Is the minimum wage holding back job numbers?

Civitas, 25 January 2011

The always interesting Chris Dillow castigates Sam Bowman for his glib ‘econ 101’ answer to youth unemployment: abolish the minimum wage and allow youths to offer their labour for any price to employers. Chris has a point. The minimum wage, especially as it is currently constituted and enforced, probably has little impact on employment levels. However, combined with other labour market restrictions and the costs of compliance, it could still be having a deleterious effect that should be addressed given recent job losses.

Supporters of the minimum wage have pointed to evidence that it seems to have increased wages in low income sectors while not being associated with any job losses. The difficulty with proving such claims is what Frederic Bastiat identified as the problem of the seen and the unseen in economic interventions. It is easy enough to see the immediate and intended consequences of a policy (in this case, higher wages) while missing out on the dispersed harms and opportunity costs that the same policy entails. For example, while jobs might not be destroyed as a consequence of a modest minimum wage during a period of economic growth, the real question is how many future potential jobs failed to be created as a consequence of the intervention. The problem with criticising policies from this angle is that you often have very little but theory to make the case.

How do you bring empirical evidence to bear on the ‘unseen’ results of interventions? One report to the Low Pay Commission made a valiant attempt. They used ONS data to look at job growth in low income sectors, and found that job growth decreased in the lead up to and after the introduction of the minimum wage. In other words, entrepreneurs shifted their future investments away from low wage employment in advance of the minimum wage coming into force:

We have shown that, for a majority of low paying sectors, employment and business creation progressed at a lower pace in areas of the country where wages needed to adjust more in order to keep up with the minimum wage, suggesting that growth was lower than it would have been had the minimum wage not been put in place.

The authors acknowledge that the minimum wage (as introduced) was still likely to be welfare enhancing despite this loss of job growth in some low income sectors. But if these results are correct, and the priority post-recession is tackling unemployment, a small increase in employment opportunities might be achievable by abolishing the minimum wage or reducing it in real terms for young people.

Such a conclusion, however, misses out on all the other, and probably more substantial, costs associated with attempting to employ people at the moment. Illustrating, rather than proving, this point is journalist Laurie Penny’s recent attempt to employ a researcher to help her finish writing a book. She offered £500 for 85 hours work, which worked out just below the minimum wage. She also suggested that she would much prefer female applicants. As Mark Wallace established, such an offer, as made, would not have been allowed by a JobCentre and might have turned out to be unlawful both on minimum wage grounds and on gender discrimination grounds.

On the one hand, one might quibble with the regulations themselves. Why shouldn’t Laurie be able to pay £500 to a willing person for 85 hours work, or £400, or £250 if that is all she can afford to offer? And if she prefers to employ a woman, even for purely subjective reasons, why should her preferences be ignored? It is her workplace after all. On the other hand, this case suggests that, more than the rules themselves, it is the cost of technically complying with fairly rigid employment regulations that impact on the ability of small and informal employers to make legal job offers. The trouble of compliance itself probably puts off a great many more potential employers than the need to satisfy what is a relatively low minimum wage. Laurie’s difficulty was not the means or the willingness to pay a researcher a decent wage. The problem was that she really needed, before she hired anyone to do her research, an HR department!