Maharey on Minimum Wages

I'd take former Labour Cabinet Minister and current Massey University Vice-Chancellor Steve Maharey's NBR column "Why minimum wages are necessary" as a launching point for ripping on Massey, but I'm reluctant to talk any kind of smack about Canterbury's competitor institutions when Christchurch's future remains less than certain.

Let's take Maharey's claims in turn.

The fact is that no one really knows if the minimum wage is contributing to high levels of unemployment. In general terms, the research suggests that the minimum wage, set at a level that matches the state of the labour market, will not cost jobs.

It would be tough to find effects of the relatively minor increases we get in the overall minimum wage in New Zealand, but that isn't to say that the aggregate effect isn't large. We could similarly say that nobody really knows if carbon emissions are contributing to temperature increases if the only data we had were twenty-five years of quarterly data on changes in CO2 output and changes in temperature. The aggregate effect can be large even if year on year changes don't do much.

If we start from the premise that there are no employment effects from the minimum wage, the case for a minimum wage still isn't as clear-cut as Maharey suspects. For starters, we expect a whole lot of the cost of minimum wage increases will be passed through to consumers via product prices. If minimum wage workers disproportionately produce goods and services consumed by poorer people, or at least disproportionately relative to poor folks' relative tax burden, minimum wage increases are not nearly as progressive as income transfers to poor people funded out of the standard income tax regime.

Here are Maharey's arguments for minimum wages:

The first reason is that it is one of the main ways of dealing with inequality. A minimum wage is an attempt to ensure those at the bottom end of the scale have at least enough money to live on.

A more efficient way of achieving the same goal is income transfers; if you want it targeted to folks in work, do it through something like the EITC (WFF). The incidence of the minimum wage isn't clear, but is almost certainly less progressive than the tax system.

It follows, and this is the second reason, that workers should not be expected to work for very low wages. This is nothing more than exploitation and a society that has any sense of fairness should not allow this to happen.

Wages would not drop massively in the absence of a minimum wage. Firms compete with other firms for workers; there isn't some big secret cartel meeting of all the potential employers where they use secret handshakes and arcane Masonic rituals to ensure that nobody chisels on a low-wage pact. It's a damned shame that Labour's notions of fairness forced a bunch of sheltered workshops for the disabled to close through ridiculous application of minimum wages; we ought to allow employers to hire workers with lower marginal product for a wage that matches their contribution.

Third, wages should be set at a level that does not require the government to provide subsidies.

I think this is a big one. EITC or other in-work income support programmes are an on-the-books expenditure; minimum wages bury the cost. If the public will is that low wage workers get higher wages, then the best way of spreading the burden of that support is through the general tax system.

Fourth, low pay is often a result of undervaluing what a worker can do or the skills they have on offer. Young workers are often paid less simply because they are young even if their contribution is the same as older workers.

Employers take greater risks hiring folks with no track record. If a kid hired on lower salary proves to be a great worker, he'd expect a decent bump up at salary review. Forcing equal pay for unequal track records forces those with no experience out of the market.

Fifth, low pay is not a good economic strategy. When times are good, low pay leads to high turnover and a weak commitment to training. ... success becomes dependent on who can pay the least to their workers not on quality, productivity, design, marketing, value-add, skill and the other elements of a desirable economy.

Efficiency wages are hardly unknown; firms wishing to avoid turnover problems may pay higher wages to get a better pool of job applicants. The other claims Maharey makes require, I think, a pretty uncompetitive market. Otherwise, some firms would start improving on the other margins to get an edge on their competitors. I don't think that Dyson would have been less innovative in vacuum cleaners had the minimum wage for product engineers been $0.02 (nor do I think their engineers' wages have ever been close to minimum).

Meanwhile, there have been burblings in favour of reintroducing a lower minimum wage for youths.