On the use, or not, of expertise by government

I will write some thoughts, next week when I have had a chance to collect them, following an excellent PEF book launch two days ago, with great discussion from Ann Pettifor, Aeron Davis and Maya Goodfellow and a packed audience. In the meantime, as spring turns to summer, I wanted to write about something else.

In a recent post I ask why we were governed by incompetents, and I related that to ideology, which in recent times means neoliberalism. But I think it is a little more than working in a neoliberal context, because I say that the Labour government often did try and do evidence based policy. Not always. I mentioned Iraq but there are other examples, but in comparison to Conservative governments they did evidence based policy a lot. The difference is while the Conservatives had neoliberal zeal, Labour were prepared to intervene in the market, particularly to help the poor. A good example was the minimum wage, which was set by a specific body who aimed to keep it at a level that did not cause significant employment loss.

The Coalition government of 2010-5 contained Liberal Democrats who did often check the neoliberal zeal of Conservative ministers. But they often failed to do so, and one example was abolishing the Agricultural Wages Board (AWB) in England. (The rest of the UK kept them.). It was part of their programme to abolish red tape. The argument was that although Thatcher had spared the AWB in her bonfire of wages boards, the minimum wage made it redundant.

I have spent a lot of my life on or near farms. When we moved from London to rural Sussex some 36 years ago I still remember vividly two conversations. One was with a farm worker. I had already noticed the unsocial hours they regularly worked, and I asked him about it. He told me how when his son was born he worked so much that he hardly saw her during the first three months. It was just a bad time of year from the farm's point of view. I guess I remember that conversation so well because we had quite recently had our first child.

What the AWB did and what the minimum wage doesn’t is regulate pay for anti-social of excessive hours. But what about market pressure from labour scarcity? The other conversation I remember was with the owner of the same farm. He was complaining about how hard it was to get additional labour when he needed it. He told me how far he had advertised but it was still difficult. I suggested he try raising his hourly wage. He laughed and said he couldn’t possibly. Those in his local farmers group would stop speaking to him if he did that.

Farming is a classic monopsony, where firms can fix wages well below the market clearing level. The ability of farm workers to find work elsewhere is limited, particularly when employers operate a cartel on wages. The farm I lived on back then was typical: I have watched farm workers working late at night and weekends everywhere I have lived near farms.

Abolishing the AWB allowed farm owners not to increase in nominal terms payments for anti-social or overtime hours on existing contracts, such that they gradually wither away in real terms. It allows farmers not to offer any of these type of payments on new contracts. Some farmers may even have tried to abolish these payments on existing contracts. The governments impact assessment calculated that AWB abolition would lead to a substantial transfer of income from farm workers to farm owners.

I wrote about the abolishing the AWB in 2014. I later had a conversation with a SPAD about their decision. He told me the level of analysis in my post was well above anything he had seen in government when the decision was made. You might think the policy was not surprising from Conservatives, who have a close relationship with the National Farmers Union (a farm owner’s club), but there was no attempt to get even the simplest of evidence, and a very short consultation period for this decision.

This illustrates a neoliberal zeal to abolish regulations, with the inevitable transfer of income from the poor to the rich, without even thinking about making a serious attempt to look at evidence on this issue. In the absence of evidence the LibDem Coalition partners chose not to fight a battle on this issue. Scotland, Wales and Northern Ireland have retained their AWBs. The Labour party opposition have pledged to reintroduce them in England.

Minimum Wages, Monopsony and Towns

Alan Manning has a very good article in Foreign Affairs about minimum wages. The impact of minimum wages on employment is a politically charged issue in economics, and so is similar in that sense to most of macro. With minimum wages, the battlefield is empirical. I often think of this battle when people accuse mainstream economics as being hopelessly neoliberal: it was mainstream economists (David Card and Alan Krueger) who first showed that the data did not conform to what Manning describes as Econ 101 economics, and other mainstream economists who have continued to find this result.

I think two conclusions can be drawn from the many studies that followed Card and Krueger. First, empirical work clearly shows plenty of examples where imposing or increasing minimum wages did not reduce employment. However few would argue that result will hold in all situations for all levels of the minimum wage. That is why, before George Osborne raised it, the UK minimum wage level was set by the Low Pay Commission, who tried to assess these issues. Perhaps the Commission became too cautious, but no doubt we will see more studies on the Osborne increase in due course.In my view another key issue future studies should address is whether increasing nominal wages has any impact on productivity.

Manning also makes a point about the limitations of minimum wages as a tool to deal with poverty. He points out that as “an hourly rate, the minimum wage on its own reveals little about the household income of those who earn it.” He suggests that minimum wages work well alongside earned income tax credits. Minimum wages can help prevent employers capturing part of tax credits by cutting wages in the knowledge that the state would make up the difference.

There are two main reasons why Econ 101 (first year undergraduate) economics gives the wrong answer on minimum wages: search and monopsony. Take search first. In the Econ 101 world no one celebrates getting a new job or worries about losing an existing one. One reason most people do both is search: it takes time and effort to find a new job. Equally it costs the firm money to recruit new people. That creates a zone around the Econ 101 wage within which variations in wages would not lead to job losses or people leaving. Where the actual wage is within that zone will depend on bargaining power between the worker and firm.

Monopsony is the situation where alternative employment opportunities for workers are scarce, which gives the firm the power to set wages below the perfectly competitive level of the standard Econ 101 model. (There is an element of search here too: the costs of moving location. These are much larger than the costs of looking for a job in your own area, particularly for families.) The classic example of monopsony is the town where there is just one major employer.

I suspect many labour economists regard monopsony in the labour market as something of a special case. That perception may need updating, argues Marshall Steinbaum here, drawing on recent work by him and coauthors for the US. They find “that most labor markets (as defined by occupation and geography) are very concentrated [few firms], and that this concentration has a robust negative impact on posted wages for job openings.” That is exactly what you would expect from monopsony: the fewer firms there are in a location, the less often vacancies occur, so the less these firms when suppressing wages have to worry that workers will quit.

The article considers a number of policy implications stemming from widespread monopsony that are worth reading. This could include, in the UK, improving rail communications into cities besides London. The one directly relevant to this post is that these results may help explain why minimum wages do not reduce employment. In the absence of minimum wages, relatively poorly performing firms may be able to shift the impact of poor performance from profits to wages. The minimum wage stops that happening. 

If monopsony is prevalent in large towns but not big cities, I couldn't help wondering if this might have something to do with the difference between towns and cities in the Brexit vote I mentioned in my last post. Support for Trump is also strong in the rural parts of the US, which is where Steinbaum et al find monopsony is prevalent. What this monopsony study suggests is that working conditions within firms are likely to be worse in towns than in cities. What impact might that have on voters? One response to worker exploitation in towns is for people to leave, as they do. For those who stay, an overriding concern might be the survival of firms within the town. This in turn could have an important impact on voter attitudes.