Tuesday, 10 February 2009

Minimum wage rise: everybody loses

minwage We’re in recession, moving inexorably into depression. 

Jobs are short, confidence is low, and prices and profits are falling.

Yesterday’s announcement that “the minimum wage” is going to be raised is an indication, however, that economic recovery is what politicians are eager to avoid.

We’re in a hole, and all they want to do is keep digging.

Let me explain that point.

When the prices producers can get for their produce are going down, as they do in a recession, then producers themselves need to cut costs if they're going to survive.  That’s a law of reality that affects everyone from car-makers to Christchurch prostitutes.

It’s serious.  When the prices for goods and services are below the cost of producing those goods and services, as they so often are in a recession, then producers either cut their costs or go under.

What happens to those marginal businesses (and to economic recovery) if they can’t cut their costs?  I’ll leave that question as an exercise for you.

How can governments help? Well, a responsible government could help this process of recovery by cutting their own spending and removing any legal impediments to letting prices fall -- which, crucially, includes the price of labour. Allowing viable producers to cut costs in the face of falling prices, especially the cost of labour, is what leads the economy into a genuine recovery.

Conversely, prohibiting cost cutting delivers the opposite result. By meddling and over-spending, by keeping prices high and setting ‘price floors’ that make it hard for marginal producers to survive, they either delay or kill stone-dead any genuine recovery.

Yesterday's decision by the National/Act/Maori Government to **raise** the minimum wage in the face of falling prices and falling production confirms that this Government intends to take the latter route.

The minimum wage is a price floor below which staff are not legally allowed to work.  The result of setting the price for labour above the market clearing price is to put labour out of work.

It’s as simple as that.

If the National/Act/Maori Government knew what they were about they wouldn’t be raising the minimum wage, they’d be abolishing it.

Prices don’t need to be fixed or kept up – at the present time they urgently need to fall.  One man’s price is another man’s costs.  As the likes of Pigou and Haberler and Patinkin have argued, “falling wages and prices would increase the real value of money holdings, and the spending out of those real cash balances would restore the economy to full employment” -- and while monetary wages might fall, as they need to, as productivity increases and the purchasing power of every dollar increases, then real wages will actually rise

It’s not a balancing act: Everybody actually wins.

But this benevolent process can only come to fruition if the politicians and the union reps get out of the way first.

The sad thing about yesterday afternoon’s announcement however is not just the number of people it will throw out of work and the businesses it will throw out of business, it’s the clear indication that the actions of this government will not be determined on the basis of economics, but instead on ordinary politics. And that ladies and gentlemen is the problem.

Despite the comments from so-called economists this morning, this is not good economics.

There are so-called economists arguing that a hike in the minimum wage will help recovery by inducing an increase in consumer spending.  These are people who think money grows on trees.  They are utterly ignorant of where this “extra spending” is supposed to come from, which is from the earnings of producers – earnings that are now severely reduced.  This is not even economics, it’s just stupidity.

There are so-called economists who’ll insist that the derisory “tax cuts” delivered last week should be enough to fund today’s cost increase.  These are people who one can only assume have never seen a balance sheet, nor grasped the extent of today’s problems.

And there are so-called economists who argue that wages are inherently “sticky downwards,” that lowering the price of labour is inherently impossible so don’t even bother trying.  Now, it’s certainly true that wages are going to have trouble falling in the context of minimum wage laws and the refusal of unions and policy-makers to let wages decline – and the insistence of so-called economists that they don’t need to.

But sadly for these theorists, their theory is contradicted by cases such as this one, and by the history of depressions past.

Remember the Great American Depression of 1920?  No?  There’s a very good reason for that: there wasn’t one.  Unlike the Great American Depression of the thirties, when the US economy went into a tailspin and President Hoover did everything he could to keep prices and wages high, in the recession of 1920, prices and wages were allowed to fall, allowing things to get back on an even keel, and within a year the economy was booming away again.

The same thing happened in New Zealand in the early thirties.  While FDR was meddling away trying to keep prices high (prolonging the American depression for nearly a decade), New Zealand’s political leaders allowed wages and prices to fall, and by 1934/45 the New Zealand economy was back into recovery mode.

These are the lessons from economic history that honest historians, economists and politicians should be learning, and talking about.

Sure, you can listen to the likes of Sue Bradford and Phil Goff and Helen Kelly and the boys at the Double Standard who demonise private enterprise and spout economic illiteracy.

There are important lessons from history they do need to learn.  In the context of economic recovery they need to learn that the demonisation of private enterprise is counter-productive, especially to the low-paid people they clam to be speaking for. They need to learn it just as much as American president Barack Obama needs to learn it, as Lew Rockwell explains:

    With his rhetoric and policies, [Obama] has decided to demonize private enterprise, just as FDR did, as a way to present government as the great savior. Now, think about this. If there is a way out of the recession, it will have to be provided by private enterprise. It will come by new businesses, business expansions, entrepreneurship, new technology, and this will be the source of lasting jobs and prosperity.
You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools! These activities amount to capital consumption. They are not sources of investment. You can say that they are stupid tasks or wonderful tasks, but it is not a matter of ideology as to whether such public projects will make us all wealthier. They will not. They drain the sources of wealth from society. They represent a cost, not a blessing.

Neither jobs nor spending grows on trees.  That’s not ideology: that’s reality.  Private enterprise is the engine of both new jobs and any real recovery we’re ever going to see – it is the solution to recovery, not the impediment.  Responsible governments understand that. 

Does this one?


  1. I think this government might actually understand what is needed. All steps taken are too small but most are in the right direction. National is performing the political balancing act that any party does to remain in power but I think I see signs of restraint in the National Party.

    If they went in all guns blazing like we libertarians would like to see and the economy needs, then the wheels would come off pretty damn quick as the public withdraws it's support.

    Now they do the "We too" economic "stimulation" package of a measly 1 billion dollars. It causes damage but not as much as Australia's 40 billion will do.

    Minimum wage rise is at inflation. It should be abolished but to prevent the wheels coming off they raise it just a tad.

    They do talk about cutting spending. Agreed not enough cutting but at least they started somewhere and again, easy does it.

    They stopped the global warming lunacy and parked it in a committee so the deluded NZ public wont start crying about lost polar bears.

    Easy does it, after all The New Zealand public needs to be weaned off Nannies tit without them throwing a tantrum.

    So far I get the impression John Key is doing an ok balancing act but relief is likely too little and too slow. I give him a D for trying though.

  2. The best that can be said of the increase is that it's probably not big enough to do massive damage. You're of course right that best policy would be abolition of the minimum wage.

    The infuriating thing is that minimum wages fail means-ends rationality as judged by the purported ends of those promoting the increases. In the spirit of wertfreiheit, we'll take their sought ends as given; in that case, a better version of Working for Families achieves their stated ends far more effectively than does a minimum wage increase.

  3. This is another example of what a complete failure John Key's government is.

    I feel so sorry for the businessmen to have to fork out money for this nonsense.

    I also feel sorry for the thousands of younger people who will have their entry into the workforce delayed because of this evil attack on Capitalism.

  4. Looks like the company will be letting a young one go redundant. Discussions yesterday was that it may end up being two. They will have real trouble finding new jobs as they are in training and have some years to go until they can be considered to be tradesmen.

    On another note, yesterday a manager of McDonald's NZ Ltd said the legislation was about to cost that company NZ$ 4-milion per years extra. They will be making some changes. You can guess what those are likely to be.

    Easy-does-it, middle-of-the-road, don't-scare-the-horses politics really works out well, doesn't it!



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