Raising the NMW to the Living Wage

 This study by Howard Reed for UNISON has been making a few waves, making the argument that increasing the statutory National Minimum Wage (NMW; £6.31 per hour) to the level of the Living Wage (£8.55 in London, £7.45 elsewhere) would represent a net benefit. But I'm not convinced.

The micro argument

Reed's micro argument is that raising the minimum wage has little, or maybe positive, effects on employment. While noting the counter arguments, he focuses heavily on the argument (Doucouglias and Stanley, 2009) that such evidence is over-weighted due to publication bias for significant findings, and highlights UK studies (for the Low Pay Commission) which together find:

"... no evidence that the recent levels of minimum wage in the UK have produced any adverse effects on employment." 

While I'm more open to the negative evidence, I think that's a fair conclusion. But as ever, what matters is the effect at the margin; so far this has been very limited because the NMW has been set to 'tidy up' pay rates, rather than to boost them artificially. At some point, increases to a minimum wage will have sufficient bite that it will make some employment transactions simply uneconomic.

Following Bryan Caplan's argument, the evidence from immigration studies - and this applies especially to the UK - is that demand for low-skill labour is highly elastic at current wage rates. If that's so, then once the NMW gets closer to those wage rates, we would expect to see large, negative employment effects. 

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Karl Polanyi is over-rated

It's one thing to argue that markets exist in a context set by institutions and cultural practices. It's another thing to claim, as many do, that they're somehow an artificial contrivance, a decisive, top-down break with past modes of social organisation. That break - which we think of as industrialisation - is alleged to have fractured economic life from its social context, at the cost of alienation and exploitation, to the benefit of the few in the capitalist class.

That claim comes most of all from the pen of Karl Polanyi. Polanyi is much cited these days; he makes a quasi-Marxist argument but rooted in a richer history and without quite so much baggage. He's an especial favourite of the bring-backist Blue Labour crowd (nineteenth capitalism's "logic was to commodify land, money and human labour"p.96), but his influence is also detected in Ed Miliband's thinking about markets. 

The argument has its rhetorical use for social democrats because it is quietly devastating of "free market" claims. Rather than a collectivist reaction of "markets don't work", the Polanyi argument is that they may well work, but only because they are, and have been from the start, an explicitly organised and managed affair. Therefore, it said, there is no "free" market, because without the state, markets would not exist. And so, no Smithian invisible hand, no Hayekian spontaneous order, and no need to demonstrate market failure before advocating state intervention - just as the state created markets based on self-interest to suit capitalists, it can change them into other, more public-spirited, modes to suit other parts of society.

Now, I'm no naive market-worshipper.

 

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Monetarist arithmetic: doing just fine

Frances Coppola makes a valiant effort, but I think Sargent and Wallace's 'Some Unpleasant Monetarist Arithmetic' remains intact. First, to clarify; Coppola writes:

"Sargent & Wallace... assume that fiscal authorities will always be profligate unless disciplined by a monetary inflation target, and that unconstrained deficit spending will always result in higher inflation."

Sargent and Wallace say that even in a monetarist model, where the central bank is not expected to accommodate government financing with seigniorage, an unsustainable fiscal policy will dominate monetary policy and result in inflation. Sargent and Wallace show that even if the monetary authority is not called upon to finance those government deficits, it can only sustain a demand for government bonds by holding down the growth rate of the monetary base. When the appetite to hold bonds is reached, the interest bill will still have to be met, and so the monetary authority will 

Second, Frances argues that Sargent and Wallace's concern for deficits driving inflation is stuck in the 1970s,

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Some thoughts on 'Some Thoughts'

Dominic Cummings' paper Some Thoughts on Education and Political Priorities is a fascinating combination of an interested (and well-read) layman's notes on developments in science and technology, an experienced education policymaker's polemic against the establishment and for a vision of excellence, and a political operator's reflections on the implications of technological and social change for the practice of politics. Despite some attacks by people who haven't read it or others who clearly couldn't understand it, I would recommend anybody interested in the issues the paper raises to pick it up and give it a read. The whole thing needs an edit, but the sections on education, government, political economy, and political philosophy are genuinely interesting, while the rest provides a reasonable primer on a vast array of subjects, from energy through to computing and beyond.

Read it closely, not only for the arguments, but also for the footnotes: a reference to Laplace's failure as an administrator directed at academic wannabes (fn.26); the fact that PhDs in Education have an average IQ or 110, which is less than the average undergraduate (fn.153); a scathing summary of the British way of government today (fn.198); or a reasonable estimate that there are in the world 2,000-3,000 psychopaths with the IQ of a Nobel Prizewinner (fn.264). Read it closely too, because Cummings is hardly the ideologue that he's been painted as, either in news reports on the paper, or in portrayals of Gove and his team as swivel-eyed revolutionaries. Cummings is clear up-front that he's an interested layman, trying to synthesise the expertise of others, and he takes that expertise in a balanced, engaged tone.  His brief summary on climate change is a good example; he is clear on the science (it happens, human action is a major cause) but alert to the potential for politics to distort the debate on either side, and notes that solutions are more difficult to find than problems.

Similarly, while the Guardian summarised, and critics have pounced on, Cummings as arguing that genes "account for 70 per cent of performance", in the paper he is quite clearly and accurately (to my knowledge, as a less well-read layman) summing up the science as saying that genes account for up to 70% of the variation in performance...

 

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Is the declining labour share a problem?

It's a stylised fact of growth in the advanced economies these past few decades that the labour share - the proportion of GDP going to pay wages - has seen a long, secular decline. For many on the left it's taken to be a sign that something is wrong. The fact that the UK's decline has been particularly marked, going from over 70% in the mid-1970s to floating around 60% in the last twenty years is, it is suggested, another sign along with increased inequality that today's economic "business model" favours capital at the expense of working people.

I'm not so sure. In the UK, I think the change in the labour share is for the most part explained as a combination of an omitted variable (self-employment) and a problem solved (corporate profitability). I think that a "shares" analysis can be misleading in times of substantial economic change, and so we have to look at the levels alongside them. Finally, I think that while corporate capital may have restored its profitability at the expense of the labour share (and this is no bad thing; profit is a good thing), it's the increasing share going to high-skilled human capital, within the labour share, that matters far more in understanding increasing inequality.

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The multiplier in normal times: around about zero

As the economy returns to growth, the years of acrimony over the direction of government fiscal policy are all being harmoniously resolved as everybody agrees that their previous position was right. So, Osborne put his head above the parapet not so long ago and stuck two fingers up at "the fiscalists" who'd wailed and gnashed teeth about his awful austerity. Said fiscalists have been making clear that they never really wailed and gnashed their teeth quite so much as people thought they did, and that of course  there's growth and they never said otherwise.

Looking back, I would say that the biggest failure of advocates of fiscal stimulus was in hand-waving through the potential for it to be neutralised by monetary policy: "of course, the Bank would accommodate the stimulus". By that, they meant that any such stimulus would, by boosting demand, contribute to increasing inflation, and that this would in turn help to create a reduction in real interest rates, encouraging a shift in spending from tomorrow to today. Therefore, higher inflation would have been a feature, not a bug, of fiscal stimulus. But with stimulus' leading political advocate, Ed Balls, repeatedly denouncing the government for allowing the Bank to tolerate above-target inflation, there always was a severe credibility gap that stimulus advocates never even acknowledged, let alone address.

Hopefully now, this discussion will go into history until the next major economic crisis, where again there will be an inconclusive contest over the question of fiscal stimulus. But as I look around, I see many stimulus advocates continue to assume a role for debt-financed spending to boost economic growth. For many, the assumption that there remains an output gap of any size (and some see it as big) seems to warrant a recourse to fiscal stimulus, with all of the rather pleasant opportunities for increasing government spending that that might bring.

Yet, leave aside the debate over stimulus in 2008-2012, the consensus is surely that monetary policy dominates fiscal policy

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Matthew Parris and Adam Smith

I heartily agree with the thrust of Matthew Parris' diatribe (£) about a political class making rash promises on the "cost of living", rather than focusing on the job of creating the wealth which can pay whatever set of costs we face:

"“Cost of living” means the price of things. Money is only a means of exchange. “Price” and “cost” are essentially secondary terms: mirages through which the eye must pass in order to focus on what lies behind. What lies behind — the question, the only question — is the wealth (or poverty) of nations. Wealth and poverty, though they may be expressed in money, do not consist in money: they consist in the goods and services that are within people’s reach; they consist in what the Victorians would have called our “circumstances”. What we can afford."

But as he later calls in aid Adam Smith, it's worth saying that Smith did not view the cost of living as being an entirely neutral question in economic policy. While he would be with Parris (and me) on the side of putting wealth creation before distribution, in his Lectures on Jurisprudence, Smith writes:

"The greatest part however of exclusive priviledges are the creatures of the civil constitutions of the country.  The greatest part of these are greatly prejudicial to society. Some indeed are harmless enough... ...But there are few so harmless. All monopolies in particular are extremely detrimental. The wealth of a state consists in the cheapness of provisions and all other necessaries and conveniences of life; that is, the small proportion they bear to the money payd, considering the quantity of money which is in the state; or in other words that they should be easily come at. Its poverty again consists in the uncomeatibleness or difficulty with which the severall necessarys of life are procured. Now all monopolies evidently tend to promote the poverty or, which comes to the same thing, the uncomeatibleness of the thing so monopolized."

While Smith certainly argued for free competition as the best route to prosperity, and accepted inequality as part of the necessary price of free competition, he was alert to the possibility for wealth to be created for some at the expense of others. Indeed, at a time when even the Conservatives now flirt with using the minimum wage to boost incomes (rather than its original aim, of stamping out exploitative pay), Smith's argument is that the best protection for the poor - one that avoids any insider-outsider distinctions - is to put consumers before producers, so that goods are cheap relative to any income in society.

Parris' argument that prices and costs are purely nominal, and their particular value meaningless, is quite right. But Smith's point is that the level of prices, relative to the market incomes of the poor, is something that is affected by public policy ("the civil constitutions of the country"); the more we bear down on monopoly and make everybody better off, the less necessary it is to boost the incomes of the poor. Think of the effects of land use planning on house prices, and you see Smith's point fairly clearly, I think: open, competitive markets, rather than monopolies benefiting insiders, are the best means we have for aligning our shared interest in wealth creation with a concern for the welfare of the poor.