04 June 2015

Only the market can give life to the Living Wage

Boris Johnson, Mayor of London and now Member of Parliament for Uxbridge and South Ruislip, created a stir at his May social media Q&A when, responding to a query about the living wage, replied:

The Living Wage should be massively expanded & be 1 of the great national ambitions with increasing productivity...

Desiring a living wage for all is not shocking. But how to arrive at such economic well-being does set the stage for a row — and this is why the progressive left has taken such interest in Johnson’s remark.

The rationale for the Living Wage

The idea of a ‘living wage’ is not in itself controversial; with roots in Catholic Social Thinking, Leo XIII wrote in his 1891 encyclical Rerum Novarum that ‘a workman’s wages [should] be sufficient to enable him comfortably to support himself, his wife, and his children’,1 a position endorsed in 1931 in Pius XI’s Quadragesimo Anno: ‘the worker must be paid a wage sufficient to support him and his family’2 — and subsequently in succeeding papal social encyclicals.3

In contemporary political discourse, a living wage is deemed a supplement to the state-mandated minimum wage for recipients residing in areas where the cost of living is particularly high. Controversy wages about how to achieve a living wage: whether by voluntary market co-operation or by coercive state redistribution.

Market forces favour sustainable wages…

For a living wage to be enjoyed by the greatest number of people, the free market is by far the better route. Goods and services are freely exchanged, with avenues open for entrepreneurship, competition, and new business ventures. Employers advertise job openings and prospective applicants offer their talents for whatever the market deems they are worth. When prices are high, new suppliers are attracted to the market (as well as new jobs) and prices drop, becoming more affordable. (And, where employment is at a premium, this shortage puts natural upward pressure on salaries.)

Employment is subject to the same market dynamic of supply and demand, with value-added skills commanding higher wages. Those with very little skills may not earn much, but they do acquire the talents and work habits to progress to better paying jobs in the future. In this scenario, unemployment will be naturally low.

…Whereas state intervention stifles sustainability.

Using the state to attain the living wage, however, is far less satisfactory and ultimately counter-productive. The basic mechanism of the minimum wage has negative consequences that far outweigh the illusion of immediate benefits. Employers will not hire staff whose low skill-sets are deemed not cost-effective — usually the young and school-leavers who would gain most for the work routines employment promises.

Henry Hazlitt summarised the position of the most vulnerable in his brilliant primer, Economics in One Lesson:

You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation. […] We have deprived society of the value of his services. We have deprived the man of the independence and self-respect that come from self-support, even at a low level, and from performing wanted work, at the same time as we have lowered what the man could have received by his own efforts.4

Moreover, the minimum wage hinders employment overall and acts as an artificial brake on economic growth. (According to ONS figures for May 2015, of the 1.83 million unemployed actively seeking work, an additional 42,000 were ‘discouraged’ workers who had given up looking altogether. Minimum wage requirements are among the many factors holding down employment numbers.)

In this regard, the campaign for a living wage is another example of the Keynesian fallacy of trying to raise aggregate demand: the true response lies on the supply side where, in J.B. Say’s classical liberal formulation, demand is constituted by supply. Increased production will lower prices and raise employment prospects, both in the form of jobs and increased real wages; the living wage is a tax on job creation and an impediment to growth.

The Prime Minister acknowledged that ‘the best way out of poverty is work — and the dignity that brings’, in his 2013 Conference speech:

We know that profit, wealth creation, tax cuts, enterprise — these are not dirty, elitist words — they’re not the problem, they really are the solution because it’s not government that creates jobs, it’s businesses. It’s businesses that get wages in people’s pockets, food on their tables, hope for their families and success for our country.

It has already been reported that Oliver Letwin, minister with responsibility for government policy, ‘spent the campaign in Whitehall drawing up proposals to merge quangos and slash Government regulation’.

And speaking in Bristol, Business Secretary Sajid Javid announced an upcoming Enterprise Bill with further reductions in red tape. ‘For the first time, the actions of regulators will be counted towards achieving the overall £10 billion in cuts … the first time in modern history that government has successively reduced red tape and continued with reductions in the next parliament.’ The harmful effects of government interference will be fact-based, as ‘business will be our partner, giving us the evidence we need to roll back the state.’

Opportunities for success trump rhetorical good intentions.

Yet the idea that a benevolent state can impose high wage rates persists by the progressive élite, who care more for the rhetorical generosity of their intentions than with the outcome of their policies; who argue theirs is the charitable choice, when in reality charity is a matter of individual choice, not government fiat.

Frédéric Bastiat noted the hypocrisy, and wrote that proponents of state activism confuse ‘the distinction between government and society. As a result of this, every time we object to a think being done by government, the socialists conclude that we object to its being done at all.’5

State action to raise up the poor when others (so it is believed) refuse to help is not benign, but a zero-sum game. Left to their own devices, businesses would offer employment opportunities for all seeking work, and prices for life’s necessaries would settle at attainable levels. Regulation and government diktat impede this natural market phenomenon and, most damning, hurt the intended beneficiaries.

One of the reasons areas are designated for living wage programmes — think of London and New York — is that state intervention impedes market forces from addressing the underlying problems, stymied by rent controls, subsidised housing, zoning restrictions, and other barriers. Dwight Lee and Richard McKenzie, authors of Failure and Progress, examined the many ways in which government missteps persist when market challenges find their own way toward resolution, and came to this conclusion:

The single most effective government poverty program consists of government doing nothing more than establishing an environment that facilitates market exchanges. Nothing else that can be done by government comes even remotely close to reducing poverty as much, especially over the long run.6

It is one thing for the free market to aim for the living wage, quite another to provide for it through the state. If Boris Johnson understands this distinction, then may his advocacy for sustainable incomes have every success in Parliament.

For, in the end, it is all the difference between market success and government failure. The latter makes the progressive élites feel good about themselves; only market freedom will bring the living wage to those who want to move from poverty to economic prosperity.

ENDNOTES

1. Pope Leo XIII, Rerum Novarum, 15 May (Vatican City: Libreria Editrice Vaticana, 1891), §46.

2. Pope Pius XI, Quadragesimo Anno, 15 May (Vatican City, Libreria Editrice Vaticana, 1931), §71.

3. Why any given wage is not a ‘living’ wage was raised by Pope Leo in Rerum Novarum: ‘Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accept harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice (§45).’ Of course, just why an employee’s wage insufficiency becomes the sole responsibility of the employer is raised by Thomas E. Woods, Jr in his essay ‘The Unanswered Question of the Just Wage’, in Catholic Social Teaching and the Market Economy, Rev. 2nd ed., Philip Booth, ed. (London: Institute of Economic Affairs and St Paul’s Publishing, 2014), 162.

4. Henry Hazlitt, Economics in One Lesson (New York and London: Harper & Brothers, 1946), 138; 140.

5. Frédéric Bastiat, The Law [1850], Dean Russell, trans. (London: Institute of Economic Affairs, 2001), 46.

6. Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993), 106.