Misjudged Campaigns From Labour Youth

Labour upside down

Yesterday I spoke to a high-flying school-leaver who has some time on his hands before he begins Birmingham University. Like his friends, he is having no luck securing a summer job. Over the last year, the rate of unemployment for youngest adults has rocketed from 11.9% to 17.3%.The Economist notes that the spike in youth unemployment may be aggravated by the national minimum wage.

Meanwhile, Birmingham University Labour Students are campaigning to equalise the national minimum wage for people in the 18-22 age bracket. How will their campaign help somebody who wants to work so he can save for university but can’t even find a job? It would appear that the next generation of Labourites are as out of touch as the current lot.

Dominic Fisher – Local Officer


24 thoughts on “Misjudged Campaigns From Labour Youth

  1. We’ve heard this before. The argument that a minimum wage causes unemployment has already been discredited. Michael Heseltine said that it would create mass-unemployment and would bankrupt the UK. We then saw falling/low unemployment for the following ten years.

  2. Jack,

    It’s hard to judge the impact of the minimum wage in isolation since our economy is subject to such a vast range of pressures.

    I do not think Heseltine’s predictions, however wrong, affect one bit the impact made by the minimum wage. His prediction was clearly exaggerated beyond what occurred.

    That said I do believe that intuitively a minimum wage will affect the number of jobs created, other factors may compensate for this and the extent of the effect is going to be determined by the level at which the minimum wage is set.

    Anecdotes are pretty worthless but this belief is confirmed by my knowledge of a number of businesses including that run by my uncle.

    I oppose the minimum wage largely because (and I appreciate its a rather unfashionable view) of my preference for freedom of contract and personal autonomy.

    To support an increase in the cost of employment at the moment is a policy which will only benefit the successful – those with jobs – and disadvantage those trying to get into the job market.

    You hardly need to be a tory to see that many firms are being squeezed and looking at ways in which to scale back and cut costs. I’d rather not run the risk of giving them any more reason to avoid hiring.

  3. “To support an increase in the cost of employment at the moment is a policy which will only benefit the successful – those with jobs – and disadvantage those trying to get into the job market.”

    Sums things up in a nutshell. By the way, Richard, it would be cool if you could do a Norwich North blog?

  4. So wanting the best for young workers and wanting to give them equal rights is misguided? This is the difference between the Tories and Labour though, Tories care about profits while Labour care about the workers who generate those profits. Can someone really survive on £4 an hour, let alone £3 an hour? That’s what would happen if the minimum wage was scrapped.

    Scrapping the minimum wage will force millions of people into poverty and help no-one at all. Small businesses will still struggle while big businesses will see it as another excuse to cut their costs even more and disrespect their workers.

  5. What people seem to forget is that profit maximisation is arguably the main objective of firms: not cost minimistaion. It would be wrong to assume that they always go hand in hand. A lot of evidence suggests that many workers are paid below their average marginal value. So long as marginal profit on each extra worker still exists, there is no need to make job cuts. Infact, some firms have found that increased recruitment has been the best reaction to a rise in the minimum wage.

    Second, we have the issue of the poverty trap. In 1997, Gordon Brown declared that we should ensure that work pays. This is not just fair but it makes good economic sense.

    In any case, the demand for labour is often highly inelastic and inflexible. The very few firms that may have reduced the quantity of labour that they demand will most likely be encouraged to compensate with increased capital investment, which contrary to popular myth assists in long-term job creation.

    Broadly speeking, as long as there is still a marginal profit to be amde on each extra worker, the minimum wage will not raise unemployment but can in fact play a role in reducing it.

  6. Heseltine aside, I think that the ‘consensus’ amongst economists is that a minimum wage, at worst, has a minor negative effect on employment. There is significant agreement that the minimum wage reduces employment among young unskilled workers.

    That said, I think there are more decisive measures we should concentrate on. Repealing the minimum wage would have a marginal effect, if any. Politically it would also be difficult.

  7. “What people seem to forget is that profit maximisation is arguably the main objective of firms: not cost minimistaion.”

    Could you be any more patronising?

    The problem with equalising the minimum wage between youngest workers and the rest is that it removes the first rung on the ladder for many workers. The recession magnifies this and is why Mark’s suggestion that opposing this odd campaign is anti-worker is laughable.

  8. With regard to me being patronising, many people fail to understand this point and I’m not going to apologise for the fact that people needed to be reminded of it.

    The minimum wage does not remove a rung from the ladder; it simply ensures that the first rung on anyone’s career ladder is worth reaching.

  9. Jack,

    Could you further explain this marginal value theory?

    How do you account (just as a for instance) for different sources of finance, eg. equity or debt and which, if either, should impact on profit?

  10. In real-world labour markets, buyers often have much more power than sellers and are thus able to impose a much steeper/lower demand curve than would exist if there was a truly competitive market. To put it simply, an imposed minimum wage which would cut the marginal profit of each extra worker can encourage firms to hire more workers to maximise profits. It’s very hard to explain without diagrams. I’ll find some links to some diagrams ASAP.

    I’ve got a charming little table infront of me on the back of an envelope. I’ll find a way of showing it to you in the morning.

  11. I agree with Richard. Upping the minimum wage (which is what Labour Student’s campaign) is about, reduces the number of scenarios where young workers will be taken on. That’s just common sense.

    I’m sure Jack can cobble together an economic theory that conveniently shoehorns into Labour’s discredited economic ‘view’, but that doesn’t make it plausible. I am sure the tens of thousands of school-leavers looking to get a job right now, will be as stunned as I am at BULS campaign to restrict their opportunities.

  12. I’m quite interested in Jack’s theory, partly because it might be persuasive but also because it’s an interesting insight into socialist thinking. From what he’s mentioned so far it reminds me of something a lecturer at exeter talked about before he moved onto ‘post autistic economics’…

    I think he means that by reducing the marginal contribution made by each member of staff (I appreciate that would usually be calculated on a per product basis but lets go with it) through an increase in the cost of employment firms will expand the number they employ to ensure total contribution remains constant.

  13. PT talks of me ‘cobbling together an eocnomic theory’ as if to imply that we are looking at some kind of voodoo; when in fact the majority of economists support the view that a minimum wage does not lead to unemployment. This is the view espoused by the OECD and the international Labour organistaion and of course Conservative party central office in 2000 and presumably beyond. PT resorts to that old mantra of ‘common sense’ when infact common sense is often naivety with folksy charm.

    With regard to what I was saying about marginal revenue vs. marginal cost, we don’t even have to refer to the kind of monopsonistic competition which I mentioned earlier. Let me run through an example I had on the back of an envelope. Before I refer to this, I should say that this is a rather crude example for the purpose of demonstrating a principle. Any criticisms of it should be directed at the fundamentals of the principle involved rather than the detail of the model.

  14. Lets assume that each worker produces £10 of revenue. (In reality economies of scale and diseconomies of scale play a role; so the one worker might not produce half as much as two workers, who may be more efficient per woker than twelve.) As a firm wishes to hire more workers it will have to raise the wage. For our purposes we should assume that to hire one worker the wage will have to be £1. To hire two the wage will have to rise to £2. For three it will have to be £3, and so on.

    So the total payroll cost will be the wage multiplied by the number of workers drawn into the market. So from 1-10 in terms of the number of workers employed the total payroll will be: £1,£4,£9,£16,£25,£36,£49,£64,£81,£100. So to take an exmaple, if they wish to employ 7 workers they will have to raise the wage to £7 in order to attract 7 workers; a total bill of £49 in Labour costs for that company (7 workers x £7 = £49).

    Revenue meanwhile works on this scale: £10,£20,£30,£40,£50,£60,£70,£80,£90,£100; because each worker produces £10 of revenue. From all of this information we can see the marginal cost of each worker (the cost of hiring one more worker at each stage), the marginal revenue and the marginal profit.

    In this case a profit-maximising firm will recruit 5 workers because any more workers hired will not have a marginal profit for the company. To put it another way, the marginal/extra revenue of each worker will be less than the extra cost. £10 vs. £11.

  15. This would allow a profit of £25 for the company:

    (Revenue: 5 workers x £10 = £50.)-(Costs: 5 workers x £5 = £25) = Profit of £25.

    If a minimum wage is imposed of say £6, how should the company react to this? By doing nothing, the company sees its costs rise to £30 because they now have to pay 5 workers £6. As a result, their profits are cut from £25 to £20.

    If they sack a worker, as classical theory suggests, they will have a labour cost of £24 (4 workers x £6) and revenue of £40: a profit of £16. As this is lower than the £20 profit with 5 workers, it makes little sense to sack staff.

    Infact if we produce all of this data in two tables (one for free market wages and another for the minimum wage), we can see that the point of profit maximistaion has shifted:

    In the free market situation profit from 1-10 workers will be like so: £9,£16,£21,£24,£25,£24,£21,£16,£9. (The fifth one along is with five workers; our profit maximisation point) But with a minimum wage all workers MUST be paid £6 until the company wishes to attract more than 6 workers into the market, where they will have to raise the wage to £7, £8 and so on. So the profit schedule (0-10 workers) looks like this: £4,£8,£12,£16,£20,£24,£21,£16,£9,£0.

    Now the company’s profit maximisation point is with 6 workers. 6 workers x £6 = £36 costs. 6 workers x £10 revenue per worker =£60 revenue. that gives us a £24 profit.

    So if the company continues to employ 5 workers it makes a profit of £20. If it cuts to four workers, it makes a profit £16. If it employs 6 workers, it mkaes a profit of £24. I know which I would choose.

  16. Obviously this concept is far from perfect. But it demonstrates that most firms are focused on profit maximisation; not cost minimisation. To cover an increase in costs (whether labour-related or otherwise.), firms may find increased production the best approach.

    To return to the issue of monopsony; in practice firms often wield power that allows them to push wages lower than what we expect from a completely transparent market. A minimum wage can paradoxically return wages to the level found in a perfectly functioning market. Again, in this case firms may wish to cover the increased costs with increased production.

    Admitedly, there are individual firms and sectors where unemployment might rise but a minimum wage will only affect a very small portion of an average employers costs.

  17. Astonishing assumptions. Let’s put this ‘theory’ in a bar setting.

    a) My first worker works for £1 an hour. To get to two I double my rates. Four? We’ll pay £4. Ten? £10 each. Credible? No. Reality is that it is easy to attract extra barmen with no or negligible increases in wage rate.
    b) No diminishing returns to labour in Jack’s world, no siree. Every extra barman will contribute £10 of marginal revenue. Rofl.
    c) Competition? wot competition?
    d) How come my marginal revenues exceed my marginal costs but I still lose money? Fixed/semi-fixes costs, hello?
    e) Return on investment? What’s that? Would I be better off putting my pub investment into a bet that Labour will lose the next general election?

    Why are 52 pubs closing a week and would more be able to survive if there was a freer market in labour? The answers are the government and yes.

  18. Jack,

    I appreciate your post and it’s an interesting theory. I appreciate that you have had to simplify it enormously in your presentation but taking account of that I don’t think it survives an introduction to reality. It may apply in certain industries rather more than others, and so if we look at a macro scale and squint hard enough maybe we will see some evidence of its efficacy. With regard to the issue of the minimum wage I would say the following (apologies to PT if I’ve repeated some of his points)

    A) Revenue does not increase with labour hired in the way this theory requires it to. In most minimum wage jobs hiring (or firing) an additional employee will make no difference to revenue. Calculating revenue on a per employee basis is pretty unusual for good reason. More normally investment decisions (which the creation of jobs is ancillary to) is decided on factors such as the IRR (Internal rate of return), and any increase in staff costs would undermine the expected return from a given project and thus decrease the likelihood of investment.
    B) Labour costs do not increase with additional employment for minimum wage jobs due to the reservoir of talentless labour, immigration or the possibility for firms to relocate overseas. Take your example but assume that each additional employee costs the same as the previous – I think this is a pretty defensible position for unskilled workers. The result is soaring employment until that pool is exhausted and cheap labour becomes scarce. If only this were true.
    C) I think you yourself acknowledge that even if the theory is correct then where the minimum wage is set above the additional revenue generated by an employee the industry is bound then to fail.
    D) You refer to monopsony, but outside of certain government-controlled markets this is extremely unlikely to occur in a free labour market.
    E) You close by saying “there are individual firms and sectors where unemployment might rise but a minimum wage will only affect a very small portion of an average employers costs.” Isn’t that exactly our point, that at a time of recession anything that encourages FURTHER unemployment is perhaps not such a good idea?
    F) You keep mentioning profit maximization over cost minimization – what’s your point exactly. One is a route to the other and both are products of the overarching goal to maximize shareholder wealth. No-one here is arguing that profit should be subsumed to a drive to reduce costs such as that the perfect business has 0 cost and 0 profit. I’m really struggling to think of an example where say, a struggling city banking firm increases the number of janitorial staff as a means to power through the recession which is precisely what your theory suggests. My bet is that increasing the cost of janitors simply makes it more likely that some of them will be let go and other employees will have to settle for clean rather than sparkling clean. This works because unlike your theory labour is not always the prime driver of revenue.

    Anyway I’ll give it some more thought this afternoon.

  19. I think I should point out that my model was a response to the classical view of the labour market. Many of your criticisms are equally valid for the classical diagram of minimum wage theory. For example, PT’s point a. neatly ignores the fact that if we accept it, there will be a huge reduction in excess labour supplied in the classical understanding of the minimum wage.

    Second, even if the supply curve inclines at a much shallower angle, it does very little to change the theory at all. In an economy as a whole the supply curve is hardly flat not least due to issues such as the poverty trap.

    In point B, Prague reveals that he hasn’t read what I wrote properly as I do suggest that in real-life there are diminishing returns. He would have found had he thought a little bit more that it has no effect on the theory itself provided that it does not apply in the extreme.

    Points C and D are completely botched in their explanation so for now I will point out that fixed and semi-fixed costs will only serve to shift the point of maximistaion further to the right and will not actually change the fundamentals of the model. The main reason for assuming no diminishing returns, a very simple supply curve and no fixed costs was for the sake of simplicity. (This would be much easier if I could put tables on here). Infact if you work all these factors into the model it makes very little difference as the introduction of a minimum wage will have an effect on profits while markets operate to the left of the coresponding level of employment, but because this effect disappears to the right of this point, profit maximisation will still shift to a higher level of employment.

  20. Richard, thank you for appreciating how difficult it can be to convert diagrams and tables into text.

    If hiring or firing an individual worker makes little difference to revenue, then this begs the question as to why a firm wouldn’t create job losses without a minimum wage. Clearly each firm has found an optimum level of staff and it would be wrong to assume that a slightly higher wage means that that level will fall.

    If we believe that wages do not increase with higher levels of employment (which would contradict classical, and to a certain extent monetarist, understandings of the labour market) the only effect that this has is to eliminate the aforementioned necessity to recruit more as a result of a minimum wage. Even in a model with dimnishing returns, fixed costs and a flat supply curve of labour however, a firm will actually reduce its profits if it decides to lay-off workers. Even if the cost of labour is constant the firm would be cutting its profits if it reduced its staff numbers.

    As it happens I believe that wages do tend to rise if an economy wishes to attract more workers even (or espescially) in the case of imigration.

    As to point C, of course a £100 an hour minimum wage would just be unsustainable.

    When I refer to Monopsony, I’m not suggesting that a complete monopsony exists. Rather that market failure leads to lower wages. For example, we have very poor labour mobility in the UK (home-ownership hasn’t helped). So while there may not be a single consumer of labour in the uk; if we seperate each sector, look at wages on a regional basis consider the difficulties of moving jobs and the formal and informal collusion between employers we find that the market wage is often below what Adam Smith would have expected.

    On point E, yes every firm is different and there may be some very labour intensive sectors where problems arise. howver the net effect of a minum wage is what I’m focusing on.

    Point F. I keep emphasising that profit maximisation is the goal rather than cost minimisation becasue so many people assume that a firm is focused on a set pay bill. As a result they ignore the fcat that sacking workers can lead to even lower profits. A classical supply and demand diagram makes thsi mistake and completely misrepresents the demand and you’ve been arguing, supply) for Labour.

  21. Jack,

    Not just a little difference, hiring or firing an additional worker may well make no difference to revenue.

    For hiring: If you have a small coffee shop every cook beyond the first doesn’t increase your food sales unless you have so much pent up demand that the first cook can’t possibly keep up with. Your model assumes that additional workers are the cause of additional revenue; I’d suggest additional revenue will often be the driving force behind additional recruitment. This matters because it means that firms can’t increase the numbers they employ to get to a theoretical maximized profit.

    For Firing: Firms just are not that efficient. Firms regularly cut employee’s without reducing their revenue, which means that at any point in time firms have staff who they could loose without sacrificing revenue. Not only that but also many firms employ people because they perceive they provide some benefit totally unrelated to revenue, ie. A counter assistant in the small coffee shop mentioned above to make it easier for the owner when he wants to take a break himself. The cleaner and gardener you have at home. The disabled lad our window cleaner employs. Increase the cost of employing such staff through a mechanism like the min wage and there is a greater chance that the benefit will cease to be worth the expense.

    The assumptions that underpin economic thinking shouldn’t be mistaken as laws to which the whole of society is bent.

    Across the labour market as a whole wages will rise with demand, but for the low end of the market, especially in a recession I think that the cost of employment will remain fairly constant

    Would £90 be unsustainable? £50 ? £25? £10? £6? Why are the arguments applicable at £100 not applicable at £5, because of the extent of the impact? You’re not saying yes the min. wage will leave some people struggling to get a job worse off but overall the benefits will outweigh the downside though, your telling us that it will have no effect or that it will increase employment.
    Your theory essentially makes two claims. A) that minimum wages won’t lead firms to lower the numbers they employ and that B) It may encourage firms to hire more.

    I’m going to disregard B) Its since quite clear to me that hiring extra staff won’t simply add on additional revenue.

    As for A) this is really just axiomatic within your model, that if each worker is paid less than the profit they generate then firms will continue to employ them. This is hardly controversial but neither is it terribly informative since no-one is denying this. I am saying;

    For a firm considering investing in a new project they will have a required rate of return by which they will appraise the investment. Increasing wage costs will decrease the return and decrease the likelihood of the investment, resulting in forgone future employment.

    For those who are employed in scenarios where they are reliant on low labour costs to sell their time you consign them to benefits with all the attendant difficulties that arise from that.

    Eg. Some employee’s wages might be increased such as it is not profitable to employ them. Certain business activities or sector may become unprofitable. Certain ‘discretionary’ employment, such as of a trainee / assistant may cease because the extra help they provide is no longer justifying the expense.

    Young people need and deserve an edge to get into employment not least because if they fail to do so then it is likely that they will never get off benefits, giving them a temporary employment advantage hardly seems unreasonable.

    As I said before I have objections to the min. wage that are ideological not practical, but to propose an increase in the cost of employment when many businesses are struggling and unemployment is soaring is the worst possible timing.

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