Minimum wage rises are gaining ground

It is springtime for a policy that has gone in and out of fashion over the years: high minimum wages. 

At the end of last month, the European Commission proposed requiring European governments to ensure “adequate minimum wages” in their economies. Across the Atlantic, Joe Biden has been elected US president on a platform that includes more than doubling the federal minimum wage, to $15 an hour, higher than any state’s current wage floor.

These developments reflect two big changes: one political and one intellectual.

In the US, Mr Biden’s commitment builds on a social movement — the “Fight for $15” — that has successfully lobbied for minimum wage increases at local and state level, because the federal minimum wage has long failed to keep up with inflation. 

In the EU, the about-turn is even more striking. Pushing wages down for the sake of “competitiveness” was central to the eurozone rescue packages a decade ago. Since then, the influence of economic orthodoxy has waned. After escaping the clutches of the “troika” of official creditors, Portugal increased its wage floor without negative economic effects; in 2015 even Germany introduced a legal minimum wage.

The embrace of higher wage floors through government policy is of a piece with a bigger shift towards using the state more actively to engineer the outcomes of market activity. This shift manifests itself across a range of policy areas — from a renaissance in antitrust enforcement to a return of strategic industrial policy — often with the EU in the lead. 

But if minimum wages find themselves in favour with establishment politicians, that has only become possible because of a change in mainstream economic thinking. The old consensus was that higher minimum wages would reduce employment, because businesses would no longer want to hire people whose productivity could not justify their wage. The conclusion was that wage floors hurt those they were intended to help. 

Over the past 35 years, however, better evidence and more nuanced theory has eroded that view. It now seems clear that minimum wages can be significantly higher with, at worst, modest effects on employment. That is the overall conclusion from last year’s comprehensive examination of the international evidence by economics professor Arindrajit Dube for the UK government.

What is more, the experience of the European Nordic countries suggests that high effective wage floors can encourage productivity growth. Because employing a lot of workers in low-productivity tasks becomes uneconomical when they cannot be hired on the cheap, wage floors create an incentive for companies to invest more capital or otherwise increase the productivity of the workers they do employ. 

Admittedly, the Nordics have achieved this through collective bargaining rather than legal wage floors and are among the few European nations that do not have statutory minimum wages. Their unions have traditionally worried that legal wage floors reduce the incentive for people to organise in the first place. As a consequence, these countries have expressed scepticism about the initiative from Brussels.

They should drop their resistance. The commission has gone out of its way not to threaten established collective bargaining models in the European countries that have them. On the contrary, in another novelty, Brussels is pushing more countries to facilitate more extensive negotiated wage-setting, including where legal minimum wages exist.

The nature of today’s labour markets means unions should see ambitious legal wage floors as their friend, not their enemy. They reduce the incentive for employers to evade collective agreements by hiring non-unionised — often migrant — workers on worse terms and undercut responsible employers. This is why Norway’s government, for example, has resorted to extending the outcomes of collective agreements to entire sectors, creating what are, in practice, sectoral minimum wages

Legal wage floors, much like statutory labour standards, also free up unions to focus on a greater range of pay and working conditions.

Most importantly, a political embrace of high minimum wages opens the door to a shift in the way governing elites view the sources of economic growth, from focusing on wage “competitiveness” to labour productivity. “Competitiveness” presupposes that prosperity comes from competing successfully on price — in a global economy that includes China.

High wage floors, in contrast, require an ambition to replace low-paid jobs with ones that compete on productivity and quality. Achieving this, of course, requires much more than higher minimum wages. It also requires expansive aggregate demand management, ample funding for programmes to help people into good jobs, and sufficient spending on education and training. 

In the middle of a deep crisis, increasing wages at the low end may seem like a dangerous gamble. But given the damage the obsession with “competitiveness” has done in Europe, the alternative is worse.

martin.sandbu@ft.com 

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