Understanding the Minimum Wage with Supply and Demand

I apologize, but I can’t resist explaining another contemporary political issue with supply and demand analysis. I’m just THAT Rock and Roll.

I notice that in Germany, Chancellor Angela Merkel is proposing that her Christian Democratic Party do a deal with the rival Social Democratic Party in order to form a government*. One of the key plans of the deal, which is yet to be agreed upon, is the introduction of an hourly minimum wage of 8.50 euros (£7.11).

A supply and demand diagram, with some cosmetic changes**,can help us understand the effects of a minimum wage:

Without a minimum wage, the market would clear*** at E, at a wage of W_e and with employment E_e.

Then a minimum wage W_min, higher than the market-clearing wage, is introduced. At this point, E‘, the supply and demand curves do not intersect. In fact, we see that employment falls to E_min. Not only that, we see that the supply curve at this wage is further to the right than the demand curve, the difference given by the grey line. More workers are trying to sell themselves into jobs than firms are willing to buy – in layman’s terms, we have created unemployment.

This should be intuitively obvious without a supply and demand diagram. If you were trying to sell your old car for £1 million, you wouldn’t be surprised if you found no takers. If you were sensible, you’d drop your asking price to a few hundred and you’d likely make the sale. If the government intervened and refused to let anyone sell their old bangers for less than £10,000, it would be surprising if any used cars would be sold.

It is the same with employment. If you refused to take a shelf-stacking job for less than £20 an hour, you wouldn’t get the job. Lower your expectations to £5, say, and maybe you would. But if there was a minimum wage of £10 an hour, then you might be priced out****- especially if it was your first job.

So, a minimum wage results in a trade off. Many low-paid workers would get a pay rise, but there would certainly be a drop in employment (whether through fewer jobs or fewer hours worked) than would otherwise have been the case.

.

So don’t you care about the low-paid? Of course I do, I’m among them myself. I’m just not entirely sure if the minimum wage is the best way to help them, if it involves making it harder for some of them to find work (and perhaps for those who will find it most difficult anyway, like teenagers and minorities.) Leaving aside other ways of helping the low-paid, like tax credits or a citizen’s income; Germany already has a good way of helping workers boost pay… collective bargaining by a strong trades union movement and works councils.

Trade unions help bargain with employers for workers’ pay and conditions in certain regions and industries. Works councils are elected by workers in a firm, and may even have representation on the Board, and again represent the workers’ interests within the firm.

Why is this better than a national minimum wage (NMW)? Flexibility.

A NMW can’t distinguish between those companies that can happily take it and those that can’t. It is a blunt instrument. MacDonalds could probably take a hit of a higher NMW without hurting it too much. But what about the small family takeaway just keeping its head above water?

The German collective bargaining system is a lot more discerning. They know a lot more about conditions in that part of the country, in that industry, and in that company. They can help set wages in their small part of the economy accordingly, and can react as times change.

.

So collective bargaining is a good alternative to minimum wages? Yes. And not only to wages, but other things like pay structure, working time limits, leave, notice periods – all those other things that governments often try and regulate.

Actually, countries with strong wage bargaining – e.g. high trade union membership – often have the least regulations on pay and conditions.And these aren’t capitalism-red-in-tooth-and-claw countries – but places like Germany, Japan and Scandinavia, which have a gentler, kinder, fluffier capitalism than our own. They look after their workers, but through social norms and negotiation and institutions rather than through state regulation.

Looking at Britain, a NMW was introduced by a Labour government in 1999. But Labour had been in power before then. Why didn’t they introduce it earlier? Could it be a coincidence that it wasn’t needed in the pre-Thatcher era when strong trade unions were able to bargain on behalf on their members?

.

A Paradox, a Paradox, a Most Ingenious Paradox! This post throws up a bit of a paradox. It sounds a bit like a right-wing whinge about how soft-headed attempts to help people, like minimum wages and “elf’n’safety” just do more harm than good. Well, maybe there are some costs to them. But workers will always want better pay and conditions. And one way of getting them is through a strong union movement.

Political conservatives hate Unions, but they also dislike state regulation of the economy. But maybe the two are alternatives. And unions are surely the more conservative of the two – people grouping together to further their aims rather than relying on government. They’re almost like Burke‘s “little platoons”, or even David Cameron‘s Big Society. In helping destroy them, maybe conservatives have helped unleash the nanny-statism they claim to detest? Hence the paradox.

A Flying Car!

One of my favourite films as a child was Chitty Chitty Bang Bang*. While now, looking back, it doesn’t hold a candle to the almighty Mary Poppins**, it does feature an amazing car, which, just when the characters’ lives depend upon it, changes first into a boat, and then a plane.

I always thought a flying car was fantasy. But in a lecture on composite materials today, the lecturer showed us this photo:

This is a Convair Model 118 ConvAirCar (also known as the Hall Flying Automobile)***. Only two prototypes were made. The first model had a crash (the pilot flew with little fuel, and escaped with minor injuries). This was perhaps enough to dampen any enthusiasm for the second model. It was envisaged that people would drive to an airport, attach the car to one of these aircraft, and then fly the rest of the way. It sounds a great idea, why did it never take off?****

P.S. A composite material is a material which consists of two distinct and separable parts, whose properties can be unique and superior to those of the constituent parts. Many natural materials, such as wood and human tissues, are composites. We have got better at making our own man-made composites, from simple ones like concrete and plywood, to more advanced ones like carbon-fibre-reinforced polymers. They are very useful in weight-saving applications. For example, about half of a Boeing 787 or an Airbus A350 is made from composite materials.

Remembrance Day

Lest we forget.

Lest we repeat our mistakes.

____________________________________________

Here is the Ode of Remembrance, by Lawrence Binyon:

With proud thanksgiving, a mother for her children,

England mourns for her dead across the sea.

Flesh of her flesh they were, spirit of her spirit,

Fallen in the cause of the free.

 

Solemn the drums thrill: Death august and royal,

Sings sorrow up into immortal spheres.

There is music in the midst of desolation,

And a glory that shines upon her tears.

 

They went with songs to the battle, they were young.

Straight of limb, true of eyes, steady and aglow.

They were staunch to the end against odds uncounted,

They fell with their faces to the foe.

 

They shall grow not old, as we that are left grow old:

Age shall not weary them, nor the years condemn.

At the going down of the sun and in the morning,

We will remember them.

 

They mingle not with their laughing comrades again;

They sit no more at familiar tables at home;

They have no lot in our labour of the daytime;

They sleep beyond England’s foam.

 

But where our desires are and our hopes profound,

Felt as a well-spring that is hidden from sight,

To the innermost heart of their own land they are known,

As the stars are known to the night.

 

As the stars will be bright when we are dust,

Moving in marches upon the heavenly plain;

As the stars that are starry in the time of our darkness,

To the end, to the end, they remain.

Another Dairy Related Joke

If honey comes from bees, where does milk come from?

Boo-bees

Ba-Dum Tssssh!

Cheesy Jokes

My older sister has gone to a Cheese and Wine evening with friends. She also just happens to be one of the foremost authorities on cheese jokes in all Christendom. I thought I’d share some of her best with you.

What did the cheese say when it saw itself in the mirror?

Haloumi

What cheese do you use to encourage a bear?

Camembert

What do you call a cheese that isn’t yours?

Nacho cheese

What cheese would you use to hide a horse?

Mascarpone

What happened when the French cheese factory exploded?

All that was left was de Brie

I’ll stop now, to let you stitch up your sides.

The First and Second Law of Thermodynamics

One of the best things about my job is that, sitting in lectures, I get to revise much of what I learned when I was at University that would otherwise be getting rusty.

In one of the greatest privileges of my life, I studied Engineering at Cambridge University – one of the oldest and best Universities in the world. One of my current students also takes Engineering, so I’m revisiting some subjects I would have been learning possibly about a decade ago now.

In today’s lecture, we learned about the First Law of Thermodynamics, which is essentially the Law of Conservation of Energy – energy can neither be created nor destroyed, but can be transformed from one form to another. Basically, the internal energy of a closed system (say, the air in a piston, or water in a tub) changes by the amount of heat added to it and work done by it. Energy is conserved, but can be transferred by heat or work.

I still remember well how we were introduced to this concept – with a recording of Flanders and Swann‘s ‘First and Second Law’:

Kings Club Feeds the Twenty One

I returned to Kings Club this afternoon, the afterschool club my church puts on for the parish school.

The children watched a cartoon, which depicted Jesus feeding the five thousand. After a busy day preaching to a large crowd, Jesus asks His disciples to feed the crowd. His disciples only have five loaves between them, there’s no way that could feed the thousands in the crowd!

Jesus takes the loaves and fishes, looks up to Heaven and prays. He then breaks the loaves and divides the fish, and hands them out to the multitudes. In total, five thousand eat their fill. Not only that, but twelve whole basketfuls of food are left over at the end.

I wish me and my Curate could have pulled off the same trick. We usually only get 12 kids, max. But 21 turned up today – and only a small packet of Chocolate Digestives and a bottle of orange squash to go around!

Postscript: Some More Thoughts on Help-to-Buy

In yesterday’s post, I was a little sceptical about the Help-to-Buy scheme*. In the interests of balance, I thought I’d offer some thoughts as to why, on the other hand**, it might be a good idea.

1. It might give the economy a short term boost.

The British public (or certainly a large and loud section of it) like surging house prices – it makes newspaper front pages, and although I’m sure people can’t be that boring, I’ve heard it’s quite a popular topic of conversation at middle-class dinner parties. Now, you know my views on it. But if enough people get a feel-good boost, and go out and buy things, it will help the economy.

I think of Britain’s love affair with house prices as a bit like a kid who has too much fizzy drink. They get a bit hyper, and then come down, and don’t do their long-term health much good. But if they’ve been laid down in bed, lethargic for a while (a bit like our economy), then maybe a sugar rush might do them good. It’ll get them out of bed, and able to start on a healthy diet and exercise and so forth.

Similarly, maybe the Help-to-Buy will give us the spur out of our flat-lining economy***; and then we can try and move to a more sustainable growth model. 

2. It might be a good deficit reduction strategy.

The government has always claimed that one of its key missions is to reduce the government deficit****. Now, for every borrower there must be a lender. If the British government is borrowing money, then everyone else, in total, must be saving. We can divide ‘everyone else’ into British households, British companies and foreigners. If the government wants to borrow less, then these three groups must save less.

Ideally this would come from companies investing in new factories and hiring people, rather than growing their cash piles. But companies have been reducing their investment since before the crisis – it’s a long term issue.

Or we could sell more goods and services abroad – but we’re not very good at that anymore, and it would take a long time to turn it around.

So, ultimately households will have to get into more debt so the government doesn’t have to – and what better way than to give out more mortgages?

____________________________________________

These comments have been a bit narky, but they point to long term problems with the British economy, and the government is no worse than any other in prioritising the short term. And, given we’ve been through one of the worst recessions in living memory, a short term boost is far preferable to a long term bust – but I suspect it’s just storing up problems for the future.

But let’s not pretend that Help-to-Buy is the best way of helping first-time buyers. Along with the many other forces that keep homes expensive, it’s just a way of taking money out of the pockets of future homeowners and into those of current homeowners.  

Understanding Help-to-Buy with Supply and Demand

In  a couple of previous posts, I have laid out the basics of supply and demand analysis, which should give us all we need to know to look at a contemporary political and economic issue – the Help-to-Buy scheme.

Let’s start with a supply* and demand diagram showing the housing market** before the scheme’s introduction:

Now let us introduce the Help-to-Buy scheme. The scheme, by lowering deposit requirements and offering loans, will allow more people to buy homes than before. The demand curve will move to the right:

We see that, although more homes will be bought, they will be bought at a higher price. The recent surge in house prices since the scheme’s introduction gives some credence to the usefulness of the above analysis.

This is a funny way to help people buy a house – make it more expensive to buy!

Let’s turn again to our supply and demand analysis to see what a better solution would look like. If the government tried to increase the supply of houses, then our supply curve would move to the right:

Now, people will be able to buy more houses, but because prices are lower, they are more affordable. People won’t have to rely on the government or the Bank of Mum and Dad to get a roof over their heads.

The A – Z of Music: I

Watch Ian Dury ‘play the fool in a six-piece band’ with The Blockheads in a performance of ‘What A Waste‘: