Search This Blog

Monday, 20 June 2011

The dismal science of getting disabled people into the workplace

It's hard to find a better reason why people call economics the "dismal science" than the fact that when Philip Davies MP says that disabled people should work for less than the minimum wage to increase their chances of being taken on by employers, he is backed up by economic theory.

In case you didn't know, here is Davies quoted directly on Thursday 16th June in the House of Commons:

"If an employer is looking at two candidates, one who has got disabilities and one who hasn't, and they have got to pay them both the same rate, I invite you to guess which one the employer is more likely to take on. Given that some of those people with a learning disability clearly, by definition, cannot be as productive in their work as somebody who has not got a disability of that nature, then it was inevitable that, given the employer was going to have to pay them both the same, they were going to take on the person who was going to be more productive, less of a risk. My view is that for some people the national minimum wage may be more of a hindrance than a help.If those people who consider it is being a hindrance to them, and in my view that's some of the most vulnerable people in society, if they feel that for a short period of time, taking a lower rate of pay to help them get on their first rung of the jobs ladder, if they judge that that is a good thing, I don't see why we should be standing in their way."

Reaction to this statement has been fierce. The Conservative party quickly distanced themselves from them and  Labour's Anne Begg, chair of the work and pensions select committee, called the remarks "outrageous and unacceptable", saying they showed "what a warped world some Tories....inhabit."

Yet, if you study basic Labour market microeconomic theory, you will know that Davies has a point. It sates that an employer, when deciding whether or not to take on a new employee will look at two numbers. One is the wage that person demands (the marginal cost of the unit of labour) and one is the monetary value of the goods or services that person provides (the marginal revenue product of the unit of labour). Should the latter be greater than the former, then they will employ that person. Should someone with a disability not be as productive, they are less likely to be taken on.

In the example Davies gives, a rational (in economic terms) employer, faced with two candidates, one with disabilities and one without, to whom they would have to pay the minimum wage, will choose the candidate who will be the most productive, as that is the only way to compare them, unless one of them accepts below the minimum wage, which they are not allowed to do.

I imagine Philip Davies will feel this is a similar argument to those who feel that maternity laws are making it less likely that a woman of child bearing age will get chosen for a job over other people, given the assumption is made that in the short term they may be less productive. Effectively, the argument goes, maternity laws are more of a hindrance than a help.

Davies believes he has some supporting evidence - he said he had talked to people with mental health problems when he met recently with the charity Mind, and he said they agreed with his analysis.

But that's because his analysis is basic microeconomic theory, and basic microeconomics is a science, and a dismal science at that. Because Davies has missed the point about what the National Minimum Wage is for.

The National Minimum Wage (NMW) is about dignity. It's about being paid a decent wage for the work you do. The reason it was necessary is that basic economic theory suggested that the equilbrium wage (where demand for labour meets supply of labour) should be paid and sometimes that equilibrium wage was so low that it was impossible to live off it. So a minimum wage had to be set above that equilibrium

The NMW also aimed to solve another problem, which was that of the "unemployment trap". In basic terms if the benefits you get are more than, equal to, or not much less than what you would get paid in work then you may as well stay unemployed and get paid to do nothing. So the NMW was seen as a "supply-side" policy as it incentivised people to join or rejoin the workforce.

Someone who is registered disabled will get disability benefit, and the wage they would earn in employment really needs to be far enough above the benefit to make it worthwhile for them to take a job.

Where Davies has a point though is that sometimes it's about getting that first foot on the job ladder and proving yourself. Many young people are sometimes prepared to work as "interns" for free for as long as a year to get themselves on the job ladder (even though that's normally funded by the 'bank of mum and dad'). Davies is suggesting that those with disabilities may want to be free to do the same without an employer breaking the law.

Recently, the Associated Press raan a story about the Ohio legislation that does exactly what Davies is suggesting. Despite the vitroilic reaction, the mother of an autistic man working for below minimum wage in Ohio said that her son's new job "allows him to have a purpose in life....he has a place to go and a reason to get up in the morning. I don't care about the money."

Also, a single adult under the age of 24 is entitled to benefits of around £70 a week, but the minimum wage would give him more than £200 a week. We talk about the need to be a significant difference between benefits and the lowest wage, well this may indicate that there is. So should the state be not allowing those who wish to earn say £140 a week (double benefits earning) to do so?

My point is, like most ideas in economics, there are two sides to this story. Despite the insults and rage Davies invited, should we really be dismissing his analysis out of hand?

In these times of mass unemployment do we not want as many people as possible in work? In this time of a massive deficit would we not prefer people in jobs earning and paying tax to people not working and paying benefits?

If so then we really should look at every option seriously, however unpalatable. Even though I will admit this one is particularly unpalatable.


  1. I doubt anyone will be working for less than the minimum wage, merely that employers will be paying less than the minimum wage. In effect a wages subsidy will be in operation.

  2. Good point Lee. I suppose this would be a bit like the subsidies offered to employers to take on those who are long-term unemployed. The fact is that there are solutions to the problem that Philip Davies seems to highlight - but we have to acknowledge the problem exists first.

  3. "Basic microeconomics is a science"

    No, no, a thousand times no! It most certainly is not: neither is history, sociology or anything else sometimes designated (particularly by American universities, it seems) as 'social' or 'soft' sciences. They are not; there is no such thing, unless you mean 'science' in a very loose and colloquial sense. And this is not an attempt to downgrade their importance in any way: in fact, economics would benefit hugely if fewer economists stopped jealously trying to claim the label of 'science' that doesn't apply. (Take pride in your own domain!)

    Anyway, listening to the clip of his speech, I don't think Davies was suggesting a wage subsidy - but it's surely an obvious (and much preferable) alternative!