Better Late Than Never

Salary The Irish Times reports on remarks made by Minister of State for Labour Affairs, Dara Calleary that suggest a willingness to let firms plead ‘inability to pay’ the minimum wage. Minister for Finance, Brian Lenihan also indicated that such measures may be considered if it becomes clear that it is a barrier to job creation.

Back in April, some arguments for reducing the minimum wage in Ireland were considered here. The debate has taken on new urgency in light of budgetary conditions, as the state is desperate to keep people in jobs and off the dole. Although long overdue, their proposal is far from perfect.

The government’s tentative plan would allow firms to ask the Labour Court for an exemption from their statutory obligations in industries such as retail and service. Evidence of financial difficulties would have to be provided, along with the consent of a majority of the staff.

This allows us to draw some interesting conclusions about minimum wage regulation, and the ultimate reasoning behind it. But first let’s imagine the situation where the staff refuse to accept a pay cut (equivalent to the status quo, where they can’t).

We can assume that the firm may be in danger of going out of business, since they are in dire financial straits. In which case, there is serious deadweight loss. The intangible assets which every functioning business possesses (efficient practices, expertise, clients, supply chains, etc.) are lost, and the employee loses out anyway.

Better to give them the option of taking a job below the minimum wage, because they can quit if they really want to. The employee is no worse off. That’s why this measure is basically a good idea. But clearly, granting the majority the option to veto pay cuts steals jobs from those willing to compromise.

At best, the selfish employees are forcing everyone to take a gamble that they will not be the one to get laid off. But it doesn’t seem fair that the compromising minority of workers can have their jobs placed in jeopardy because of a greedy majority who refuse to accept a pay-cut.

There’s a clear admission here from the government that it’s wrong to force minimum wage on employees when it puts their jobs at risk. But they are happy to force it on them just because some other workers in the same industry prefer the outcome with higher unemployment, regardless of their reason? That’s just not good enough.

The government is also admitting that there’s no problem with employees ‘choosing’ to accept minimum wage, when the alternative may be unemployment. Why is wage competition less coercive when the driving justification is inability to pay, rather than simply a desire for higher profits or lower prices?

It’s not. Workers are just as much coerced under the government’s new plan than they would be if the minimum wage was abolished in its entirety.

In times of full employment, the statutory minimum wage may not steal jobs from the least advantaged. During the booms years, everyone was going to employed anyway and it just ate into profits. But at all other times during the business cycle, the minimum wage costs jobs.

Why do we tolerate this? Because of a moral judgement on the motivations of employers. People think it’s wrong for workers to be coerced into cheap labour for higher profits and lower prices – even though this would have the effect of creating jobs.

We think that saving jobs is sufficient justification to effectively abolish the minimum wage. And creating jobs is just the equivalent, so why not abolish the minimum wage altogether? It just doesn’t make sense.

Under normal business conditions, the public is clearly blinded by their moral judgements of entrepreneurs to see why it’s wrong to enforce the minimum wage on labourers. Disadvantaged workers may be willing to compete for employment by accepting a lower wage, but they’re not allowed.

It doesn’t matter if capitalists are making profit. When business regulation hurts workers and costs jobs, it is wrong. We can be glad that the government is recognising this in the current climate, finally. But further reform is needed.

© The Free Marketeer 2009

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2 Responses to Better Late Than Never

  1. Dave McGuire says:

    I think using words like selfish and greedy to describe workers in an article who’s only moral axiom is that “profits need to be maximised” is an interesting choice.

    Your “just as coercive” argument doesn’t work because the goverment can accept that wage competition is bad but also it is better than mass unemployment and therefore see the need for speacial circumstance. i.e. killing is bad, killing in self-defense is ok. The governement likely sees the wage competition as some kind of faustian pact for economic growth.

    Also, you are constructing a self-contained case on questionable assumptions both about what the goal of the government should be and what the government has implied through its proposals instead of tackling head on the argumetns for the minimum wage.

  2. That wasn’t the moral axiom guiding the piece, to any extent. My thesis was actually that reducing the minimum wage would improve economic opportunities for the most disadvantaged in our society, by protecting their jobs and not forcing companies to lay them off.

    Your second point is pretty interesting. The state doesn’t tolerate wage competition forced upon everyone during the good times, because it doesn’t save that many jobs. During times when it can make a difference though to a lot of firms, it’s better to allow wage competition. That’s a pretty sketchy line to draw? I don’t think it’s as clear as “depression wage control causes mass unemployment, otherwise minimum wage doesn’t affect us that much”.

    Philosophically though, you’re also taking jobs from the least skilled and least advantaged by stopping them from competing for employment on price. It might be for the ‘greater good’, but how fair is that?

    If there are questionable assumptions, feel free to question them. It’s naturally tainted by my philosophy on what government should do, and the inferences drawn from policy decisions are obviously speculative (meant to provoke thought?). If I didn’t elaborate sufficiently on the arguments against the minimum wage per se, apologies.

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