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Newsletter: From Evidence to Action

Never let evidence get in the way of a good prejudice

BD  Live editorial commment by Steven Friedman of the Centre for the Study of Democracy

NEVER let evidence get in the way of a good prejudice — especially if its target is poor and working people. This core principle of the economic debate here and in much of the world seems sure to be much in fashion now that the government has announced plans to introduce a national minimum wage.

A legally enforced minimum wage is among the protections for working people that are routinely denounced by the economically correct here and abroad as a threat to growth and prosperity. Everyone knows, these arbiters of truth tell us, that paying working people more, protecting worker rights or using the law and policy to assist the poor will frighten away investment and curb economic growth.

But everyone does not know this and the list of those who don’t is beginning to include some rather unexpected names — such as the International Monetary Fund (IMF). Its World Economic Outlook, published in April, includes a chapter that discusses the findings of an IMF research exercise that examines the effect of reforms designed to free up markets in 16 economies, rich and "developing", which together accounted for 75% of world economic output last year. As the IMF has consistently advocated "freeing up" labour markets — in other words, removing protections for workers — it seems likely that its researchers expected to find that labour market reform was a strong boost to growth.

They did not. Labour market regulation, the IMF team reports, "is not found to have statistically significant effects" on the economy’s productivity. The document hastens to say that this may be a result of measurement problems, but this does not alter the point that the IMF’s evidence shows that freeing employers from the obligation to take worker interests into account does not hamper growth. On the contrary, a graph in the report suggests that the effect of labour reform on finance and business is slightly negative.

Another mainstream organisation that has produced findings likely to distress the economically correct is the Organisation for Economic Co-Operation and Development (OECD) which, of course, represents the largest economies. It produced a report on inequality last month that finds that it "drags down" growth. This turns on its head one of the pillars of economic correctness — the claim that inequality is not a problem because it stimulates growth and so ensures that we are all better off. If inequality hampers growth, of course, then many of the policies and laws that are regularly denounced for putting redistribution ahead of growth — including a national minimum wage — may be essential if we are to find a longer-term growth path.

Some economists reply that inequality does not always impede growth — they warn against replacing one sweeping orthodoxy, that inequality always aids growth, with another, that it always impedes it. But their point, too, that inequality’s effect on growth depends on circumstances, undermines the sloganeering insistence that economies always grow best when inequality is left alone and that any attempt to fix it is anti-growth. Given the tensions inequality causes in this country, it is hard to imagine how failing to curb it could help growth here.

Does the fact that the IMF can’t find that worker protection restricts growth and the OECD now argues that inequality may hold back the economy mean that the slogans we repeatedly hear in the economic debate will change? Unfortunately not.

When policy ideas reflect deeply held prejudices, it takes more than data to shift them — the IMF’s outlook document finds nothing strange about advocating precisely the reforms its research shows are not needed. Here and elsewhere, "ideas" remain part of mainstream debate for years, even when the evidence has discredited them. One of many obvious examples is the constant stream of myths about social grants and their harmful effects, which blithely ignore a mound of research showing that their effect is positive. The belief that too many rights for working people must be bad for the economy and society is a product of deeply held prejudices that go back hundreds of years. It is not produced by research or evidence and so cannot be overturned by them.

Fortunately, this does not mean that research evidence is a waste of time. Evidence doesn’t change ideas on its own. But it does tell those who take policy decisions what the likely effects will be. If a national minimum wage is introduced, and its effect is not what the doomsayers insist it will be, the prejudices may begin to erode as people get used to the new situation. There will still be voices insisting that the minimum wage is dooming us all to poverty but there may be less of them.

That some very mainstream organisations are beginning to acknowledge that some of their long-held positions are not supported by the evidence does suggest that the events of the past few years have shifted opinion and that the need to reduce inequality, offer more protection to working people and fight poverty are re-entering the mainstream. The key question, of course, is whether the people whose decisions shape our economy are listening and drawing the necessary conclusions.

• Friedman is director of the Centre for the Study of Democracy

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