On The Effect on the Minimum Wage of Reducing Housing Benefit

[danieldwilliam]

No housing benefit for the under-25’s.  There are quite a few reasons why that’s a poor policy.

I wonder if it is the start of an attempt to remove the minimum wage.

I’ll need to talk a little about reservation wages before explaining my concern about the minimum wage.

The reservation wage is the wage below which a worker will not enter the labour market. Below a certain wage workers will reserve their labour.  Just as Naomi Campbell won’t get out of bed for less than ten thousand lots of people won’t go out to work for less than a certain wage.

They might have savings and value the leisure time.  If I had £100k in the bank I’d be tempted to take a few years off. Their labour might be more valuable to them unpaid and used in the home. They might be a stay-at-home Dad or a be caring for elderly parents. Or they might be in receipt of welfare transfers such as housing benefit or a state pension and the difference in cash income between not working and receiving welfare and working and receiving a wage isn’t worth the hours of toil.

Welfare transfers put a floor underneath the price of labour below which people would rather stay at home. (1) So far, so good.  If you want more people to work then if you reduce things like housing benefit it will lower the reservation wage. People won’t be able to hold their labour idle, they’ll have to go out and get a job.

This is where economics kicks you in the nuts.  Reducing the reservation wage increases the supply of labour. People who used to have enough welfare transfers not to work now don’t and must seek work or starve. (2) Sainsbury’s and the local refuse collection service will be over run with applicants for minimum wage jobs.  So what happens when an employer is over run with people clamouring for work.  Why, any sensible employer would reduce the amount of wage on offer.  An excess of supply should push the price down towards a new equilibrium with more supply, more demand and a lower price for labour.  But Sainsbury’s can’t reduce the wage they offer below the minimum wage.  So they won’t hire this wave of extra labour.  If they could pay bag packers £2 an hour it might be worth hiring everyone on offer, but at £6.08 an hour Sainsbury’s can’t or won’t make it pay. So, we have a growing pool of people who want to work but who aren’t worth employing at the current minimum wage.

So what happens? 

What happens to all these frustrated people who are desperate to work?  I think two things of interest.(3)  Firstly, they start offering non-cash incentives to be hired.  Unpaid overtime, putting up with bad working conditions, taking on more responsibility for no extra pay. Not joining a union. Signing away non-cash workers’ rights. The second thing is that they start asking for the minimum wage to be reduced to the point where they are hired.

With an over supply of unskilled labour there is political pressure to reduce the minimum wage. This is easier to do in a period of high inflation.  There is also economic pressure on jobs that are nearly minimum wage but not quite. With minimum wage jobs becoming harder and less secure people will be incentivised even more to move up the skills ladder towards jobs that are close to minimum wage. This added competition will reduce wages towards the minimum wage. A period of wage deflation at the low skilled end of the labour market is indicated as previously idle labour is forced into a fight with currently low paid labour.

This seems to me to be a feature of this government, that it is successfully setting two sets of workers against each other.                                                                                                                                                                                                                                                                                                             

               

(1) They do other things, like subsidise dividends for share holders of low-wage employers. Basically a transfer between two different classes of tax payers. 

(2) and just to let a little of the politics of humanity creep in here – work or starve, in Britain, in the 21^st Century. Or worse, work or have your children grow up malnourished. Or worse, work *and* have your children grow up malnourished. And David Cameron wants me to vote No to Scottish Independence and the Labour Party actually expect me to take seriously the argument that Scotland should stay in the Union so that the Labour Party can deliver social democracy in England at some point, when it can be arsed.  

(3) Also, crime, black and grey market labour such as prostitution or illegal sweatshops.

Comments

[alitheapipkin.livejournal.com]

I'd like to see some figures but I suspect most under 25s who claim housing benefit do not have hospitable parents who live somewhere with a decent jobs market. All the people of my acquaintance who claimed at that age grew up in care or with relatives other than their parents, grew up somewhere very rural, or fell out with their parents over their sexuality and either got thrown out or didn't feel safe at home. Seen through those eyes, I'm not sure at least some of those people weren't just as vulnerable as those on disability benefits.

[danieldwilliam.livejournal.com]

Yeah – I think you’re probably right. The pool of people who are claiming housing benefit but who could, in my good conscience live with their parents is likely to be pretty small. Certainly not £2bn worth.

Thinking back to pals of mine who got into difficulties with their parents there wasn’t really any way they could stay where they were.

I’m not sure I’m in favour of a policy that makes people choose between being beaten or raped by their parents and homelessness.