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Sunday, February 17, 2013

Minimum wage levels - capitalism is not the problem

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There are increasing pressures around the world for a rise in wage levels - namely in the United States and New Zealand. These claims are of course greatest in the the Western labour markets, where stagnant wages for unskilled workers have been a drain on private consumption, given the spectre of high indebtedness. The interesting aspect about these campaigns is just how little understanding there is about the issue. People simply don't understand, or don't care to acknowledge the reason why wages are down. Here are some critical facts to acknowledge:
1. Wage levels are not all stagnant: People will skills such as professionals have seen substantial increases in their wage/salary levels. It is the unskilled wage earners who have seen their wage levels go sideways because they are effectively competing with China. In 10 years they will be competing with Bangladesh and Africa. Even in the third world, the disparities are even greater, depending on whether you are providing a service to 'locals' or foreign enterprises. i.e. Software programmers in Asia are making a killing and you might think they are pocketing the 'wealth', but the trickle down is evident because these people want to distinguish themselves by eating at nice restaurants, living in upmarket apartments and buying brand-name clothes. The attitude is that, my parents suffered without these things for so long, so they want to have, and they want their parents to have, that which they went without. Some of these cultures are more savings/education-orientated than others, but most allocate cash for luxuries.
2. Capitalism is not to blame: The lack of wage growth among unskilled workers is the result of statism; that is government intervention into what were regarded as 'third world markets'. Under the guidance of the IMF and WB, most of these countries have since adopted austerity measures and liberalised their labour markets. Having conveyed a great deal of discipline, these countries are being rewarded with investment. Africa and central Asia are attracting the bulk of mining investment, SE and China, the bulk of the factory jobs. Now, its important to realise that this sudden rush of third world labour onto the global market has transformed these economies into tiger economies.

So its 2013, and there are various appeals being made for increases in the minimum wage. Is it justified? Well, you might be surprised to here me argue that it depends on the context. Generally, I would argue against minimum wages, however if one acknowledges that there is already distortion in the economy, then you might find that it actually makes more sense to adopt counter-distortive measures. The question is 'how you do it', because the wrong distortion can actually make matters worse. So what is the distortion we are talking about, and what are the impacts:
a. Immigration restrictions - There is little mobility between labour markets, and for good reason, this would be incredibly destabilising. It would be nice to expect a perfectly integrated labour market in future. But first the disparities in labour pricing have to be absorbed, and that could take another 2 decades if you think about all those workers who are still to be released from low-productivity jobs in Asia, Africa, etc. There must be 0.5-1 billion people to be absorbed into higher-pay jobs. That takes time; but rest assured no system will do it faster than the capitalist 'market system'. Are you worried about kids working in factories? As sad as this might sound; many actually welcome it. Of course there is the spectre of parents mistreating their kids, by forcing them to work long hours for the sake of personal luxuries, but this is a 'parenting' and regulation issue, not a problem with capitalism. i.e. Capitalism is trade between consenting adults (i.e. moral agents). It does not recognise a child as a moral agent, so any abuse of a child is a regulation issue.
b. Eventual absorption of excess labour - The excess of labour in third-world makets is really an issue of under-utilised labour that needs redeployment. Once that occurs, say in 20 years time, then a great many jobs will flow back to the West, if not before. The reason for the jobs flowing back earlier is that the third world, or at least some of these countries will be slow to reform their labour markets, to educate their kids, and otherwise slow to raise productivity, and curtail corruption.

So is the solution a higher minimum wage? And should there be a minimum wage at all? I will argue that there should not be a minimum wage because its a distortion upon the uptake of labour. NZ needs to price its labour competitively against other Western countries so that it can avail of niche manufacturing jobs as well as telecommunication, technical service jobs that could well be outsourced to a skilled NZ. There is always going to be a struggle for NZ to be economically relevant. The greater danger for NZ is perhaps the prospect of a resources boom - namely in energy production. If NZ became the oil sheikdom of the South Pacific, one could expect a huge gain in the currency, given its an economy of just 4.3 million people. This is a compelling point of vulnerability for any manufacturer; as well as being a point of vulnerability for a call centre. The good news is that this 'vulnerability' for manufacturers is likely to take 10 years to arise. Almost enough to make it a non-issue.

You have to ask yourself whether a minimum wage set at a sufficiently high level to make a difference would actually make a positive difference. The reality is that it makes it impossible for under-skilled people to get a job; whilst raising the wage value of people who are worth more. But it does this at the expense of others. The appeal of higher wages is that it might be construed as resulting in more money being spent in the economy, salary earners paying more tax. This is true for those who retain their job. But the problem is those who are marginalised by their lost competitiveness. Worse still is that higher wages at the top of the skill chain will merely boost spending, raising imports. We want more people employed for less, as opposed to fewer people for more. You'd expect unions to welcome this; but it appears they are only interested in the perceived gains extorted for members. They don't actually care whether their policies are effective or not. i.e. Unions will send members broke in order to retain their relevance. Kind of like the political parties who don't reveal this false dichotomy between arbitrary wages and distorted labour markets.

You might wonder whether Asian or 'emerging' markets could be enticed to raise their labour costs in order to make the West more productive. i.e. Might they welcome higher taxes on labour? The answer is that Asian countries are very poor and the culture is non-compliance for tax collection. They only tax imports, and the wealthy, because no one else has enough money, or would pay taxes. Most local governments have a litany of landowners who don't pay rates. Income taxes on the poor would be even harder. It is also not a desirable policy to tax that process of wealth creation that is creating jobs. This is what the West killed with its high-cost impositions. Asian countries are forcing the West to economise: expect more of it. If wealthier Asian countries were able to adopt a labour (say payroll tax), they would loose jobs to the informal economy, or offshore. They don't want to kill the goose that lays the golden egg. Why would you stop a process which is correcting the distortions created by governments in the first place.

If this is so simple; why are academics so confounded by the problem. Why can't economists agree? The reason they can't agree is because economists are parasites who are living off taxpayers. They are so privileged with easy money, they have become detached from the real world. They are actually not obliged to find answers. Instead they bed themselves down into 'schools of thought' and spend the rest of their tenure   fighting it out with other schools, without ever reconciling their ideas. To what end? They live in the vain hope that some bureaucrat in the PM/President's Office will proclaim them an economics genius, and henceforth they will be celebrated as the 'anointed king' of economics. They will not even care if, as was the case with John Maynard Keynes, whether the government misappropriates their ideas. This is after all why bureaucrats and academics exist - to justify government policy. Political leaders simply pick the ideas that appeal to them; that offer them a rationalisation for placing them at the centre of economic activity.

Rest assured I will never be a celebrated economist expounding like these. You have to suck up to government or business leaders to get that gravy. Nobel Prize! You must be dreaming! I'd be stoked it you'd just mention me to your kids in your next bed-time story. Yep, its a horror!



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'Buying NZ Property – Download the free sample readings!

NZ presents some of the most alluring property in the Western World; particularly given the greater easy of residency, the low cost of property, and the liveability of the country. In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

New Zealand Property Report 2010 - Download the table of contents or buy this 180-page report at our online store for just $US19.95.


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