Establishment economics turns out to be wrong. Again

When one of the leader writers for The Times gives us his considered views on matters economic we can - and should - assume that this is the establishment talking to us. This is what those who, in general, run the country actually believe. That it’s wrong is somewhat disconcerting although it does aid in explaining why we’ve such problems with the way the place is run.

So it is with Oliver Kamm and his views on the minimum wage:

Finally, minimum wage legislation in Britain, where the price of labour has a floor, is widely regarded as a success, as labour markets are far from perfectly competitive. Big employers have a degree of market influence that enables them to pay wages below the equilibrium price. They can afford to pay higher wages without increasing unemployment.

This is the monopsony argument. And, if it were true, it’s a reasonable argument in favour of a minimum wage. It is widely believed, in that establishment, that it is true. But it ain’t. We have good evidence that it ain’t too:

The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.

The Low Pay Commission pretends this won’t happen. Its chairman Adair Turner says: “Our analysis suggests that previous upratings [to the minimum wage] have largely been absorbed without adverse effects.”

Can I give Mr Turner some advice? Try reading your own report matey.

In particular, appendix 3, which starts on page 213 of this pdf. It contains a survey of employers who were affected by the rise in the minimum wage in 2003. It shows that: 37 per cent of them cut staffing levels, whilst only 4 per cent raised them; 31 per cent cut basic hours worked whilst 3 per cent raised them; 28 per cent cut overtime hours; 81 per cent said their profits fell; and 63 per cent said they raised prices.

This, of course, is exactly what basic economics would predict. It corroborates this research, which shows that where the minimum wage bites hard – for example in care homes – it does reduce labour demand.

Which raises the question: how could anyone ever have thought otherwise?

The general view - among the people who matter, that establishment - about the minimum wage is that it does not harm employment prospects, that there is no cost to it. This general, establishment, view is wrong.

Which is, of course, why that minimum wage is driven ever higher as the people who make that decision have convinced themselves that there is no cost to doing so. There is a cost, it’s carried by ethnic minorities, the young, the untrained. But as none of them are part of the establishment perhaps that wouldn’t change the policy even if our rulers knew about it. It’s left to liberals like ourselves to point out the error.