blogs.telegraph.co.uk/finance/jeremywarn...ally-raised-not-cut/
Minimum wage should be substantially raised, not cut
According to a report in this morning's Daily Telegraph, the Low Pay Commission is to have its terms of reference changed in a manner which would allow it to freeze or even cut the minimum wage if the economic uncertainty continues. This is wrong headed, not just morally, but economically. We should be substantially raising the minimum wage, not cutting it, particularly now with the economy down in the dumps.
Like motherhood and apple pie, everyone can agree that in theory at least it would be a very good thing if everyone was paid more. But there are of course powerful economic arguments why we cannot all be Rolls Royce owners. High pay for all undermines competitiveness and could render a lot of small, marginal businesses struggling to make ends meet redundant. It might also compound the problem of youth unemployment, since companies would tend to favour older, more experienced workers over younger ones if forced to pay a higher minimum, or what is sometimes called a "living wage". A third potential negative is that it might encourage undue and unsustainable levels of immigration.
Yet according to recent research conducted by the National Institute for Economic and Social Research for the Resolution Foundation, these dangers are massively over estimated. Indeed, the NIESR findes that in aggregate the reduction in conditional labour demand with the Living Wage is around 160,000, or just 0.5 per cent of the workforce. Admittedly, demand for young unskilled workers would be much more seriously affected – 300,000 according to the research – but this could presumably be mitigated through differential rates, as is already partially the case with the minimum wage.
As for the wider effects on UK competitiveness, I suspect these would be pretty limited too. Most big, internationally competitive companies operating in the UK already pay all their UK employees a living wage – recently defined as £7.20 an hour nationally and £8.30 for London (the minimum wage is currently £6.19 an hour with no London differential) – so they would be unaffected.
Low pay tends to be confined to four or five sectors which are largely immune to considerations of international competitiveness – wholesale and retail, hotels and catering, community and social services, seasonal agriculture, and less skilled intensive manufacturing. These industries substantially cater for domestic demand, and therefore cannot easily be offshored. To force them to pay more might therefore have inflationary consequences, but it wouldn't necessarily lead to significant loss of overall employment.
Some fellow "right" leaning commentators have told me I deserve to be taken out and shot for peddling "leftie nonsense". Wages should be left to the market to decide, and to the extent that there is a case for raising the living standards of the low paid, it should be done through tax cuts.
I don't necessarily quarrel with these suggestions, but consider this. To take those on the minimum wage – roughly £12,000 a year for a full time employee – totally out of income tax and national insurance would "cost", according to my back of the envelope calculations, something approaching £20bn. Such a tax cut is not feasible with the deficit still running at 8pc of GDP, and in any case would require offsetting spending cuts which really would begin to drill at the very foundations of the welfare state. The Coalition's little efforts at excavation really don't, despite Labour's squeals of outrage.
By contrast, substantially raising the minimum wage immediately addresses two major economic anomalies. One is the now perverse growth in corporate profits and cash accumulation. Rather than being recycled into the economy, which is what happens in normal times, corporate profits are being hoarded, further eating into demand. In the US, corporate profits as a proportion of GDP are at a record high. Wages, by contrast, are at a post war low. Again I don't lightly dismiss the right to make or even hoard profits, but things are getting seriously out of quilter. This is not the way capitalism is supposed to work, where wealth accumulation gets shared through trickle down effects. The division of spoils has reached a level which if unaddressed threatens to be dangerously destabilising, socially and politically.
The other issue concerns the use of means tested tax credits to top up people's take home pay. That the taxpayer should be subsidising low paid work in this way is totally absurd and should be ended as soon as possible. Indeed it explains quite a lot of Britain's economic predicament – with excessive levels of household borrowing and now fast growing government debt. Debt has become a substitute for income.
Unfortunately, the National Institute makes no attempt to model what the effects on government revenues would be from introducing a living wage, in terms of the savings on tax credits, other forms of benefit, and the gains from tax revenues, but they would obviously be quite substantially positive, allowing for compensating tax cuts to business.
I'm not saying that statutory introduction of a living wage would be without its downsides. The most serious of these is that it would be inflationary. Some small traders, already struggling to compete with the likes of Tesco, might be put out of business. But if phased in over time, the long term economic impact on domestic demand would be overwhelming positive and to my mind undoubtedly preferable to alternative approaches to demand management such as fiscal stimulus or further money printing.
By the way, there is quite a bit of Tory support for this line of argument. Matt Hancock MP last week articulated a not dissimilar agenda for dealing with the problem of low pay.
