A Minimum Wage or a Free Economy?

by D.J. Webb



The Conservative and Liberal Democrat halves of our ruling coalition government are engaged in a debate over employment legislation, with some Conservatives calling for less regulation of employment and also for smaller companies to be exempt from minimum-wage legislation. Libertarians oppose state regulation, although I think it would be fair to say that libertarians are seeking a more holistic, workable approach than simply deleting minimum-wage laws. The reason for this is that, in the absence of welfare reform, abolishing the minimum wage will have the result of decreasing yet further any incentive for the unemployed to find work. I am not convinced that removing the minimum wage—especially one set at current rates—will have a significant positive impact on the employment market in the absence of a broader package of measures to free the economy.

Let us remind ourselves of what the minimum wage rates are. Workers over 21 get a minimum of £6.08 an hour. This falls to £4.98 for workers aged 18-20, to £3.68 for workers 16-17 years of age, and to £2.60 for apprentices. I think it pretty clear that these are not princely sums, and that they do not provide a great incentive to young people to find work. Assuming a 37½ hour working week, the £6.08 rate amounts to a monthly take-home pay packet, after income tax and national insurance, of £868.70. Council tax, rent and transport easily devour the majority of that, leaving the minimum-wage worker with less than £100 a week for food, clothing, utilities, entertainment and incidental expenditure. Those over 25 on the jobseeker’s allowance pay no income tax, national insurance or council tax, have no transport bills and have their rent paid for them, and in addition receive £67.50 a week. The gap between the lifestyles afforded by the minimum wage and by the jobseeker’s allowance is very small indeed. In the case of those with children, welfare benefits can often be the only viable option, as work simply does not pay enough.

In this regard, it is worth clarifying that the libertarian support for minimal state regulation is not the same as preferring the impoverishment of the working poor. There is something wrong with the entire setup of a society where the state is having to intervene to prevent wages even lower than £6 an hour. However, the state is not the answer to this predicament, but rather the cause of it. The left counterpose the interests of labour and capital and call for the state to intervene; but labour and capital have the same interests (economic growth) and it is the state’s demands for exactions that restrict the growth of capital, and thus the growth of employment and eventually the growth of wages.

Socialism is based on a perceived antagonism between labour and capital, but serves in the end to prevent the expansion of capital, thus preventing the expansion of employment and the tightening of the labour market at the lower end that would force wages up naturally. If the TUC and others really understood the best interests of their workers, they would be calling for less state spending, less taxation and thus greater freedom for the expansion of capital.

Workers need a living wage

The classical economists did not call for minimum wages and employment regulations, but by the same token they did see that there was a minimum level of remuneration that constituted a “living wage”. There are a number of reasons for this:

  • Workers need to survive. A certain level of wages is required for workers to be able to keep themselves healthy enough not to have a detrimental impact on the efficiency of their labour.

  • The labour force needs to be reproduced. This means that wages should ordinarily be enough to finance the raising of a family. Clearly a few apprentice jobs for workers who have not settled down with a family are a good thing, but in general wages need to be set at a level that allows for social (and sexual) reproduction.

  • There is a basic level of consumption that is required in order to take part in society. To get to work in the UK usually requires a car. A telephone is not a luxury. If workers cannot afford to purchase consumer goods, there is then only a limited market for such goods. The level of consumption consonant with a basic lifestyle needs to move upwards in line with social progress over time, in order that workers at each stage are able to participate at a normal level as consumers in society. Workers also need to be able to afford to join clubs and take part in sports activities in their spare time. None of these things is a luxury.

  • Finally, and importantly, wages need to be set at a level that does not impose costs on society. Immigration is one way in which the need for wages to be set at a level that allows for the raising of a family can be circumvented, and yet, while cheap labour is good for an individual employer, this also imposes costs on the taxpayer and wider society in the form of crime, policing, anti-discrimination legislation, etc. Workers who cannot afford healthcare may be saving their employers a lot of money in wages, but if those workers, as the US, are then forced to attend Accident and Emergency departments in hospital, then public costs are created in a way that allows cheapskate employers to pass the costs that should have been covered by wages onto others.

There is nothing in the theory of libertarianism that denies that a living wage is essential and an entirely reasonable demand. Indeed, all the arguments advanced so far are simply a statement of the objective realities that any economy functions under. I have not suggested workers need to be well-paid in order to be nice to the workers; rather, that if wages fall too low, additional problems are created for the economy.

It is clear that abolishing the minimum wage would allow some employers to “free-ride”, by privatising the benefits of cheap labour and nationalising the costs. However, arguably, this would be unsustainable in the absence of mass immigration. Even if some employers took a free ride, once the labour market tightened along with the development of the economy, the natural laws of the labour market would serve to strengthen the hand of labour against capital. It follow therefore that immigration is the key policy that allows the welfare state and cheap labour system to trundle on in the UK as it does.

The role of credit

With mass immigration keeping wages low and keeping the labour market loose, with government policy boosting property prices over the past few decades and with the state willing to finance mass welfarism, it is unsurprising that there is a large underclass in the UK. The economic model pursued by all three of the main political parties in the UK has fostered it.

So far, therefore, from having participated in a consumption binge in the last decade—as alleged by our newspaper commentators—large numbers of English people have struggled to take part in the normal life of society in terms of their own consumption. We are told that the party is over, but for many millions the party never got started in the first place. The growth in wages has for several decades lagged behind GDP growth. Women have been forced out to work, thus unwittingly facilitating the rise in property prices, which are now financed by two incomes. Running on the spot, as millions have been, credit has been one way in which people have been enabled to maintain what should be considered by libertarians as merely a decent standard of living, one that a living wage ought to finance as a matter of course.

The rise in personal indebtedness is therefore the reverse side of insufficient labour remuneration in the economy, particularly at the lower end. We can ask ourselves the question of whether all those who have run up five-figure credit card bills would have needed to do so had wages been a little higher and had there been no personal taxation. It is clear that with income tax, national insurance and council tax accounting for around 40% of people’s incomes, and with wages depressed by immigration and property prices supported by immigration and financial chicanery, that personal indebtedness is not in fact a personal failing, but the result of the economic model pursued by a large state that absorbs 50% of GDP.

The path to higher wages

Low wages have got to be a problem for libertarians: they are not something we celebrate, but something that shows the economy is being run in a distorted fashion. Worse, low wages encourage state intervention, in a way that pushes up taxes and costs for all businesses and so slows the expansion of capital (thus leading to more low wages…).

I wouldn’t necessarily see the need to abolish a minimum wage set at £6.08 per hour. Companies that cannot afford to pay this simply cannot afford to hire staff in the first place. The real impact of such minimum wages is likely to be limited, given that it is set at a rate that is likely to give the worker only £30 a week, or 70p or so an hour, more than living on benefits.

If we really want to see people earning decent wages, we need to start rolling back the state. We can begin by deleting the uniform business rate, which funds grandiose council schemes and prevents employment. Employers’ national insurance contributions also make it expensive to hire staff. The way a free economy works is that as employers expand employment, the pool of people left to be hired is reduced, and their hand in negotiations is improved. By making it cheaper to employ staff, we therefore advance more quickly to the point where workers can demand higher wages themselves. Obviously, abolishing these revenue streams for the state has to be paid for by slimming the public sector—but public-sector employment, by imposing taxation on the productive private sector, is the very thing that creates low wages in the economy in the first place.

Finally, we need to close down the employment tribunals and the entire edifice of compensation claims and discrimination suits. Given that we do have income support for those laid off, I would introduce a system where any worker on the permanent staff could be laid off with three months’ notice, with no reason given. The reason could be that the worker was male, or female, or black, or white, or pregnant, or homosexual, or old: companies should be free to hire and fire who they like. In a free economy, where the rolling back of the state boosts employment creation, we would not be so desperate to cling to jobs in workplaces that did not appreciate us. This system would also reduce costs for employers and reduce the risks of taking on inappropriate staff.

After decades of expansion in the public sector, rises in taxation, and a stratospheric increase in immigration there is no one policy that can improve the labour market. We need to advance on all fronts, by cutting the public sector, cutting taxes, cutting labour regulations, and ending immigration all at once. Merely abolishing the minimum wage is far from sufficient: all it could do would be to accomplish the further immiseration of the working poor. Isn’t it obvious that the more the state intervenes, the worse these problems get, and then the more intervention is called for? However, it needs to be emphasised that an end to immigration is part of the policy mix required to transform the labour market, because it is the policy that facilitates the overall economic model. Libertarians should see clearly that immigration is not part of a free economy, but in fact an integral part of the state-run economy, a policy choice that prevents a healthy economic model from taking root. Do all these things, and we won’t need a minimum wage, as the labour market will naturally function in a way that eliminates wages of £6 an hour. Small businesses would flourish under conditions of full employment, and best of all, the end of all the interminable tribunals would establish England as a free culture once again.

4 responses to “A Minimum Wage or a Free Economy?

  1. A minimum level of income is necessary to live a reasonably free life.

    Increasingly, smart machines perform the work that people used to perform. We are entering a future where people increasingly cannot compete with machines. Professor Dwight Murphey has written extensively of the problems this creates for Classical Liberalism.


  2. Is it not also possible that setting a minimum wage tells employers what they can get away with? Given the current high-ish level of unemployment it is an employers market, and by law, they only have to pay £6.08 per hour. I wonder how many employees are being paid less than they could get, if only a legal minimum did not exist?

  3. Dorji Den is an obvious spam. I’ve removed his posting.