Thursday, 3 April 2014

Abolish minimum wage laws?

Ryan Bourne argues that the minimum wage should be abolished for various categories of less productive employees, e.g. the long term unemployed and youths.
I favour that GENERAL PRINCIPLE, i.e. abolishing the min wage for the unproductive while ensuring their take home pay is up to socially acceptable levels via in-work benefits (i.e. an employment subsidy). But Ryan Bourne’s way of implementing the principle is possibly not the best. To illustrate, there are plenty of youths who are productive enough to make employing them at the min wage a viable proposition. Plus there are plenty of middle aged people who have been unemployed for LESS THAN a year WHO ARE unproductive: at least in that their lack of skills or some other factor means it may take them a long time to find a job where THEY ARE productive.
So a better way of effecting the principle would be to allow ANY employer to employ ANYONE at a sub min wage rate (or even pay no wage at all), but with the proviso that public employment agencies have the right to remove relevant employees from such employment when such agencies find what they think is more productive work for the individuals involved.
The latter proviso would help minimise the obvious problem that arises when there is no min wage, namely that employers are tempted to exploit the system by hiring relatively productive employees at a sub min wage rate in the knowledge that the state makes good relevant employees take home pay with in-work benefits, i.e. an employment subsidy. (Not that that problem was of CATASTROPHIC proportions in the days before minimum wage laws were implemented)
And it’s not just employers who are tempted: employees also gain at the taxpayers’ expense in that a subsidised job will tend to be relatively undemanding and easy going, all else equal.
Another way of minimising the problem would be to limit the subsidy to relatively short period: perhaps 3 months or so.
That combination of a maximum period of employment with the help of the subsidy, plus the possibility that the state removes an employee at a moment’s notice would tend to persuade employers to claim the subsidy only in respect of the GENUINELY unproductive. That is, no employer wants to lose a GENUINELY productive employee, while employers are not too bothered about losing GENUINELY unproductive employees.
Another possible condition would be to limit the number of subsidised employees to a small percentage of each employer’s total workforce. And various other rules are easy enough to envisage.
The above system would raise aggregate employment, amongst other reasons, because employers, instead of ceasing to hire further employees when employees’ marginal product was the min wage, would expand their workforces to the point where the marginal product was somewhat less: even zero.
An obvious criticism of the latter system is that it would make for high labour turnover. Well it would. But that’s not entirely undesirable. That is, it’s a good idea for those who cannot find a job at which they are productive, to try a variety of jobs so as to see what suits them.

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