Category Archives: Ronald Coase

Gene Epstein: Murray Rothbard’s Mixed Legacy

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@LivingWageUK documents the Achilles heel of the #livingwage

Research publicised by a Living Wage UK highlighted the Achilles heel of any living wage proposal. This Achilles heel applies to the voluntary adoption of the living wage and a living wage mandated through minimum wage laws.

The critique to follow accepts pretty much everything claimed by the living wage movement about the benefits of the living wage but simply traces out the consequence of this one promised benefit.

Source: New evidence of business case for adopting Living Wage   Living Wage Foundation.

The living wage is substantially above the minimum wage. Offering the living wage will change the composition of the recruitment pool of low-wage employers. This is the Achilles heel of the living wage which Living Wage UK documents in its study it tweeted about and from which I have taken the above snapshot.

Jobseekers would not have considered vacancies by these employers will now apply because of the living wage increase. These better calibre applicants will win those jobs ahead of the jobseekers whose current productivity levels are less than that to justify the cost of the living wage.

Central to the living wage rhetoric is that somehow employees will be more productive because of the adoption of the living wage.

The simplest way of doing that for an employer is to hire more qualified, more productive employers are no longer a hire the type of people you currently hire. They will be unemployed or pushed into the non-living wage sector of the low-wage market.

A living wage is an exclusionary policy where ordinary workers, often with families who are not productive enough to produce $19.25 per hour living wage plus overheads will never be interviewed.

The workers with the type of skills that currently win those jobs covered by a living wage increase will not be shortlisted because the quality of the recruitment pool will increase because of the living wage.

There will be an influx of more skilled workers attracted by the higher wages for living wage jobs. They will go to the head of the queue and displaced workers who currently apply for and win these jobs before the adoption of the living wage.

Any extra labour productivity from paying a living wage increase is in doubt because low skilled service sectors are notorious for their low potential for productivity gains. They are the bread-and-butter of Baumol’s disease.

The modern theories of the firm focus, in part or in full on reducing opportunistic behaviour, cheating and fraud in employment relationships. The cost of discovering prices and making and enforcing contracts and getting what you pay for are central to Coase’s theory of the firm put forward in 1937.

The profits of entrepreneurs for running a firm is directly linked from their successful policing of the efforts of employees and sub-contractors to ensure the team and each member perform as promised and individual rewards matched individual contributions (Alchian and Demsetz 1972; Barzel 1987). Alchian and Demsetz’s (1972) theory of the firm focused on moral hazard in team production. As they explain:

Two key demands are placed on an economic organization-metering input productivity and metering rewards.

The main rationale in personnel economics from everything ranging from employer funding of retirement pensions to the structure of promotions and executive pay including stock options is around better rewarding self-motivating employees who strive harder and reducing the costs of monitoring employee effort.

At bottom, the efficiency wage hypothesis is entrepreneurs are unaware of the higher quality and greater self-motivation of better paid recruits for vacancies but wise bureaucrats and farsighted politicians notice these gaps in the market. Bureaucrats and politicians notice these gaps in the market before those who gain from superior entrepreneur alertness to hitherto untapped opportunities for profit do so and instead leave that money on the table.

It’s kicking the living wage movement when it is down to mention that low paid workers with families will lose a considerable part of the living wage increase because of reductions in family tax credits and in-kind assistance from the government that are linked to their pay.

Their jobs are put at risk because of a large increase in the cost of employing them to their employers. Their take-home pay after taxes, family tax credits and other government assistance increases by much less. This is a pointless gamble with job security because of the much small increase in the take-home pay of many breadwinners on the living wage.