What reactions to the bonus cap tell us about pay controls

The Financial Times reports today that bankers may be changing their practice in response to a European Union cap on bank bonuses.

"We are not thinking of transferring people from London to Dubai tomorrow,” said one US banker. “But future growth in Africa could be led out of the Middle East or South Africa."

(Financial Times)

Advocates of minimum wage policies could learn a lot from this insight. Many will refer to data that shows that increases in the minimum wage don't correspond with proportional job losses. This is quite plausible, most of us find firing people incredibly unpleasant. The same goes for these banks. Firms would rather not shuffle existing jobs around the globle. There are non-monetary costs to laying off staff and upsetting their plans that we'd rather avoid once we've hired them.

This is less true of those who haven't been hired as potential employers feel much less empathy for those they do not know. We should be more concerned about the impact on jobs that do not yet exist. It is after all the unemployed who are most vulnerable and need new jobs most. Measuring the effects of a rise in the minimum wage on future jobs is complicated, but estimates do exist:

Neumark and Wascher’s study found that the elasticity of employment with respect to the minimum wage was -0.24. In other words, a 10% increase in the minimum wage led to a 2.4% decrease in the demand for labour.