Minimum wage policies offer a lesson for advancement of farming

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The classical economic argument against an increased minimum wage is that increasing the cost of labour decreases demand for labour; job losses will concentrate in the worst paid sectors of the economy. [Shutterstock/Andrii Yalanskyi]

It is not the case that any minimum wage is bad. Equally true, it is not the case that any biofuels demand is bad. Empirical evidence finds that a set minimum wage is beneficial for economy and society. Likewise, biofuel demand contributes to advancing farming, writes Zoltán Szabó.

Zoltán Szabó is a sustainability consultant in bioeconomy.

The classical economic argument against an increased minimum wage is that increasing the cost of labour decreases demand for labour; job losses will concentrate in the worst paid sectors of the economy.

However, in those places where meaningfully large but not excessive increases to the minimum wage (or the introduction of a minimum wage) have been implemented (in those places where politics has overruled economists), the observable results in labour markets do not support the classical predictions.

A national minimum wage was introduced in the UK in 1999. Although the National Living Wage (NLW) was a significant intervention in the labour market, the Low Pay Commission report in 2016 found little effect on employment. The 2019 report finds that the labour market for NLW workers is generally positive.

A recent review of evidence shows that minimum wage increases in 29 US states where minimums exceed the federal standard have not led to economically meaningful job losses. Other cases, such as Germany and Hungary, offer similarly muted effects.

Anecdotal evidence shows that in today’s market environment, European farmers struggle to eke out a living. Copa-Cogeca found that profitability was a major problem.

A 2018 EU report focusing on profitability shows that the annual income per farmer in the EU had been about €20,000. Since an income of €20,000 is not an appealing prospect, it is no surprise that young farmers are few in number. Farm income is around 40% lower than non-agricultural income.

Farm income has been mostly flat in the past decade despite a decrease in the number of farmers and an increase in average farm size.

A European Parliament study has found that ‘structural statistics for EU agriculture make it clear that many farmers (at least a third, and more if other members of their household are included) also have other gainful activities.

In other words, many farmers rely on other incomes, given that revenue from farming alone is insufficient to maintain a decent standard of living.

In short, farmers and their employees struggle to earn a decent living, and farming presents economically bleak prospects to a younger generation that has other options. From 2008-2018, 2.3 million farmers left the sector and were not replaced. Some of their land remained in agriculture through farm consolidation; a significant amount was simply abandoned.

Farm profitability needs to be at the heart of agricultural policies. Cross-sectoral policies, whereby farming, climate and energy policies are coordinated, are necessary.

Arguably, the best way to improve farm incomes, other than subsidies, is to increase demand for the products that farms produce. Crop-based biofuels offer a way to provide price support to farmers with declining incomes. Unsurprisingly, farming associations support biofuels in Europe.

In direct contrast to some political rhetoric underpinning opposition to crop-based biofuels, even at their moderate volumes in the EU today biofuels have not actually increased agricultural prices.

The 2017 EU Renewable Energy Progress Report found that “EU ethanol consumption had a negligible impact on cereal prices”. The report also noted that lower biofuel demand for vegetable oils was a factor contributing to the fall in oils/fats prices.

Arguably, without biofuels, demand for farm products would be even lower, further aggravating the situation.

As Copa-Cogeca, CEPM, FEDIOL and other farming associations have stated, producing biofuels from arable crops in the EU has opened up new agricultural commodity markets for European farmers.

Biofuel production has encouraged investments on farm and into agricultural research, which in turn has allowed yields to be increased through improved techniques and new crop varieties. This is found to be beneficial for the production of food, feed and biofuels.

Moreover, jobs are created and maintained mostly in rural neighbourhoods – IRENA finds that 239 million jobs were supported directly and indirectly in the European Union by the production of liquid biofuels in 2018-2019.

As the evolution of the case of the minimum wage shows policy issues are not black and white.

The minimum wage debate shows that modest increases in the minimum wage have had positive impacts on employment and that even comparatively large increases have had such remarkably small impacts that they can be viewed as successful.

Importantly, none of this empirical evidence contradicts the basic economic reality that at a certain point minimum wage levels will depress employment. Instead, the empirical evidence makes clear that the policy should be about finding the right balance rather than allowing simplistic ideology to argue that no minimum wage would be the best policy for society.

Exactly the same situation holds true for crop-based biofuels produced in the EU, and ethanol in particular. A mix of over-simplified economic theory and ideology has misled a plurality of EU policymakers into believing that crop-based biofuels present no benefits, even though empirical evidence in 2020 makes that position indefensible.

Moreover, the evidence today makes clear that whatever the right balance is for crop-biofuels use in the EU, current volumes are too little.

Extreme arguments have been mobilised in both cases, such as suggesting a massive increase in the minimum wage or replacing all transport fuels with biofuels. However, business and industry, along with most policymakers, do not support these extremities. Moderation and context are sorely needed in the biofuels debate.

An increase in biofuels use in the European Union to 2030 is the obvious choice based on empirical data to advance social, climate and economic priorities. Without biofuels, farming in Europe is likely to continue to decline—resulting in job losses.

The decade between 2020 and 2030 should be used to tap the potential in biofuels to strengthen farming, by providing a stable market outlet – making the prospect of farming more alluring to young farmers.

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