Wednesday, February 23, 2011

A Brief Thought on this Month's Budget Surplus

A lot of Tories and right leaning media types seem to be rather happy about the higher than expected revenue for January this year. I really don't think it deserves such celebration.

It's worth pointing out that the higher revenue was due to higher income tax, and a fair bit of that was from self assesment returns due at the end of that month. It's then worth pointing out that these returns would have been for the tax year running from April 2009 to the end of March 2010 (when Labour were still in power).

So not necessarily something that the coaltion can take all the credit for.

Thursday, February 17, 2011

On Youth Unemployment and the Minimum Wage

Today's youth unemployment statistics are worrying, no doubt about that. Tim Worstall is pointing the finger of blame for squarely at the door of the minimum wage, I thought I'd take a look at the historic data and see what it shows.

The data in question can be found here (Specifically, Table 9, Datasets: YBVQ,YBVR,YBVS)

It's a bit of a short cut because the data is only for 18-24 year olds, so doesn't include 16 and 17 year olds, but I think it's close enough. In addition to the data for youth unemployment I've also included the data for the minimum wage and adjusted for average earnings. We can only go back as far as 1993, but this is a reasonably good time period since A) We were recovering from a recession and B) We didn't have a minimum wage.

So, here's a graph of the results:

So what conclusions can we reach from the dat, well since we can't see the 80's we unfortunately can't really prove anything on my preferred "it was Thatcher, Neoliberalism and Globalisation" line of reasoning. We can however see that there's not a huge amount of difference between the non minimum wage nineties and the minimum waged noughties, the latest figure is a little higher than the 90's figure but this could be put down to the greater severity of the recession and the current set of cuts.

There is one potential bit of support for the anti minimum wage argument in all this data, that is the rise in youth unemployment after 2004, this rise occured against a background of above average increases in the minimum wage despite the otherwise benign economic conditions. Unfortunately there's anther huge variable that throws a gigantic spanner in the works and that's that 2004 was the year that ten new eastern european nations joined the EU. While it's an acceptable argument that the minimum wage might have put employers of hiring, it's also quite reasonable to argue that employers hired foreign workers in preference to unskilled domestic workers.

All we can really say from the data is that if the minimum wgae had an affect on youth unemployment, the effect was not particularly signifigant. While the data may in parts indicate a relationship, it could easily be explained by other factors. All in all, I personally don't think the minimal benefits we'd see are worth the massive social costs.

Thursday, February 03, 2011

All About Industrial Policy:,Part 3 - Notes on Unemployment

The inspiration for this post all began with an argument I had with Tim Worstall over at Duncan's place over unemployment. I suggested that there was a relationship between trade policy and unemployment, Tim's rather scathing response was:
Eh? Trade causes unemployment does it? Well, that puts the kibosh on Keynesian economics then, doesn’t it: what with the insistence that employment is determined by aggregate demand.
Which to be honest, I thought rather missed the point. As a general rule, an increase in aggregate demand leads to a drop in unemployment, it is clear though that this rule doesn't describe the whole picture, that dealing with unemployment is more than just a case of fiddling with the right macroeconomic variables. To drive home this point, in 2007 at the height of an economic boom with demand by the bucketload, youth unemployment was 14.4%, it's clear that we need to look deeper to find the cause of unemployment.

At a basic level we can say that unemployment occurs when there is no demand for the available supply of Labour. This might be because there is no demand at all for labour, although it is often more likely that that the supply and demand are not compatible. Although there is a demand for labour, it is likely to be a demand for labour with specific skills not possesed by the available labour.

An obvious question at this point is: Why are jobs not being created that can make use of the available labour supply? To do this, we need to look at the process of job creation. One of the best descriptions of this process is the idea of Creative Destruction from the Austrian Economist, Joseph Schumpeter. Essentially, entepreneurs within a market economy will constantly be looking to put resources to their best use and even when jobs are lost, entepreneurs will find new uses for this newly available labour. I believe that this process as a whole goes on, but I think it's far from perfect.

Where we see unemployment, I believe that largely it is because the creative/destructive process within the economy has been unable to find a use for the available labour. It's at this point that we can bring the issue of trade. The starting point here is to imagine a world where wages are roughly equal, in this situation entrepreneurs have a huge range of options open to them. Once we start to add in competitor nations with lower wages to this world, many of the potential avenues of opportunity in the higher waged countries will dry up since as they will be unable to compete with lower priced competitors.

The point here is that the rise of foreign competition means that domestic entepreneurs have a harder time of things (they also have some advantages, but I'll cover these in a later post), making the process of job creation becomes more difficult. In a market economy, we have to accept the fact that jobs will be destroyed, what's important is that we look after those who lose their jobs, ideally by creating an environment where it's easy for them to find new jobs.

One reason I'm a fan of industrial policy is that it is clear that there are areas of the country and segments of the population for whom the job creation process as it stands is not working particularly well, jobs have been destroyed but not enough new jobs have been created. I'd like to see the government take a more active role in improving the situation.