In defense of Lord Freud (sort of)

Comments made by Welfare Minister Lord Freud have created a bit of a storm today after being raised at Prime Minister’s Questions by Labour leader Ed Miliband. Freud was recorded saying:

“You make a really good point about the disabled. There is a group where actually, as you say, they’re not worth the full wage.”

At the risk of incurring the wrath of my fellow lefties, I’m going to defend Lord Freud’s remarks while still disagreeing with the argument I think he was trying to make. I say think because what he actually said was pretty clumsy, and could easily be interpreted as offensive when viewed a certain way. So what do I think he was saying then?

It seems to me he was making a case argued by most opponents of the minimum wage. The argument uses what economists call marginal productivity of labour. This goes that firms will hire additional workers up to the point where the costs of paying the worker a wage is equal to the additional output they will achieve by hiring the worker. So if a worker can produce 5 widgets an hour, but only costs the equivalent of 4 widgets an hour, they will be hired, but a worker who costs 4 widgets but can only produce 3 won’t be. If the workers was willing to work for the monetary equivalent of 2 widgets though, the firm would hire them. If the minimum wage is set at the equivalent of 4 widgets however, this worker who can only produce 3 widgets an hour will be left unemployed.

So Freud is saying some people (in this case some disabled people) are not productive enough to produce enough to be ‘worth’ the minimum wage. This is probably true in many jobs, and I’m not just talking about seriously disabled people here, but also those who have been unemployed long term and/or are recovering from drug or alcohol problems. In economic terms this seems a rather uncontroversial thing to say and one that – despite what they may say today – most Conservative MPs  would agree with. So where I would defend Lord Freud is to the extent that he was only (rather clumsily) expressing a very commonly held belief.

But is he right though? I’ve already said that I agree there are some people who employers will view as not worth paying the minimum wage to. They could be right or wrong about this, but there is no doubt employers do not like to hire the long term unemployed, and discrimination on the grounds of disability remains a real thing. But those in agreement would argue that if there were no minimum wage restrictions, employers would hire those workers if they were willing to accept a low enough wage. This is where I disagree quite strongly. People with more business experience than me may say I’m wrong here, but I don’t believe employers make hiring decisions based on the marginal productivity of labour. I think they will always try to hire the best candidate at whatever is the prevailing wage rate. For evidence I would cite the almost total failure of Nick Clegg’s Youth Contract, which provided a wage subsidy to firms hiring an unemployed young person. Take up was atrocious.

Freud’s instinct (which he half expressed) was to favour an exemption from the minimum wage for certain groups, and to top up their wages with universal credit. To the extent that it was limited to certain groups, it would likely be ineffective as the Youth Contract demonstrated. I would also be suspicious that that was just the start, and that a complete removal of the minimum wage would be on the cards leading to a race to the bottom.

A further objection would be Freud’s implicit assumption that because the private sector won’t hire certain people at the current wage, it’s OK for them to pay those people whatever they think they are worth. But businesses are there to serve us, not the other way around. The floor on wages should be the amount at which a person is able to afford a decent standard of living. If the private sector cannot or will not hire everybody for at least that wage, then the government should act as an employer of last resort and tailor make jobs to each individuals talents.

For disabled people, previous governments have felt the need to create organisations like Remploy to create employment for those who struggle to find private sector work. This government scrapped a lot of Remploy factories, and few of those losing their jobs managed to find another one. It seems to me organisations like Remploy are more likely to be more at providing decent jobs for disabled people than scrapping the minimum wage ever would.