This is not the first time this subject has been covered on the IEA blog – but the point needs repeating. We should remove all impediments to employment in a recession and this should include a suspension of the minimum wage – or at least a reduction to its 2006 level. Other labour market regulation should be suspended too. This could be done in a pragmatic way – for example creating a 12-month or 24-month waiting period before employment regulation applied to new contracts.
Last week, the President of the European Central Bank said in a speech that the ECB was asking governments to borrow more money to keep economies going in the recession. If the ECB regards it as its job to promote fiscal remedies that are likely to be unsuccessful then why does it not promote labour market remedies that are likely to reduce the extent of long-term unemployment arising from the recession? The employment effects of the 1990s recession were much shorter-lasting than those of the 1980s recession because of the liberalisation of labour markets. We need to return to those more liberal days, if not in the EU as a whole, at least in the UK.
The minimum wage is particularly important in times of falling employment – times through which it has never been tested. Its level can be set such that it does not significantly reduce employment during good economic times, but what then happens when jobs are lost?
Workers who lose their jobs generally have to take jobs in areas where they are less highly skilled and experienced. Whether it is because of the costs of retraining or the lower levels of productivity in alternative occupations, the wage an employer is willing to pay may be below the minimum wage – especially for the most vulnerable groups (the old, the young, the disabled and the poorly educated). If such people cannot get jobs quickly after losing a job, because the minimum wage prices them out, their skills deteriorate and their productivity falls further below the minimum wage and a vicious circles sets in. We then end up with an “insider outsider” labour market. That is something that we must avoid.