« Why do politicians make bad decisions? | Main | Heresy of the week: The welfare state was created by capitalism, not socialism »

Work and prosperity
28 February 2013

Lower taxes for the working poor would be better than a living wage

Here’s a challenge: Looking over the last twenty years or so, can you name an issue on which the Conservative Party got it wrong, while the Labour Party turned out to be right?

This isn’t an improper question to be asking ourselves. After all, we all make mistakes – and learning from them is the best way of avoiding more in future.

If you’re still scratching your head (and it is easier to think of issues on which both parties have been wrong), a good answer would be the minimum wage – which was advocated and introduced by Labour and, for many years, opposed by the Conservatives. 

At the time, the main objection was that a wage floor would destroy jobs. However, as noted in a thought-provoking post for the Economist’s Free Exchange blog, the evidence is pretty clear that, in Britain, this has not happened. Indeed, the continuing ability of the British economy to create jobs in the near absence of growth is a wonder to behold.

But did the legislation succeed in pushing up wages (which was, after all, the point of it)? The answer to that is yes – and not only at the very bottom of the scale:

  • “...minimum wage increases may give both workers and employers an incentive to raise their productivity levels in order to preserve jobs: people work harder to justify the higher wage. That helps explain why minimum wage increases can influence pay higher up the income scale. That dynamic—that higher minimum wages often have less of an employment effect because they cause workers to exert more effort—is also something that left-leaning supporters of higher minimum wages should take into account.”

Emboldened by this evidence, there is growing clamour for a ‘living wage’ – so-called because an unsupplemented minimum wage is not enough to decently live on. 

However, the anonymous author of the Free Exchange blog warns us not to push our luck, pointing to the increasingly powerful forces of globalisation and automation:

  • “In occupations consisting of mostly routine work, it will be very easy for an employer to respond to higher costs by moving the job elsewhere or swapping in a machine. Think of check-out clerks. While many retailers have invested substantially in automated check-out, others have not, presumably because the cost difference between human and robot is not yet big enough to justify the change. It seems very probable that higher minimum wages will in some cases tip that balance.”

If that is the case, what can we do to improve the lot of low-paid workers? Well, we could always tax them less, as Tim Worstall suggests over at the Adam Smith Institute

  • “We've talked a lot around here about how the working poor should be lifted up entirely out of the income tax system. Get that personal allowance up to something like the full year, full time, minimum wage. And of course, national insurance would have to start at that point as well.”

In mentioning National Insurance, Worstall doesn’t just mean employees’ NI contributions, but employers’ contributions too. Citing evidence that the cost of the latter is effectively paid by employees in the form of lower wages, he comes to a very interesting conclusion:

  • “If we now include employers' NI as well as income tax and employees NI then simply raising the personal allowance (to all three) to the full year, full time, minimum wage would give workers a larger post tax income than the living wage would.”

Unlike the living wage, there’d be no incentive for employers to replace their workers with machines or to send their jobs to China; unlike job subsidies, there’d be no picking winners; and unlike tax credits (which is how minimum wages are topped-up at the moment), you’d have a direct uplift to wages and the associated boost to productivity. 


You must be logged in using Intense Debate, Wordpress, Twitter or Facebook to comment.

Register to get The Deep End delivered to your inbox.