Minimum Wage, Maximum Derp
For me one of the most important lessons for British economic policymakers over the last six years should be to fear the interaction of micro with macro, supply-side policies with demand-side policies.
I do not think it is a merely a co-incidence that the worst fall in nominal demand since the 1920s occurred at the same time as a supply-side shock (collapse) in 2008. All recessions in British history have been driven by tight money aimed at lowering inflation. Was this time different? It’s not obvious why… CPI rate, September 2008? 5.2%.
And I do not think it is merely a co-incidence that the worst recovery in demand on record has occurred at the same time as inflation has sometimes hovered, sometimes soared above the inflation target. CPI rate, September 2011? This is during the time when the Darling/Osborne austerity drive “sucked demand out of the economy.” That CPI rate in September 2011 was, again, 5.2%.
Here is MPC hawk Martin Weale writing this week:
If wage growth picks up more rapidly than I expect, it will be an indication of inflationary pressure in the economy and Bank rate will need to rise sooner. If wage growth remains subdued, Bank rate should rise more slowly. Because the future is uncertain, we cannot make any promises about where Bank rate will be in a year or two years.
Raising the minimum wage by 3% at a time when hourly wage inflation is 1-2% at best, and is one of the indicators preventing the Bank from screwing up the demand side again… that would surely be an incredibly foolish gamble.
What, exactly, have policymakers learnt from six years of negative supply shocks and disastrous demand-side outcomes? Have we even learnt anything about wages, nominal shocks and employment? It does not appear so.
So sure, let’s try another supply shock. Maybe we’ll get “lucky” and the labour market tightens enough this year that hourly wages pick up, so that a 3% NMW raise doesn’t hurt many more people. Maybe.
Here is the Low Employment Commission report for 2008 (before the recession):
3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.
Good one! Our labour market may be doing badly, but just look at Spain! Those guys are really screwed. They continue:
Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.
It’s “difficult to explain”… right. A total mystery. I can’t think what might have caused it, so let’s blame immigrants and old people, those are surely the most “significant developments” in the British labour market in the years to 2008. If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.