Category Archives: Austrian Economics

Labour’s proposed £10 minimum wage shows just how unelectable they really are

Criticising Jeremy Corbyn’s leadership of the Labour Party and attacking him personally is now futile. It has been done and done again. It is demonstrable that, from an electoral standpoint, he is ineffective. Don’t take my word for it; listen to the increasingly agitated voices of his critics on the Left.

Equally true in my opinion is that one of the worst aspects to contemporary politics – thanks especially to the public relations industry and mass media – is the celebritising (Microsoft Word tells me this isn’t a word, but I have not been corrected in person and refuse to let a red line discourage me from using it) of politicians and the focus placed upon personality rather than policy.

This trend will continue to have a profoundly negative impact upon the legitimacy of public servants. In an age of status and reputation obsession, it is important to draw attention back towards the things that matter.

One thing that matters immensely to a country is having a strong opposition that applies adequate pressure to an incumbent government. They say that it’s best to have conservative government with a strong labour movement in opposition, and the UK is in renewed, desperate need for a strong labour movement.

One of the things that most frustrates me about the Left is its insistence that its programs help the disadvantaged, the poor and the worker, when, in actual fact, evidence shows that they do precisely the opposite. Mr Corbyn’s fresh pledge to raise the UK’s minimum wage to £10 per hour provides an excellent example of this problem.

First off, government should be out of the business of setting wages (with the exception of those working in the civil service, of course). We have seen throughout history the damage caused by government control of pricing.

And wages are a price. They represent the cost of labour to an employer, and ought to remain a private concern that both parties to that transaction agree to. The beauty of capitalism has always been that it is based most fundamentally around the concept of voluntarism.

When government steps in and artificially raises the price of labour, several important things happen. Firstly, a surge in unemployment is almost inevitable. A 2006 review of more than 100 minimum wage studies by David Neumark and William Wascher found that about two-thirds found ‘negative employment effects’.

When employers are forced to pay their staff more money, they need to make alterations in order to break even. This could mean cutting back on staff directly, cutting the benefits of existing staff or scrapping hiring plans or schemes in the future. Young people, too, will suffer disproportionately as they lack the skills and habits of work and will be more expendable in the workforce.

Secondly, arbitrary rises in the price of labour may lead to significant price hikes on the high street. As basic market laws and common sense tell us, if the price of a good increases, the likelihood that a customer will buy it decreases. For the worker on minimum wage, there may be a crucial trade-off: a pay rise for all, for his job.

In his influential Economics in one lesson, Henry Hazlitt notes: “it may be thought that if the law forces the payment of a higher wage in a given industry, that industry can then charge higher prices for its product, so that the burden of paying the higher wage is merely shifted to consumers.” A pay rise is, after all, only relative to inflation and changes to the cost of living.

It therefore stands that the best way to raise the earnings of a worker is to ensure that market forces are culpable for the raise. Labour productivity must be increased either by means of management or production innovation, or by improving technology and training. Creating an environment that is conducive to the making of profit will be far more beneficial to workers in the long run.

We have just entered a period of two distinct changes to the National Minimum Wage (now called the National ‘Living’ Wage because, you know, PR): its introduction and its subsequent raise. Employers are currently coming to terms with these rises as well as the prospect of leaving the European Union.

Any further government control of labour costs is bound to have a substantial disemployment effect. But there is more. The difference between welfare and wages must also be taken into account.

If as a country we say that it is illegal to pay a man less than £160 per week, and we also say that an unemployed man can earn up to £120 (I am using arbitrary figures) per week through the welfare state, then we prevent another man from enjoying the dignity of work and self support for anywhere between £120 and £160 per week.

This may sound like pedantry, but it is an important consideration for those who advocate governmental wage control. Artificial increases in the cost of labour will result in a gap between the minimum a person will earn in work and the maximum he or she will receive in benefits. Any such gap is a barrier to employment. 

And why does the Labour Party not see this? I am struck by just how coy the Left can be with economic programmes. Anybody remember Natalie Bennett’s housing policy disaster at the last General Election? Of course, I do not think this will matter in the long run.

Labour will not be elected into government in 2020. Even with a change of leader in the next twelve months, its troubles (from a damaging referendum divide to the lingering stench of anti-Semitism) are far from being dealt with.

Perhaps Jeremy Corbyn’s quiet resignation that he will not make it to Number 10 is making him lazy. If he thought he had a real chance, he would surely be trying a lot harder. Most polls now show ‘don’t know’ to be a better candidate than the Labour leader for Prime Minister.

And with policy proposals like a new inflation-inducing minimum wage, it’s not hard to see why.