Would raising the minimum wage increase unemployment?

The headlines from the Labour Party conference at the weekend included a suggestion that they wanted to increase the minimum wage, as it had lost value in real terms over the last five years. An increase of 45p an hour was mooted. Ed Miliband seemed to row back from this somewhat on Sunday, floating some nonsense about different minimum wages for different sectors, and talking about increasing fines for employers breaking the minimum wage laws (no one gets fined now, so it’s not clear what increasing the fines would do). Ed Balls then mentioned raising the minimum wage in his speech today, so maybe it is on the cards.

This kind of talk leads to furious whingeing from big business about how raising the minimum wage would increase unemployment. It’s always couched in terms of small businesses being unable to afford to pay higher wages. But do they have a point?

An increase in the minimum wage would increase costs for the minimum wage employer. This may lead them to lay off staff all other things being equal. But all other things are not equal. If wages go up, so do the incomes of their workers. Those workers will be able to buy more stuff which will increase the profits of businesses. If the increase in sales is significant enough, employment might actually rise following an increase in the minimum wage.

But will incomes actually rise? Won’t the increase in wages just be offset by a reduction in payments of tax credits? Well yes. But by no means all minimum wage workers are eligible and/or claim tax credits, so there will still be a positive increase in income at the lower end economy-wide. And if less tax credits are being paid, this creates room for tax cuts, either on individuals (who then have more disposable income) or on businesses (to offset the increased wage bill).

So while it’s possible increasing the minimum wage could increase unemployment, it’s equally, if not more likely that unemployment would be either unchanged, or actually fall as a result.

And if unemployment does rise as a result, is there anything the government could do? Yes, it could strengthen the safety net, by offering a guaranteed, public sector job paying the same wage to those displaced by the increase. This would create a healthy competition for workers, and competition is good right?

Another way to think about government debt

The Tory Party conference is coming up, so expect to hear lots about how they literally saved the country from becoming like Greece, tackling the deficit head on and paying down Britain’s debt. The reality’s a little different though. Mercifully, and despite their better efforts, the deficit has remained high, as the government’s cuts have been offset by higher welfare spending and lower tax take. The high deficit seems to be supporting the economy just enough to allow a weak recovery at the moment. The national debt however, continues to grow.

All the main parties want us to fear government debt and play on our wish for our children to have a better life by constantly talking about the burden we are placing on future generations. To a large extent, this scaremongering has worked. Most people hate austerity, but accept “there is no alternative”. We must get the deficit down.

But should we be thinking about government debt as placing a burden on our children? How will we pay it back? For an alternative viewpoint, the following is an extract from a book called the “Seven Deadly Innocent Frauds of Economic Policy” by Warren Mosler. Everyone can and should read this book for free here. I’ve replaced some words to make it fit for the UK i.e $s to £s or the Fed to the Bank of England.

“Next, you need to know what a U.K. government bond (gilt) actually is. A U.K. government bond is nothing more than a savings account at the Bank of England (BoE). When you buy a gilt, you send your pounds to the Bank of England and then some time in the future, they send the pounds back plus interest. The same holds true for any savings account at any bank. You send the bank pounds and you get them back plus interest. Let’s say that your bank decides to buy £2,000 worth of gilts. To pay for those gilts, the BoE reduces the number of pounds that your bank has in its current (reserve) account at the BoE by £2,000 and adds £2,000 to your bank’s savings account at the BoE. (I’m calling the gilts “savings
accounts,” which is all they are.)

In other words, when the U.K. government does what’s called “borrowing money,” all it does is move funds from current accounts at the BoE to savings accounts (gilts) at the BoE. In fact, the entire £1.4 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the BoE.

And what happens when the gilts come due, and that “debt” has to be paid back? Yes, you guessed it, the BoE merely shifts the sterling balances from the savings accounts (gilts) at the BoE to the appropriate current accounts at the BoE (reserve accounts). Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.”

So rather than a burden, a more realistic way to think of the national debt is as the financial savings of the private sector. It’s not something we should be overly concerned about. Over the last few years, the private sector has been demanding to save (lend money to the government) as it has not been able to find profitable investments in the real economy. It wanted risk-free assets, and nothing is more risk free than putting money into a savings account at the BoE. This huge demand for risk free savings has keep the price of those savings high (and the interest rate low). So when the government boasts about keeping interest rates low, this has been a prize for failure rather than anything to be proud of. In a strongly recovering economy, the demand for risk free savings (gilts) will fall, so interest rates will rise. This will be a good thing as it will mean we should see more investing in the real economy.

When we hear politicians talk about the economy, up is down, left is right and black is white. The truth is often the complete opposite of perceived wisdom, so read Mosler’s book and have your mind blown.

 

What does it mean to be fiscally responsible?

Expect to hear this phrase a lot next week from the Labour Party – “fiscally responsible” or “fiscal responsibility”. The last time I heard it used was on Sunday when Chuka Umunna was being interviewed on The Sunday Politics by Andrew Neil. Umunna is the Shadow Business Secretary and he was squirming under questioning about why Labour wouldn’t pledge to renationalise Royal Mail. Umunna said he wouldn’t because he didn’t know how much it would cost to renationalise and he wasn’t willing to write a ‘blank cheque’. Labour, he said were determined to be a fiscally responsible government. But what does this mean?

The phrase has two meanings. One used by politicians and neo-liberal economists, and one, more relevant (to 99% of us) meaning.

The first meaning is all about numbers and rules i.e. the deficit shouldn’t be bigger than x, or the debt-GDP ratio shouldn’t exceed y. These numbers will be completely arbitrary and purely designed to make the person advocating them sound sensible or competent. Indeed, in the EU there is a fiscal rule that deficits should not exceed 3% of GDP (how’s that going). How did they come up with that? Is 3% some sort of tipping point? No. One of the French officials who helped come up with the rule said:

“We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand [the French President at the time] needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple.”

You will often hear politicians talking about the way the spend your money, of getting value for money, or not wanting to shoulder future generations with debt. Expect this to be a theme from Labour as they try to convince people they can be responsible with ‘taxpayer’s money’. It’s likely we will hear Ed Balls come out with some nice sounding ‘fiscal rules’ before the next election. They will be completely bogus. ‘Economically illiterate’ as people are fond of saying these days.

A lot of people do seem to approve of these messages though and agree that’s how a government should act (a lot of this is down to people believing governments are spending their taxes, but as I argued here, they are not). The problem is however, this is absolutely not how a responsible government should be acting, and doing so is likely to be detrimental to the majority of its citizens.

Which brings us onto the second definition of fiscal responsibility. Here’s Professor Bill Mitchell on what we should think of fiscal rules (like a deficit limit for example):

“Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends. The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances. There is nothing intrinsically good or bad about any specific budget outcome.

…It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.”

So a more relevant definition of fiscal responsibility would be the responsibility of government to use its spending power to maximise real outcomes like full employment and increasing living standards, building homes for people and ensuring we have world class health and education systems. But responsibility also includes ensuring inflation doesn’t get out of control, so it doesn’t mean spend spend spend. Tax and spending decisions should be taken on the basis of maximising real outcomes while keeping inflation stable. That’s true fiscal responsibility.

Some policy ideas for Party Conference season

It’s Party Conference season again, kicking off with the Lib Dems this weekend. While the main parties will doubtless be floating radical new policies like voluntary codes for zero hour contracts, voluntary codes for private sector landlords or how best to ‘nudge’ people to behave in ways not in their long term interest (mainly borrowing more money), I thought I’d float just 3 alternative policies I’d like to see introduced.

1. No surprise to regular readers, number 1 is a job guarantee. While David Cameron and George Osborne are high-fiving about unemployment falling by 24,000, long-term unemployment and youth unemployment both remain high. Even if we now have a strong recovery, hundreds of thousands are going to be left behind, as employers are unwilling to hire people without recent job experience. To fix this, the government should create jobs to act as a transition from unemployment to regular paid employment. These jobs should be available to anyone struggling to find a job, but who is willing and able to work. This would also render the whole zero hours debate moot.

2. Housing affordability and availability is a real issue for millions. Nasty policies like the bedroom tax don’t help, and the Government’s enhanced right to buy is exacerbating the problem. We need 250,000 new dwellings per year to meet demand. At the moment we are building less than half that number. To address this, central government should award grants to local authorities of £200 per resident, for the building of social housing. These homes should be required to be built to passivhaus standard. Building regs should also be amended to prevent some of the worst residential building we see today.

3. A debt jubilee. Current policy seems to be to ‘recover’ the economy based on pumping up private debt levels once again. This is clearly unsustainable. Debt levels are already too high, and much of it probably can’t be paid back. We should accept this and hit the reset button. Each household could be given a one off payment of £10,000, which must be used to pay off debt, be it mortgage debt or unsecured debt. Those who do not have any debt get to keep the £10k to spend on whatever.

Pie in the sky? In the current climate yes, obviously these things won’t be implemented, but in terms of the ideas being practical, affordable and beneficial for the majority? Yes, I think these policies are all those things. Got any of your own? Leave your ideas in the comments.

 

What type of jobs could the government create?

Read a bit of nonsense this morning from the so-called ‘Taxpayer’s Alliance’ about how ‘work for dole’ programmes should be expanded to save money. The effectiveness of this as a policy rest upon the idea that most unemployed people are generally taking the piss, and if we make being unemployed more unpleasant (as if it’s not unpleasant enough already), people will just go out and find a job. The idea also appeals to a certain type of person who view themselves as ‘paying for’ unemployed people to live it up on benefits, and think they should have to dance for their suppers.

Needless to say, I think this idea is garbage, and the actual problem is a lack of paid work. The solution to this seems obvious. The government should just create jobs. This is anathema to people like the Taxpayer’s Alliance, who suffer from a certain kind of cognitive dissonance about the issue. While they have no problem in coercing welfare claimants into jobs at Poundland et al as long as it pays no more than the current level of benefits, if the government were to actually create jobs paid at a living wage, these jobs would be ‘make-work’, akin to Keynes’ digging holes and filling them in again.

Even people who realise there simply aren’t enough jobs to go round are resistant to the idea that the government should simply create some, because they doubt that sufficient useful work could be found, so it’s better to leave people unemployed.

To counter this, I thought a list of potential jobs that could be created might be useful. I’ll start with a few of my own and request others to add their suggestions below in the comments:

Sports Coach

Street Musician

Street Artist

Actor

Landscape Gardner

Community Allotment Worker

English Language Teacher

Community Translator

Childcare (own kids)

Childcare (someone else’s kids)

Adult Social Care

Youth Worker

Household Energy Efficiency Installer