France Raises the Minimum Wage Rate
Crisis-stricken Greece had to cut its minimum wage by 22% in February this year – this was part of its agreement with the 'Troika' of lenders. For workers under the age of 25 the cut was an even bigger 32%.
Reuters at the time wistfully reported that this 'slashed the living standards of low-paid workers'. Presumably the author of the report would have rather seen them join the swelling ranks of the unemployed and retain a vague hope of a 'higher living standard' if their jobs ever came back.
Minimum wages raise no-one's living standard. They merely price unskilled workers out of the labor market. Not a single advance in living standards can be credited to so-called 'pro-labor' legislation – what raises real wages and living standards is the increase in capital per worker employed and the concomitant increase in economic productivity.
Political interference with wage rates historically often amounted to little more than a belated acknowledgment of the increase in real wages already achieved by the progressing market economy. However, the introduction of minimum wages redounds on all those whose labor is valued below the minimum wage rate in the marketplace. They become permanently unemployed – minimum wage rates thus forever cement institutional unemployment.
As Ludwig von Mises notes in Human Action:
“The market wage rate tends toward a height at which all those eager to earn wages get jobs and all those eager to employ workers can hire as many as they want. It tends toward the establishment of what is nowadays called full employment. Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment.
But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point, institutional unemployment emerges. While there prevails on the unhampered labor market a tendency for catallactic unemployment to disappear, institutional unemployment cannot disappear as long as the government or the unions arc successful in the enforcement of their fiat.
If the minimum wage rate refers only to a part of the various occupations while other sectors of the labor market are left free, those losing their jobs on its account enter the free branches of business and increase the supply of labor in them. When unionism was restricted to skilled labor mainly, the wage rise achieved by the unions did not lead to institutional unemployment. It merely lowered the height of wage rates in those branches in which there were no efficient unions or no unions at all. 'The corollary of the rise in wages for organized workers was a drop in wages for unorganized workers. But with the spread of government interference with wages and with government support of unionism, conditions have changed. Institutional unemployment has become a chronic or permanent mass phenomenon.”
The laws of economics can not be altered by political fiat. What Mises describes above is the inevitable result of instituting minimum wage rates. It follows from this that raising the minimum wage rate will increase institutional unemployment even further. The government is thereby depriving the poorest members of society of their dignity: they can no longer find work even if they would be perfectly willing to accept a lower wage. If they do agree to lower pay, both they and their employers become criminally liable – regardless of the voluntary nature of the agreement. In today's welfare nations, these workers all become either parts of the 'shadow economy' – and thereby criminals – or wards of the State, forever dependent on the government's largesse.
The title of today's article is a reference to Fred Sheehan's excellent analysis of interventionists of Hollande's ilk. As Sheehan wrote:
“Presidential candidate François Hollande, as is true of Federal Reserve Chairman Ben Bernanke, believes he can order nature around. Both have lived inside the fishbowl their entire adult lives.”
A Tragicomedy of Economic Error
Hollande insists that he won't let markets dictate his policies. He seems to believe, as though he were invested with divine powers, that the laws of economics don't apply to his government. This is akin to believing that one can repeal gravity or order the sun to shine on a rainy day. It betrays a frightening degree of economic ignorance.
Hollande's decision to raise the minimum wage – yet another in a series of inane policies put in place in the short time since he came to power- will do yet more harm to the French economy. Unfortunately it also threatens to intensify the euro area's debt crisis down the road.
It already does great harm by sending a detrimental signal to everybody else: 'See, we can do what we like. There is no need to reform the economy.'
Reuters reports that the hike in the minimum wage was a bone thrown to unions and an attempt to 'soften the blow' of 'tax hikes and a spending freeze' the government is forced to introduce in order to meet the goals of the EU's new fiscal compact. The basic assumptions introduced in the article remain unquestioned, although central bank governor Christian Noyer is quoted as warning not to take the current complacency in the financial markets for granted.
“France's new government announced a cosmetic 2 percent increase in the minimum wage on Tuesday as it seeks to soften the blow from tax hikes and spending freezes to the struggling economy.
President Francois Hollande is pushing for Europe to refocus away from austerity towards measures to boost growth and is relying at home largely on planned tax increases to shrink the public deficit within a target of 4.5 percent of gross domestic product by the end of 2012.
But he faces an uphill struggle, as national statistics agency Insee forecast that economic growth in 2012 would remain feeble at 0.4 percent and that the unemployment rate would reach 10.3 percent from 10 percent currently.
Hollande's five-week-old Socialist government will drop 1 billion euros ($1.25 billion) of planned spending this year, on top of a three-year spending freeze that kicks in 2013, Budget Minister Jerome Cahuzac said. Eager to show that belt-tightening is not its sole concern, the government agreed to raise the minimum wage from July 1 by 2 percent, although the increase fell far short of union demands.
Prime Minister Jean-Marc Ayrault told cabinet ministers on Monday that overall spending at ministries and regional government departments would be frozen from 2013 for three years, excluding debt costs and pensions. France has avoided deeper cuts thanks to investors who shun debtors such as Spain or Italy but want better returns than they can get on German debt, seen as the ultimate euro safe haven.
French central bank Governor Christian Noyer warned the country not to take the market's confidence for granted.
"The market is convinced that France is determined to stick to the targets for improving the public finances," Noyer told journalists at news conference. "As always with market trends, we must be careful to remain on track and not drift because the markets are volatile and can change opinion very quickly," he added.
As data showed France running a growing current account deficit, he also urged the country to become more competitive. The economy is set to eke out quarterly growth of 0.1 percent in the third quarter and 0.2 percent from October to December, while inflation is expected to fall to 2.0 percent this year from 2.3 percent in 2011.”
How exactly is a hike in the minimum wage supposed to 'soften the blow of tax hikes'? It is likely to do the exact opposite: it will add to the pressure. Businesses whose existence is already threatened by tax increases will see their costs rise yet again and will consequently be forced to let some of their unskilled workers go. These workers in turn will no longer contribute to economic growth and become a liability for the government to boot as they will henceforth be on the dole. On an economy-wide basis a 2% increase in the minimum wage rate is certainly not merely 'cosmetic'.
In France, institutional unemployment has already been revealed as being stuck at a very high level even during the 'good times' of the previous boom. At its lowest point the unemployment rate was at 7.5% – hardly what one would call a rousing success.
France's unemployment rate since January of 2000. Even at the height of the last boom it never managed to drop below 7.5%. This proves that labor market rigidities have cemented institutional unemployment – click chart for better resolution.
As the chart below shows, over the past 22 years the French minimum wage rate has been consistently hiked at a rate far in excess of the increase in CPI (admittedly CPI is not a reliable measure of the 'general price level', which simply cannot be measured with any precision – but it suffices as a rough guide).
France's minimum wage rate compared to CPI since 1990 (chart via Reuters) - click chart for better resolution.
To the extent that the productivity of the lowest paid workers is either equal to or exceeding the growing gap between prices and these wage increases, no harm is done. This is however a highly dubious proposition. How big an increase in productivity can one expect from unskilled workers? There are of course many jobs in which even relatively unskilled laborers can experience a boost in their productivity due to the employment of new capital. Consider for instance the scanning devices used by cashiers, which have replaced the cumbersome and error-prone cash registers of yore that required cashiers to manually type in every price.
However, new capital investment always involves the question of the alternative uses capital could be employed for. As Friedrich Hayek once pointed out in a lengthy interview with John O'Sullivan, the success of trade unions to raise the wages of certain industries led to massive capital investment in these particular industries to make them more efficient. Where wages have been driven up the fastest, capital investment has also increased the fastest.
On the surface this may appear to be beneficial: after all, the industries concerned are now are able to afford the higher wages the unions demand. However, the fact of the matter is that capital is scarce – so these investments must happen at the expense of all other industries. The great mass of workers can not be better equipped as a result.
By forcing employers to accept uncompetitive wage rates in certain industries and forcing them to increase their capital spending to make up for the higher wage costs, the wage rates of all other workers will remain lower than they would otherwise be – or even worse, these workers will simply become unemployed. As a rule, it is precisely the workers who would need new capital investment most urgently that are deprived of it, as the efforts of unions to increase wages are most likely to succeed in industries which already employ a great deal of capital per worker (as an example take the German car industry: the 'IG Metall' metalworkers union routinely achieves the highest wage increases for its members in Germany).
Friedrich Hayek interviewed by John O'Sullivan in 1985. The passage relevant to this article begins at roughly 1:04.
France and Germany at Odds – A Grave Danger for the EU
It has in the meantime turned out that Francois Hollande sees himself as the champion of the fiscally challenged 'Club Med' nations, in opposition to Germany. The German-French axis that worked comparatively well while Nicolas Sarkozy was still president of France has been rendered asunder.
As German news magazine 'Der Spiegel' reports:
“The main reason that the Europeans are muddling through the crisis so ineptly is that the continent remains divided on a central issue. Some countries, like Germany, the Netherlands and Finland, insist on fiscal discipline, while most of the other countries are calling for financial transfers from the wealthy north to the poorer south.
The German Chancellor is the head of the first group, while French President François Hollande is the leader of the second. As a result, the German-French tandem which used to set the tone in Europe, until former President Nicolas Sarkozy was voted out of office, has now been crippled.
At the G-20 summit in Los Cabos, Europe's leaders didn't even try to conceal this division. "We need fiscal discipline because we have a debt problem," Merkel demanded. Her adversary Hollande warned, on the other hand, that an overly rigid austerity policy would lead to recession.
At a meeting attended by Merkel, Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy last Friday, there was also no agreement at all on the core issues. Hollande wants to collectivize debts in the euro zone as much as possible. Merkel is against the idea, because it would require Germany to make the largest contribution. She would only be willing to make concessions on the issue, she said, if the individual countries agreed to relinquish a substantial share of their sovereignty on budgetary issues to Brussels. Hollande wants precisely the opposite approach, as he emphasized in Rome. For each piece of surrendered sovereignty, Germany would have to move a step closer toward solidarity, the Socialist president demanded.”
Hollande wants to put the cart before the horse: first Germany is supposed to agree to debt mutualization, and only afterward is control over budgets and economic reform to be tackled. His secret hope is probably that the second part can then be skipped altogether and Germany will simply end up paying for everybody's profligacy in perpetuity. The split between these two 'core' countries now threatens the entire EU. The article in 'Der Spiegel' continues:
“The conflict between the two leaders extends well beyond questions of policy. Hollande waged an election campaign against German dominance in Europe. As a result, he became the voice of, in particular, the Southern European countries, which are sharply opposed to German austerity policies. It's a role Hollande seems to enjoy.
"Our impression that Hollande would find his way back to being more willing to compromise after the elections was wrong," says a senior government official in Berlin. "Now he apparently wants to demonstrate that France is the leading power in Europe."
Merkel resents the Frenchman for gathering allies against her in the EU and even in Germany, and for taking the partisan fight into Europe's governing bodies. It seems as if the Germans and the French are about to embark on a battle for dominance in Europe — and in the middle of a serious crisis, of all times.”
As Peter Atwater points out in a recent article at Minyanville, this outbreak of nationalism and the persistent failure to formulate a common policy to tackle the euro area's problems is a typical feature of a declining social mood trend. Instead of cooperation, the negative social mood fosters an 'us versus them' climate. Meanwhile, the premier barometer of society's social mood – the stock market – shows us that it has deteriorated greatly:
The Euro-Stoxx 50 Index: its huge decline indicates that the social mood in Europe has turned extremely bleak - click chart for better resolution.
As Atwater points out, what once used to be referred to as the 'European leadership' actually no longer exists. It has splintered into a diverse group of far more narrow interest groups that are all pulling in different directions. When looking at a graphic that asks 'who is in charge?', one is immediately struck by the realization that no-one is.
Peter Atwater's depiction of the 'European leadership' – what used to be a large cohesive group has splintered into far more narrowly focused smaller groups that are pulling into different directions and are all primarily pursuing their own interests - click chart for better resolution.
Atwater remarks that his chart actually doesn't really do the situation justice anymore – in reality, even the smaller interest groups have begun to splinter further in many cases. For example, the ECB's governing council is no longer a monolith. It has become subject to a growing rift between the 'hawks' led by the German Bundesbank and the rest.
The new direction of France under Francois Hollande's presidency is yet another symptom of this ever more negative social mood backdrop. Germany's pleading for 'more Europe' is increasingly falling on deaf ears, even in Germany itself. Politically, 'more Europe' is no longer the dominant trend.
This is also why the hope expressed by J.H. De Soto that the euro will enforce economic reform may prove to be too optimistic: the euro may well break apart before such reforms are instituted or manage to bear fruit, simply because the major social forces driving the politics of the day are no longer in favor of retaining the common currency. Politicians increasingly see it as a straightjacket they no longer want to endure. They and their electorates both blame it for the economic crisis and believe that inflation – which a return to their national currencies would enable- will bring salvation.
Unfortunately, a break-up of the euro-zone may only be the first act in a far bigger break-up: that of the EU itself. Many of the things now taken for granted, such as free trade and freedom of movement for capital and people may be rescinded if the common currency falls apart. In fact, this seems a highly likely outcome: how else will the economically weaker nations keep their citizens from moving their capital abroad or the economically stronger nations keep economic refugees from overrunning them?
In the end, the unceasing attempts to create a European super-state may yet succeed in destroying all that was and is actually good about the EU.
Angela Merkel and Francois Hollande: increasingly at odds to the detriment of the euro area.
(Photo credit: Benoit Doppagne/dpa)
Charts by: BigCharts, Peter Atwater, Reuters, tradingeconomics.com
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