Increase minimum wages and give job guarantees for the low paid

I lived in the North-West of England for a time in Lancashire as I pursued my PhD at Manchester University. It was during the UK Miners’ Strike 194-85, which was in response to the Thatcher Government’s attack on the major unions in the UK to further its ideological war on workers’ rights and welfare provision. The union lost dramatically after a struggle of 12 months symbolising the rise of neo-liberalism. The same ideology that sought to undermine the rights of workers also led to policy changes that, ultimately, caused the financial crisis and on-going real recession. The reason I raised that experience is because I read a report from a Manchester research organisation over the weekend which highlighted a major problem in that region (poverty wages etc) but also, without stating it, provided an alternative policy approach to the current crisis which would quickly get economies moving again – creating jobs and enhancing the capacity of households to spend. A policy response that antithetical to what is being tried at present is to increase minimum wages and introduce employment guarantees for the most disadvantaged workers whose welfare has been disproportionately undermined by the crisis. That would not only help alleviate the major problem at present – deficient aggregate demand – but also redress some major equity issues that the crisis has accentuated.

The strike made it hard for households (like mine) which depended on coal for heating and hot water to cope through the harsh winter. But, apart from the miners in the Nottingham area who didn’t join in the strike, the support on the ground for the miners was strong. The major newspapers including the so-called “left-wing” newspapers such as the UK Guardian joined with the right-wing tabloid rags (The Sun, Daily Mail, Daily Mirror) in opposing the action.

Some of the newspapers became propaganda machines for the Coal Board (for example, The Sun). The Coal Board later admitted that it had used the newspapers to publish false data about the number of strike breakers (particularly in Yorkshire) to undermine the morale of the striking workers. The newspapers continually published lies about the officials of the National Union of Miner (claiming corruption; pocketing strike funds for themselves etc).

Anyway, it was a grim time to be studying in the UK. The weather was bad enough but the general living conditions – the high unemployment, low wages, poor housing stock and poverty – in the North-West was to my eyes quite a challenge. I had grown up on a Post WW2 public housing estate, which in Australian terms was near rock-bottom. But our houses were like palaces compared to what the low-income workers had to live in around some of the tougher Manchester suburbs.

I thought about that time over the weekend when I was reading a report – – published last week (August 2, 2012) by the Manchester New Economy research organisation.

New Economy say that their:

… purpose is to create economic growth and prosperity for Manchester … home to a population of 2.6 million residents … [which] … generates 50% of the North West’s economic output and 5% of the total national economic output … [it is] … one of the six Association of Manchester Authorities (AGMA) commissions which were established in 2009.

It interacts with busines, universities and governments (all levels) to generate evidence-based cases for job creation and skills development; environmentally-sustainable investment opportunities and the like.

The Report was accompanied by a Press Release – The true cost of living in Manchester – which stirred a journalist at the (Manchester) Guardian newspaper to write this article (August 3, 2012) – £7.22 an hour – the price of a reasonable life in Manchester.

The Report provides a detailed analysis of the “changes to earnings and the cost of living in Manchester” and found that as at 2011:

Real wages and incomes of the lowest paid in Manchester have fallen dramatically since 2009, alongside substantial increases in the cost of essential goods and services. In real terms, hourly wages for the bottom 10% of earners in Manchester fell by 50p (7.5 percent) in two years. Real annual wages fell even more dramatically for the bottom 10%: part-time workers have faced a £619 (19.8 percent) wage cut and full-time workers’ pay fell by £904 (6.1 percent). There are an increasing number of households in Manchester that, even if they are able to secure full-time employment at the minimum wage, will earn less than they need to achieve a reasonable quality of life, even taking into account the benefits and tax credits to which they are entitled.

From which I concluded that the minimum wage in the UK is too low relative to what it costs to live. I hold the view that one should not work full-time at existing wages and be considered poor.

I also concluded that there were inadequate employment opportunities available in the Greater Manchester Region, a common problem in the UK generally.

I also concluded that the recession had impacted heavily on the least advantaged workers in that region and had introduced a deflationary dynamic – a second wave of malaise – which would ensure the private sector recovery would be slow and drawn out and if public spending support was denied then the economy would stay in recession with increased poverty for years to come.

The Report recommended, among other things that:

1. Policy-makers “should place greater weight on increasing the real incomes of those in low paid work”.

2. Action is needed “to raise the number of hours worked by the lowest paid”.

3. Skills development within a policy framework designed to expand the work opportunities.

4. Minimum wage should be a “living wage”.

I will come back to that Report later.

But then I read a Bloomberg Op Ed (August 6, 2012) – Mario Draghi Cannot Save the Euro – by former IMF Chief Economist Simon Johnson.

He argues that the ECB boss Mario Draghi has in recent weeks signalled through his public statements that “things are going to get ugly” in Euroland.

He asks the question:

… what, if anything, Draghi might achieve with a looser monetary policy. The euro area has many problems, including a lack of competitiveness in the periphery, chronically poor growth in countries such as Portugal and Italy, deeply damaged public finances in Greece and Spain, and a labor force that’s not mobile enough to go where the jobs are. Which of these could be resolved by reducing interest rates across the board?

I agree that the point he wants to focus on is a serious policy issue. The Eurozone is caught up in a dilemma of its own making. The nature of the monetary system is such that once a major asymmetrical negative aggregate demand shock hit it, there was no easy way out short of abandoning the whole show, which they should have done in 2008 or so.

The experiment failed. Now they are making things worse with consequences that will last for decades because of the political belligerence of those in charge.

I agree that monetary policy is not the correct instrument to be addressing the European crisis. I have noted many times that the prioritisation of monetary policy (and the eschewing of fiscal policy) reflects the ideological developments in my profession over the last three decades. The policy emphasis of the neo-liberals was to neuter the capacity of the treasury arm of government and to render the central banking arm devoid of political influence.

At the same time, the policy focus was to promote the “self-regulating market” via privatisation, deregulation and attacks on public welfare (to make workers more desperate and willing to accept the demeaning job offers that the deregulated labour market increasingly generated.

But I would not agree that the main issues now are structural rather than cyclical. The crisis hit in 2007-08 – it came very quickly despite the storm clouds being clear to all those who understood that the neo-liberal growth strategy (fiscal rules constraining net public spending and deregulation constraining real wages growth below productivity and promoting private debt growth) was unsustainable.

There were structural elements involved in this build-up – but I would locate those structural failures in the design of the monetary system rather than in the attitudes of workers or the lax behaviour of treasuries.

First, the deliberate strategy by Germany to attack their own workers’ rights by casualising segments of their labour market and stifling real wages growth (and thus constraining domestic demand growth) certainly allowed relative unit labour costs to decline in that nation by comparison with the other member states. But as a strategy for balanced growth across the region it was a disaster and has magnified the problems that the demand shock brought.

Second, without a floating exchange rate for each nation, trade imbalances that arose due to differential productivity had to increase the exposure of external deficit nations to the aggregate demand shock. The amount of work that fiscal policy had to do when the crisis hit was so much larger given the fixed exchange rates.

Third, with fiscal rules limiting the politically acceptable fiscal policy freedoms, it was obvious that the Eurozone nations would have to invoke harsh deflationary strategies which have only served to worsen the crisis and lock their nations into a vicious downward spiral of low growth/recession, shrinking tax bases and rising unemployment (given that it is an aggregate demand crisis overall).

Fourth, the common monetary policy allowed credit growth to exceed any rational limits in certain regions of Europe. Government played along with the myth that the self-regulating market would deliver sustained wealth to all.

Within that sort of system, the economies were certain to blow up if confronted with a serious cyclical decline in aggregate spending. The massive debt loads in the private sector (banks and households) and the collapse of the playing-card housing markets in certain nations exacerbated the regional effects.

I am currently studying the latest report from the EC on its Structural and Cohesion Funds program (see the Fifth Report) – as part of an investigation of how much redistribution has actually gone on in the EU under this scheme. Tracking down all the data is not straightforward and I will report my efforts some time soon (I hope). That should make some readers happier (Andrei!).

But what the accompanying Dataset to that Report shows is that despite massive disparity across the EU27 nations and their regions in real GDP growth, there was still positive growth – within the flawed structure of the system.

The following two graphs show the average annual real GDP growth from 2000-07 for the EU27 states and the EU27 overall (extreme left observation). The first graph shows the member-state level results. The second graph shows all the NUTS regions along with the national results to give you an idea of how much intra-national diversity there is on top of the obvious international diversity.

The horizontal axis in the second graph is a bit hard to read (given the number of regions) and the acronyms shown are the national EU signifiers. To the right of each of the national acronyms are the regions of that nation (so for example Estonia (EE) is clumped very close to Ireland because it has only two regions in the standardised geography).

But you can map the axis from the top graph to the bottom graph to get a better idea or download the data and have a look at the detail yourself.

The data shows that there was a huge diversity of growth outcomes across the EU27 regional space. Some of the economies that were growing strongly (for example, Ireland and the Baltic States, and to some extent Spain) were living in a fools’ paradise. The growth was never going to be sustainable – notwithstanding the financial crisis.

Their internal economies had become distorted by the growth of the construction and real estate sectors. Greece also grew strongly but that was on the back of strong public sector growth and tourism.

Other nations clearly struggled with chronically low growth (for example, France, Denmark, Italy, Portugal, and Germany (as it absorbed the low productivity Ost lands)).

I am studying the factors promoting a lack of convergence in the growth performance of these economies at present. The stated aim of the Structural and Cohesion Funds program is to promote convergence in economic performance. Divergence rather than the opposite characterised the early years of the Eurozone with the ECB replacing national central banks (so a common monetary policy across many EU states) and the same nations abandoning their currency sovereignty.

The question then is whether the growth that did occur despite all the “structural imbalances” was uniformly unsustainable. If other nations had not have expanded their external deficits then the German strategy would have led to recession earlier given it was stifling its domestic growth sources.

Certainly Spain, Ireland and the Baltic states would not have grown as fast in the absence of the real estate booms.

But despite these points, the main reason the Eurozone is in a massive crisis now is not because there are structural issues that need to be addressed. At the macroeoconomic level there is clearly a deficiency of total spending and for growth to occur that has to change.

It is clear that the private sectors are unwilling to drive the growth which means that export-led strategies will fail.

The UK Guardian economics editor Larry Elliot noted in his article over the weekend (August 5, 2012) – Three myths that sustain the economic crisis – that the crisis is being sustained by three myths:

The Anglo-Saxon myth is that big finance is a force for good, rather than rent-seeking and corrupt. The German myth is you can solve a problem of demand deficiency with belt tightening and export growth … [and] … a third myth – that there was not much wrong with the global economy in 2007.

He says that the global model in 2007 was deeply flawed “as it operated with high levels of debt, socially flawed in that the spoils of growth were captured by a small elite, and environmentally flawed in that all that mattered was ever-higher levels of growth”.

That has been one of my recurrent themes in my academic work (and my blog) for many years. The neo-liberal model of growth has failed. It is also not a way out of the mess.

It is clear that if the member states want to be part of a common monetary union and they want to minimise the degree to which there are federal transfers (of a macro not micro variety) then there cannot be massive cyclical demand asymmetries.

A nation state with its own currency can address asymmetries of this nature across its regional space directly. A Eurozone nation has limited capacity to do so within the stifled (and flawed) logic of the monetary system.

I make the distinction between macro and micro-motivated transfers within the system because the Structural and Cohesion Funds program are an example of the former and do not seek to address asymmetrical aggregate demand gaps that arise on a cyclical basis. A monetary union requires a macro capacity to quickly stimulate (or deflate) spending in regions (states) when these gaps (either demand-deficiencies or inflation-gaps) arises. The Structural and Cohesion Funds program are not designed to fill that purpose. I will explain all of that in a later blog once I have done some more research into the matter.

No-one is denying that structural issues are not important in Europe. I am not suggesting that real living standards in Greece can rise very much even with a fiscal-led growth expansion until they address productivity issues. The data shows that Greeks work long hours but have higher unit costs because their productivity is lower.

No-one is suggesting that if a nation surrenders its currency sovereignty then it better ensure it has a robust (growth-sensitive) tax base to allow public spending to service both structural and cyclical needs.

So how do we go back to the Manchester Report after all of this? Answer: via employment-rich fiscal policies.

The idea that governments just splash spending around the economy and hope for the best is flawed even though the major problem at present is a lack of spending. Most of the fiscal stimulus packages around the world were not employment-rich.

Massive amounts were spend (handed over) to the culpable banking sector to ensure their executives retained their capacity to rort the distributional system and maintain their salaries and bonuses.

A far better strategy would have been to introduce system-wide deposit guarantees and nationalise the failed private banks.

The Manchester Report tells me that minimum wages have to rise in that region but also, across the United Kingdom. The same policy would be usefully introduced in most nations.

But what about capacity to pay I hear you say? First, the evidence is that minimum wages do not undermine employment opportunities if aggregate demand is strong enough.

Of relevance to the UK, there was an interesting study from Stephen Machin entitled – Setting minimum wages in the UK: an example of evidence-based policy, which was presented to the Australian Fair Pay Commission’s swansong research forum in Melbourne in 2008.

Stephen Machin is Professor of Economics at University College London, Director of the Centre for the Economics of Education and a Programme Director (of the Skills and Education research programme) at the Centre for Economic Performance at the London School of Economics, an editor of the Economic Journal (one of the top academic journals), has been a visiting Professor at Harvard University and at MIT. So in mainstream terms he is thoroughly one of the orthodox club.

He examined the impact of the creation of the UK Low Pay Commission, which the Blair Labour Government established to try to remedy some of the worst excesses that the neo-liberal era had delivered to low wage workers. Both sides of politics in the UK from Thatcher onwards were remiss in this regard.

The UK Low Pay Commission (LPC) was established in 1997 and was given the task to define an effective National Minimum Wage (NMW). The following graph is taken from his Figure 1 (page 15) and is self explanatory.

Machin’s commentary is as follows:

The NMW was introduced in April 1999 at an hourly rate of £3.60 for those people over 21 years of age, with a development rate of £3.00 for those aged 18 to 21 years. The key economic question has been the impact of minimum wages on employment … Over the period 1999 to 2007, the macroeconomic picture indicates that employment continued to grow as minimum wages rose (Figure 1).

In terms of the effects on specific age cohorts, Machin concluded that:

Across all workers, there was no evidence of an adverse effect on employment resulting from the introduction of the NMW.

What about the effects in the most disadvantaged sectors? Machin reports on research that “searched for minimum wage effects in one of the sectors most vulnerable to employment losses induced by minimum wage introduction, the labour market for care assistants”.

He concluded that:

Even in this most vulnerable sector, it was hard to find employment losses due to the introduction of the minimum wage.

As I have noted previously, the 2006 OECD Employment Outlook entitled Boosting Jobs and Incomes, which was based on a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003 concluded that:

• There is no significant correlation between unemployment and employment protection legislation;
• The level of the minimum wage has no significant direct impact on unemployment; and
• Highly centralised wage bargaining significantly reduces unemployment.

The Australian Commission that sets minimum wages in Australia, Fair Work Australia, noted in its 2009-10 decision that:

Our attention was drawn to extensive literature and studies concerning the relationship between minimum wage rises and employment levels … The relevance of some of the studies is limited insofar as they are directed to the effects of increasing a single minimum wage in circumstances which are quite different to those which characterise the Australian industrial relations systems, including the range of minimum rates at various levels throughout the award system. Although a matter of continuing controversy, many academic studies found that increases in minimum wages have a negative relationship with employment, but there is no consensus about the strength of the relationship.

So one of the policies I would adopt to resolve the crisis in Europe and elsewhere would be to increase minimum wages to ensure that workers who engage in full-time employment are not below the relevant regional poverty line.

In this blog – Minimum wages 101 – I provide more discussion on the issue.

I noted that minimum wage setting should have nothing to do with cyclical stimulus policies. It has everything to do with how sophisticated you consider your nation to be. Minimum wages define the lowest standard of wage income that you want to tolerate. In any country it should be the lowest wage you consider acceptable for business to operate at. Capacity to pay considerations then have to be conditioned by these social objectives.

If small businesses or any businesses for that matter consider they do not have the “capacity to pay” that wage, then a sophisticated society will say that these businesses are not suitable to operate in their economy. Firms would have to restructure by investment to raise their productivity levels sufficient to have the capacity to pay or disappear. The outcome is that the economy pushes productivity growth up and increases standards of living.

No worker should be paid below what is considered the lowest tolerable standard of living just because low wage-low productivity operator wants to produce in a country.

My recommendation that raising the minimum wage as a cure to the crisis is not inconsistent with that argument. In effect, what is lacking in the current climate is spending.

The lowest paid workers have less mortgage stress than others because they were unable to build up debt in the same way.

What they need is more spending power and there would be a significant surge in employment-generating demand should the mininum wage be raised in nations where it is clearly below acceptable (structural) levels.

I would also introduce a Job Guarantee immediately as a long-term commitment to stable employment but which would provide a significant short-run spending stimulus.

The Job Guarantee arithmetic is such that the rise in structural deficits that would be required to provide the extra minimum wage jobs would be relatively small – dwarfed by the bank bailouts that have gone before.

The ECB would be well advised to inform national governments that they will fund such schemes across the Eurozone. The cash would go to the most disadvantaged workers who would quickly transform it into spending.

The resulting stimulus to the private sector, knowing that this source of income would be stable, would boost private confidence and stimulate investment.

Public tax revenue would start to recover and the pressure from the bond markets would ease.

Please read my blog – Austerity proponents should adopt a Job Guarantee – for more discussion on this point.

For more information see the blogs that come up under this search string – Job Guarantee.

I will be talking about this in Brussels in September at the Employment Policy Conference the EC has organised. More specific details later.

Conclusion

I have run out of time today but the message is clear. The current approach to recovery in Europe and elsewhere is deeply flawed. It is based on the same ideological perspectives that created the problem. The solution cannot be found in these myths (as Larry Elliot calls them).

I also agree with Simon Johnson that long-run structural changes have to occur in some economies to give them a chance to sustain growth into the future. I would probably disagree as to which changes specifically should be made.

But all of that is moot when it comes to analysing what the current problem is – which I would argue is a lack of aggregate spending. We certainly do not want to go back to a situation where we drive private spending again by ever increasing levels of debt.

That is the current UK strategy and it will fail.

In acknowledging that the global economy in 2007 was flawed for the reasons Larry Elliot identifies we have to conclude that the neo-liberal approach to fiscal policy is also flawed. That is one of the tensions now. We cannot go back to private debt-driven growth but at the same time we cannot expect governments to run surpluses when the non-government sector is restoring balance sheet integrity.

But to help the most disadvantaged workers who are bearing the brunt of this crisis, immediate steps are possible – increase minimum wages and introduce guaranteed employment.

Then I would argue the demand deficiency would be well on the way to being solved and governments could turn their attention to the longer-term imbalances and structural constraints.

Introducing a viable socially liveable minimum wage and offering a worker a public sector job at that wage will neither break the budget nor undermine the capacity to engage in longer-term structural reform.

Alternative Olympic Games Medal Tally

My Alternative Olympic Games Medal Tally is now active.

I update it early in the day and again around lunchtime when all the sports are concluded for the day.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.