Lord Freud’s words were wrong. His economic analysis wasn’t.

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October 17, 2014 by Paul Goldsmith

freud

Fact, unemployment for disabled people has remained stubbornly around the 50% mark for decades. Here is what Lord Freud had to say about that:

“Now, there is a small… there is a group, and I know exactly who you mean, where actually as you say they’re not worth the full wage and actually I’m going to go and think about that particular issue, whether there is something we can do nationally, and without distorting the whole thing, which actually if someone wants to work for £2 an hour, and it’s working can we actually…”

Those are Lord Freud’s exact words. The Government’s welfare minister was recorded responding to a question at a fringe meeting at the Conservative Party conference and this tape and the transcript got handed to the Labour Party. They kept it in their pockets for two weeks and brought it out at yesterday’s PMQs – at which the Government thought they would be able to bray about low inflation and unemployment figures.

Yes, Lord Freud is effectively saying that some workers were “not worth the full wage”. As you can imagine – he has been hit with a barrage of abuse from all around the political spectrum – from opposition MPs to members of his own party, to disability campaigners, to even the Prime Minister – who said “We pay the minimum wage, we are reforming disability benefits, we want to help disabled people in our country and we want to help more of them into work. And instead of casting aspersions, why does he not get back to talking about the economy.” Lord Freud has issued an unreserved apology, but Labour and others are still calling for his resignation.

Yet, Lord Freud’s comments, misjudged though they were, have obscured the actual message of what he was trying so clumsily to say. What has not been reported is what he said after this – which is that the universal credit could be used to make up the difference. Economics explains what difference this is.

Basic Labour market economic theory states 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. Many severely disabled people who would like to work thus can not do so. Markets are amoral. If a severely disabled person cannot produce more than the minimum wage’s worth of work, no employer will be able to profitably employ him. Some generous ones might do so at a loss, but we cannot assume that there will be enough of them.

As Sam Bowman points out in the Spectator, unemployment can have appalling effects on people’s self-worth and quality of life. Lifelong unemployment, compounded with the other extreme difficulties of severe disability, can be life-ruining. Lord Freud knows this, and, what’s more, whatever the politics of it, Freud’s comments were broadly correct. Saying that someone’s market value is a particular level is a claim of fact about how valuable their work can be to an employer. It has absolutely nothing to do with their moral worth as human beings.

Bowman also notes that many countries recognise this and subsidise firms for employing workers with disabilities. Denmark has a permanent wage subsidy scheme for disabled people, and the United States, France, the Czech Republic, New Zealand, Argentina and Slovakia all have lower minimum wages for disabled people, combined with disability benefits. (http://www.ilo.org/wcmsp5/groups/public/—ed_norm/ relconf/documents/meetingdocument/wcms_235287.pdf).

But, on the other hand – 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 Lord Freud 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’). Freud is suggesting that those with disabilities may want to be free to do the same without an employer breaking the law.

About three years’ ago, the US state of Ohio introduced some legislation that does exactly what Freud 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 Lord Freud 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.

50% of disabled people are unemployed. 93.6% of learning disabled are unemployed according to Ross Clark in the Times today. Lord David Freud is thinking outside the box for answers. Ed Miliband, what are YOU doing about it?

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