, and for the most part it appears content to demonstrate that Labour are fiscally imprudent, while Labour do their level best to make National’s job as easy as possible.

I fail to understand how, but for whatever reason, Labour appear to believe that demand for labour is inelastic. It is central to their economic policy that they can increase the cost and risk of hiring staff, and that this will have no effect on how many staff businesses take on. Occasionally, they even proffer the view that increasing the minimum wage will increase the number of people in employment because those on minimum wage will spend more, thereby increasing demand for goods and services and leading to higher employment. If this is the case, I have asked their members on more than one occasion, why do they not propose a $1,000,000 per hour minimum wage? The answer appears to be, in a nutshell, that a little bit of nonsense is OK, but a lot of nonsense is just silly.

To be fair, there is no question that some businesses would benefit from an increase in the minimum wage. Businesses whose customers are on or close to the minimum wage, but whose staff are paid sufficiently more than the minimum wage that the increase wouldn’t affect their own payroll costs would do nicely. The poor have long been a goldmine, and boosting the yield of that mine will benefit some. But regardless of what the latest OIAed email from Treasury dating from early 2010 might say, there is ample evidence that increasing the minimum wage beyond about 60 per cent of the median wage does cost jobs. [Update: Eric Crampton says his piece on Treasury’s minimum wage email.]

Moreover, I can think of very few employers who would be unaffected by the massive increase in the role of the unions proposed by Labour. Since that was the subject of my previous post, I shan’t devote much space to this point, but suffice it to say that the recent grounding of Qantas flights should sound a cautionary reminder about legislating to artificially inflate the power of unions.

Apparently desperate to stem the flow of votes to the Greens, Labour have given up contesting for swing voters and have started stealing Green policies. Or rather continued, seeing as the Greens have been pushing for a $15 minimum wage for some time. Their most recent acquisition from the Green’s manifesto is the extension of in-work tax credits to those not working. In total, Labour’s policies would boost the income of beneficiary families by around $60 per week. Ironically, given their proposed minimum pricing on alcohol, this combination of policies is likely to in effect be a subsidy to retailers of cheap alcohol.

Given that Labour appear to agree in principle on the need to reduce debt, announcing another $2.6b in reducing the marginal returns from getting a job, while at the same time reducing the number of jobs available is ludicrous and grossly irresponsible.

Labour’s capital gains tax policy was among its least bad. A clean CGT could be a good thing, but Labour’s proposal is not clean and is riddled with exemptions that would seriously undermine any potential benefit. Moreover, I am inclined to accept Eric Crampton’s Seamus Hogan’s argument that capital gains are already taxed and the introduction of a new tax would increase, rather than reduce, distortions caused by the tax system.

Labour’s promise to remove GST from fresh fruit and veges is also fraught. Not content with increasing the risk and cost of hiring staff, Labour also intend to make businesses’ monthly GST returns more complicated, and transfer more public money to lawyers while businesses and IRD go to battle over what constitutes fresh fruit and veg.

While bemoaning the wage gap with Australia and the resulting brain drain, Labour have effectively promised to exacerbate the wage gap for our best and brightest by imposing higher taxes on them. The only section of the population who would come close to closing the gap with Australia under Labour are beneficiaries and those on minimum wage. The proportion of the population closing the wage gap for themselves by moving to Australia would increase.

The only policy difference where Labour enjoys clear support is its opposition to asset sales, but it too is incoherent policy. If asset sales are so bad, and if indeed SOEs are the ladder with which we shall dig ourselves out of our hole, why then does Labour not propose to acquire more? If the dividends from profit-making entities are so important, why does Labour not propose to buy back the rest of Air New Zealand? Or other formerly state-owned businesses, such as Telecom? Indeed, why does Labour not borrow to invest in the New Zealand share market if the dividend returns are so good? If you’re a Labour Party member, the answer, once again, is that a little bit of nonsense is OK, but a lot is just plain silly.

The onus should be on Labour to explain how it is we happen to have precisely the right amount of state ownership of profit making enterprises. It seems a remarkable coincidence, and frankly the mainstream commentators have been outright lazy in not calling Labour on it. I can understand National being reluctant to try to make the point in a soundbite, but the plethora of so-called political journalists have plenty of column inches to ask the question.

Moreover, in their attacks on National for surrendering future dividend income, Labour forget to mention that there is a tax on corporate income and the government will, therefore, sell the shares for 100 per cent of their market value, and get to keep 30 per cent of the income generated from those shares. It’s a fantastic deal, and one which any private company would jump at if they had the opportunity.

The relatively low-key campaign from National masks the extent to which New Zealand faces, in my view, the starkest choice since 1984. Phil Goff’s Labour has put forward the worst economic policies from a major party since Muldoon.

It is an old aphorism that all political careers end in failure. This could hardly be more true than it is for Phil Goff. Entering Parliament on the side of the angels opposing our most disasterous prime minister, he contributed to the most transformational government in New Zealand history. Having finally taken the helm of his party after a 30-year career, he has turned against his own convictions and followed his caucus ever leftward. In doing so, he looks set to go down as the least successful leader in the history of the Labour Party. He will leave Parliament, probably shortly after the next election, unmourned and unmissed. And in the long years of his retirement he will lack even the consolation of reflecting on a noble defeat, earned fighting bravely for what he knew to be right.

Is it any wonder he now wants to talk about voluntary euthenasia?