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Treating companies mean will not keep them keen

Few beliefs are more fashionable in politics and economics than the view that companies respond best to a “treat them mean, keep them keen” approach. The award of a share in the Nobel memorial prize in economics this week to David Card will cement this belief — even though the honour was given for his research methods rather than his famous 1994 finding that a rise in the New Jersey minimum wage did not reduce employment.

Almost every week, wherever there is a social problem, politicians and economists, whatever their political bent, say the solution is to make life harder for business. In the UK, Card’s findings have encouraged parts of the Labour party to propose raising the national minimum wage to £15 an hour, higher than the median wage. Left-leaning economists say the move would raise productivity because companies will be forced to innovate to survive.

On the right, Prime Minister Boris Johnson makes the same point. In a recent speech, he argued life should be made difficult for companies so they would improve productivity. In the past, he said, they used “immigration as an excuse for failure to invest in people, in skills and in the equipment, the facilities, the machinery they need”.

In the US, the administration of Donald Trump believed tariffs strengthened the American companies that had to pay for them. The current administration is happy to raise corporate taxes in a bid to “build back better”. The EU is tightening regulations on automakers to lower costs of electric vehicles. In each case, we are told good things come from being beastly to business.

It is not just politicians who think business needs a good kicking to implement necessary change. The IMF this week said the Covid-19 pandemic — an event pretty bad for business — had “accelerated change across many sectors of the economy through greater automation and a transformation of workplaces” and looked forward to higher productivity growth as a result.

These policies are far from identical and some have redistributive or environmental ambitions at their heart, where politicians will admit quietly that the result will not be win-win for all. But in each case, competition and market forces are not seen as sufficient as a disciplining device on companies. Regulations and restrictions are the new game.

The question is whether the new attitude works. Card’s genius was in demonstrating that there are occasions when the answer is yes. Raising the burden on business through minimum wages did not hurt employment in New Jersey and this finding has been replicated across the US and in many countries. But, sadly, improved productivity has not been the reason companies have kept workers on. Research from the UK’s Low Pay Commission shows that in 20 years of experience in raising the minimum wage, it found “few specific examples . . . of employers succeeding in raising productivity”. Rather companies took lower profits, raised prices and, it found, “asking workers to work harder seems a worryingly common response”.

Far from the prospect of Brexit spurring a wave of investment as companies rushed to adapt to the burdens it imposed, the UK’s investment performance since 2016 has been woeful, according to Bank of England research, because companies could do more than complain. They could go elsewhere. Productivity experts are not expecting immigration curbs to raise productivity.

The pandemic might have jolted companies on to a higher productivity path for an undefined period, but I hope no policymaker would ever suggest repeating the crisis as an economic strategy.

While there are some exceptions, making life difficult for business does not improve corporate performance. “Treat them mean, keep them keen” is terrible advice for healthy relationships. It is just as bad in economic policy.

chris.giles@ft.com

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