Monday 4 November 2013

A living wage

Well, you wouldn't start from here would you. What a bizarre place the modern UK has become. Gordon Brown's huge extension of tax credits and the general extension of welfare benefits has led to a large percentage of wages effectively being subsidised by the State. The damage that this has done cannot be under-estimated. Brown was a brilliant marxist economist, he knew full well what he was doing. Now so many people are dependent on state hand-outs that any threat to take them away can result in protest groups like UK Uncut being formed.

Ed Milliband's weekend whimsy has been to suggest that companies pay the living wage rather than the minimum wage. the difference is quite a lot, but far less then people imagine when taxes are taken into consideration - almost half the increase would go in NI and income tax anyway, plus benefits would be reduced for the higher income - leaving receivers of ed Milliband's promise probably no better off. The companies too would benefit for one year, so hardly and incentive to change or much of a reward for doing so. all this smoke and mirrors avoids the key question in any event, why are wages so low?

Well, firstly, free movement or labour has not helped the lowest paid as they face the heaviest competition for work from unskilled immigrants. Secondly, with input costs rising as the Pound has de-valued 25% since the recession, businesses have had to cope with increase costs, with prices hard to rise in a deep recession, wages took the brunt of the crunch. Thirdly, there are taxes, it is very expensive to employ people, less so at the bottom, but still expensive. This is why firms have moved to zero hours contracts and other ways of trying to avoid full-time recruitment, because the costs are prohibitive. Fourthly and finally, taxes are too high, this is related to the third point for employer taxes but also applies to the employees, too much of their wages go on taxes on council tax, fuel duty, VAT at 20% and so on - even though income taxes are low and nearly non-existent for low income households, other taxes are high, reducing their disposable income to be spent on real goods and services.

What is interesting is that Labour are sort of trying to come up with a partial solution to point three, but ignoring the other three. Current politics has become a game of band aid policies, with seemingly little attempt to alter under-lying dynamics. Above I have laid out the obvious, immediately changeable issues, with even mentioning the standard or schooling or the type of jobs being generated by the economy, both of which are harder for a 5 year Government to do too much about.


Blue Eyes said...

Tim Worstall often repeats his claim that if you took minimum wage salaries out of income tax the net pay of people on the current minimum wage would receive the same as people in the "living wage" would receive under the current tax regime. I haven't done the maths but it seems plausible.

I think Ed Miliband is reassuring his core vote that he is not going to simplify the tax system and reduce the need for public administrators.

Ryan said...

As I think I said before here, the system is a few years from collapsing.

As you correctly point out, the minimum wage and quite high levels of personal tax allowance plus the tax credits system means that you have many people on minimum wages that pay no tax at all but continue to benenfit hugely from free healthcare, subsidised housing, free school meals, free education etc. This is before you take into account the effect of the tax credit system. Is this a subsidy to the employees or the cheap-skate employers I wonder?

I believe the Daily Mail pointed out that if you do the maths the average family with an income of £36,000 per year pays no net tax at all. This seems quite plausible to me, certainly they pay very little in and definitely do not pay in more than they take out in healthcare, education and so on. This means that the burden of the state falls almost entirely on lawyers, doctors, engineers, architects and other middle-class professionals.

Now here's the rub: I struggle to get an appointment with my doctor because he refuses to work more than three days a week. One of my best friends takes a salary of £50,000 for a 4 day week because if he worked 5 days he would lose all their child benefit as well as being taxed at 40% (in other words, if he worked 5 days he would only increase his income by about 10%). Plenty of other middle class professionals I know are now putting as much money as possible into their pensions and thus claiming maximum tax relief specifically so they can retire at age 55 since work no longer pays (I'm one of them).

Brown achieved the Marxist dream of equal pay for all without a revolution, and now we are heading for the same outcome as all Marxist economies - a collapse in productivity as the "carrot" of capitalism has been taken away. It looks like the middle-classes who are always the ones that suffer most in a Marxist revolution, are the first to reject paying any more into the system, and are voting with their working hours and retirement funds. We should bear in mind that it was the taxpayer uprising of middle-class professionals in Greece that brought about the collapse in the economy there.

CityUnslicker said...

Quite right Ryan.

it left-wing handwiring about social justice, when the opposite is true. the only thing it has going for it is it is democratic to rob the few for the benefits of the many.

never lasts though, those capable either give up as your examples show or leave and go somewhere less oppressive that allows them to reap the rewards of their efforts.

CityUnslicker said...

Quite right Ryan.

it left-wing handwiring about social justice, when the opposite is true. the only thing it has going for it is it is democratic to rob the few for the benefits of the many.

never lasts though, those capable either give up as your examples show or leave and go somewhere less oppressive that allows them to reap the rewards of their efforts.

Bill Quango MP said...

Great post - I was thinking about this today and drew much the same conclusion.

On the phone ins the public said every business could afford to pay £5,000 pa extra / year / employee {excluding NI taxes} If this was so, why don't they? Why not just pay more and have better employees? Banks don't offer £100k bonus to get morons. {well..ok..let's leave that for now}.
if you could afford more, you would pay more.

One member of the public said if your business won't stand a £5k hit, you're not going to last long anyway. Which is true, but does assume there is only one employee. What if there are 10? That's a £50k hit. And how is the business to make that extra £50k?

Put up prices?
If it was that simple, why haven't they already done so?
Or cut costs ?

And the biggest costs to business are employment and rents. Everything else can be adjusted. Stock doesn't need buying if its not selling. Vans don't need fuel if they aren't running. But staff and rents/rates must be paid regardless.

So..If I was that employer looking at a £50k hit, I might consider going down to 7 employees.
That way the £50k wage increase is only £35k and the wage bill reduction is about £42k.

Give everyone a decent pay rise and even make £8k for yourself. Of course, for the 3 who are axed, well, don't worry.

the living benefits bandwagon will be rolling past very soon afterwards.

I can feel a post on Leon Blum or the 1937 Roosevelt years coming up again. I've done them before but its such a perfect historical study of what happens in the aftermath of a depression when government's and people think they deserve more than is available.

Blue Eyes said...

Tony Blair of all people understood Ryan's excellent point.

Blair said that public services has to appeal to the people who actually paid for them, otherwise support for paying for the services would vanish, leaving people who are not net contributors suffering.

As a single earner paying my own way I watch all the money get zapped from my pay packet each month and ask "what on Earth do I get in return?". I get safe, clean(ish) streets. I get to see my GP occasionally if I am offered the chance during the very narrow opening hours of the practice. That's about it. I don't mind so much paying for health "insurance" because I am fairly sure I will get old or die trying. But the rest of it? OK so I am happy to make a contribution to the education system because I believe that's important. But really, why am I paying so much every month in total? It really is a scandalous amount. I'm not a spectacularly high earner.

It just doesn't seem very fair on people like me. I would vote for a lower tax party if there was one, but they are all chasing the mums vote. At some tipping point, lots of people in my situation will see the thriving countries with lower tax burdens and think about moving there. At which point the UK tax base vanishes almost over night.

Pepperdyne said...

These gimmicks are vote-winners but do nothing to address the underlying issue.

Meanwhile it is bizarre how the tax credit system has become entrenched, taking money with one hand only to return it with the other. Only recycling it via a bureaucracy has its obvious costs.

There's a self-selecting aspect with the "living wage" where some employers will pay a premium in order to reward and retain staff. But not all workplaces will want this nor benefit from it.

Nobody is talking about QE, labour productivity or the other fundamentals that really determine prices and wages.

Electro-Kevin said...

If I were young and qualified I'd be off.

We were by far the highest earners and yet seemed to be the poorest in our street (by a considerable margin) at one point.

Now I know why.

john in cheshire said...

We need a General Pinochet to put us back on the track of normal. In an ideal world, the libdems would be rounded up and shot. The labour party would be consigned to gulags to make mail bags, every socialist would be given a month to leave to his favoured socialist utopia and the muslims in our midst would be allowed no more time to pack up and go back to wherever they hatched. It sounds ghastly, but when our paid servants have failed so fatally to uphold our civilisation, I can't honestly see anything less that will enable us to resume a life of normalcy. It is not possible to reason with the unreasonable and socialists/communists/fascists/greens/marxists/progressives - whatever they call themselves - are inherently unreasonable. And their muslim mates are no better. Of course, this lot exist at the highest levels of society; many think that money equals selfishness and callous disregard for individuals. Well, it does, but that's what constitutes left-wing beliefs. They love an ambiguous mankind, but they can't really stand the thought, let alone the sight of, the common man. You know, you and me. Those who don't happen to have the same hate-filled thoughts about everything and everyone.

andrew said...

all this is a consequence of imperfect globalisation.

there are a large number of jobs that can/have been outsourced to lower cost countries. there is also a large number of jobs that have an implicit salary ceiling as above that point that job can be replaced.

this is in contrast with some jobs that cannot be relocated like accountants, managers, doctors

people with jobs and money have chosen to put it in property- wise in some ways as we all have to live somewhere.
this tends to increase the price of property.

the people with money and the people without money have to eat the same food and live in the same houses.
so there has to be some sort of transfer payment.

argue about how big the transfer payment is and how it is given by all means.

personally I prefer something rather invisible like tax credits or the min wage rather than 'special' housing or 'special' shops.
or paying people to not work

CityUnslicker said...

Andrew I was with you until you said live in the same houses and eat the same food. What you are saying is there should be no fruit of labour. This is a terrible idea. With no difference between hard (physical or intellectual) work and not working or menial work then where is the incentive. productivity will collpase - which in fact is exactly what we have seen in the Uk relative to other Countries.

Blue Eyes said...

CU it's worse than that. I reckon people who are good at gaming the system can do *better* on welfare than by earning relatively good money. How come my hasn't-worked-for-decades neighbour can afford oak flooring and I am stuck with 1970s crappy carpet? How come so many of my "poor" neighbours (80% council tenants) have such flashy cars?

The really amazing thing is that most people still carry on working. We are the irrational majority.

john miller said...

Good post but I don't think Brown was brilliant, either as an economist or as a Marxist.

There are three people in the pub (sorry, Gordon, Temperance House), Brown, me and a big geezer.

Brown says, "I am going to create jobs and reduce unemployment!".

Then he says to me, "Give me a hundred quid!".

Then he says to the big geezer, "Here's seventy quid, go and dig a hole in the road".

Simples, really...

Bill Quango MP said...

Ever thus BE.

Why did my non working council neighbours from 1995 have Levi Jeans and trainers?
When I , who worked for the Levi Store, and got 40% discount, still couldn't afford those latest, must have, items?

Ryan said...

Here are some figures for you:

Minmimum wage jobs about £6 per hour, for a 40 hour week works out about £13,000 per year. Personal allowance is about £8000 so only £5000 of that will be taxed at about 20%, i.e. you will pay about £1000 in tax.

However, working tax credit is about £2000, child tax credit is about £2750 per child. So with 2 kids on a minimum wage you can claim about £7500. This, of course, is not taxed income so its actually worth the equivalent of about £9500 extra gross. So far from paying any tax your are actually getting subsidised to the tune of £8500 gross by other taxpayers.

Then there are the benefits - child benefit worth £1750 for two kids (also untaxed income). But then you have the less visible benefits like housing benefit, and free school meals. I would estimate that free school meals alone are worth another £1300 in savings for a family with 2 kids. Once again this is untaxed income.

So, what we have is a situation where Natalya, the Polish bog cleaner is paid £13,000 per year for her work as an unskilled cleaner whereas Dave in International Sales is working his ass off for his full bonus and getting paid £40,000 per year. These salaries are determined by the employer based on the employment market and the relative worth of these employees labour as determined by the free market in labour. The Labour Party has arranged the tax and benefits system to ignore the employers view of their employees worth such that Natalya and Dave actually end up with exactly the same net disposable income. This is the end goal of socialism - a complete levelling of the income structure, exactly the same as in a communist system but without the violent revolution.

Of course this system, as I have said earlier, has exactly the same problems as the communist system. The people that are normally the most valued and the most productive actually decline to produce any more. In a communist system you can at least threaten to shoot them (i.e. substitute the carrot of capitalism with the stick of communism) but in a socialist system you can't. Socialists always assumed if you achieved communism slowly enough it would be met with little resistance as people considered it to be preferable to capitalism. But the reality is that people like Dave the International Salesman say "I think I've worked enough now I'll retire, or only work 4 days a week, or drop this stressful job and go and work as a shelf-stacker in B&Q, or start up my own business as a tax avoidance scheme, or take redundancy when it is offered and get some of my NI contributions back until I can retire". Before you know it Dave has only paid significant tax for the 20 years he was raising kids when the socialist state had relied on him working his ass off for 40 years.

Of course, the enormously generous tax credit system implemented under Brown was unfunded by direct taxation of the middle class, so we have the bizarre spectacle of a "Tory" government trying to cut all other services in a desperate attempt to keep the tax credit system in place. Given that the people on less than £35,000 are paying almost no net tax, can you imagine how much the middle classes would have to pay if they were forced to pay tax for the current 20% government overspend? The 40% tax bracket would probably have to go up to 60% or more and nobody will want to pay that.

UnusualSuspect said...

Now, I like a good rant as much as the next person. Shouting at the dole-ys and pointing the finger at immigrants is very gratifying but its hardly a solution to anything, is it?

The first point that many on here dont want to hear is that property prices (and by extension rents and rates) are far, far, far too high. They need to be reduced in the order of 50% to get the economy moving. Saw a piece on the BBC about pop-up shops
Mentions that someone paid £100 to open a restaurant for ONE NIGHT!!!!! There is no way that the rentier economy should be sucking this level of income out of the economy. Simply no way.

Whats wrong in Britain is the demographic bulge. Too many bloody pensioners siphoning off services they didnt pay for and squatting on assets that govt policy is delibrately inflating to the detriment of the young. Here we have whining about people not paying enough taxes while thats whats been going on for decades with the boomers.

We need to increase taxation, but in tandem cut services. Let those who have benfitted from 1970s inflation and have strangled the economy with their exhuberant malinvestments pay for their own retirements. Why the hell should I lose free medical and school benefits for my kids when the boomers got everything handed to them?

Land valuation tax. If they dont like it, let em sell it off to pay for their own care.
My kids get less to pay for grannys swimming lessons? You can fuck right off, grandad.

andrew said...

@ cu,
Sorry, I will put the same thought in a different way :

As others have posted:
A person on min wage probably gets heavily subsidised by the state.
A household on less than 35k does not contribute to the state.

You can debate how big the subsidy is and when it becomes 0.0 and you start paying tax. Not going there.

In any event, a substantial fraction of the UK say 20%-60% (again the precise percentage is very debatable and your vmv) are in receipt of transfer payments.

These people participate in the same housing market as the rest of the country (through the rent the govt pays) and go to the same shops

As many jobs - mainly the unskilled ones - have moved to another country and some others have an implicit cap the downward pressure is currently focussed on the poor and unskilled.

Living in the uk is expensive for a number of reasons.

Because of this we make large transfer payments to lots of people.

This is expensive and unpopular (especially in places where most of the posters pay lots of tax)
and yes, leads to perverse consequences and disincentives to work.

What are the alternatives:-

(a) Don't pay any transfers - let them starve on the streets
(b) Poor houses - hide them away stop them breeding make them do some work
(c) Housing estates in the North East and special food shops - hide them away
(d) The current imperfect muddle we have
(e) A universal minimum income - administratively simple disincentive to work, I think the ussr tried this already
(f) A universal level income - administratively simple, removing any incentive to work

(g) something else I haven't thought of

To those who think making uk housing halve in value would help solve the problem, I would point out that we are an open and internationalised country, in the same way that there is an implicit ceiling on some salaries, there is an implicit floor on property prices.
... unless we wall England off from the rest of the world.

I dont like any of the answers but dislike (d) the least.

ReusableSuspect said...

"I would point out that we are an open and internationalised country, in the same way that there is an implicit ceiling on some salaries, there is an implicit floor on property prices."

Well, yes, but if the govt were serious about collecting taxes they could force registration of rented properties, but they dont.
If the govt were serious about collecting taxes they could introduce stamp/capital gains on property bought by foreigners. But they dont.
If the govt were serious about getting the economy going they wouldnt have introduced 'Help to Sell' for the underwater Tory voter who cant shift their property at inflated prices.

You highlight beautifully the stupidity rampant in policy making in this country; theres a floor on asset prices but a ceiling on the salaries used to purchase them.
Its got to be one or the other; subsidise peoples wages to a very high degree, or allow asset prices to fall to reflect the lower wages.

The only credible alternative is to tax the land value and encourage those on the fringes to find a buyer and a price.

But I say that you and many in govt are utterly terrified of the market pricing property either without current subsidies or with a new tax attached.

In my experience the situation is becoming so acute in many areas that we will see social movements, protest and violence with increasing frequency unless the govt act.

If it comes to a street fight between young hard-as-nails-ex-soldier-lads who have no jobs or housing and effette london gents with their 'portfolios' of northern housing, I know who I'd put my money on.

And, since the good burghers of C@W are so against subsidy and so pro- market pricing, theres only one way to go....

Need to sort your thinking out folks before the dispossessed get organised.

Ryan said...


"These people participate in the same housing market as the rest of the country": No they don't Andrew. The middle class pay more to buy themselves out of working class areas. Therefore the market for middle class housing is not the same as for working class housing. It is the transfer payments which actually push up the price of housing for the unemployed and the working class, because the limited supply of housing in the UK forces councils with a statutory obligation to house those with children to rent out housing at any price and simply pass the cost onto middle-class taxpayers. The price has therefore risen to the level that can succesfully be subsidised by the middle-class taxpayer.

As for your other assumptions:-

(a) Don't pay any transfers - let them starve on the streets: Why not? What's the moral imperative? I have my family to support and I know how best to do it - why am I compelled to support someone else's? Was life before the welfare state any worse than now - crime was actually far lower.

(b) Poor houses - hide them away stop them breeding make them do some work: The only way to eat better is to grow more food. The only way to be better housed is to build more and better houses. Increased productivity is a good thing. Work is a good thing. Incentives to work less are not a good thing. Benefits are an incentive to work less. Flattening the income structure through transfers are an incetive to work less. The only way for the working class to be better off in the long term is actually for the working clas to produce more of the things they need.

(c) Housing estates in the North East and special food shops - hide them away: Or demolish towns in areas of low employment and move people to areas of higher employment to increase productivity perhaps? The quality of housing in the UK is in decline because not enough working class people are building houses - if you forced the middle classes and upper classes to do the building you wouldn't solve the problem (and you wouldn't have any doctors either).

(d) The current imperfect muddle we have: We don't have a muddle. We have a deliberate system aimed at producing a flat net disposable income. You now have to be earning >£70,000 a year before you actually have a disposable income greater than someone on a minimum wage but claiming all available tax credits and benefits. This is a chronic disincentive for the most productive to work for their bonus or to work extra hours or to take retirement late. Not good for the economy. The socialist economy we have now encourages the working class not to work at all and the middle class to not work very much.

(e) A universal minimum income - administratively simple disincentive to work, I think the ussr tried this already: Actually the Eastern bloc countries had (f). A minimum income is fine as long as it covers the full cost of the employee. At the moment US company Starbucks pays no corporate tax in the UK and employs people on a minimum wage paying almost no tax which doesn't cover their housing, education or healthcare. Is that right? Should we have a flat rate tax on everybody and the minimum wage be £6 per hour AFTER tax? Unemployment would go through the roof but at least we would know where we really were. We are subsidising our way into neverland economics.

(f) A universal level income - administratively simple, removing any incentive to work: The Eastern bloc countries had this system. Brain surgeons were paid the same as road sweepers. Many didn't appreciate it - they got sent to the gulags. There was no incentive for the brightest to come up with better ways of doing things so the eastern bloc economies stagnated in 1930s style factories while the West moved forward.

(g) something else I haven't thought of: Economics is all about incentivising greater productivity. Everything else is socialism and doomed to failure.

hovis said...

This is getting all rather intemperate.

On the one hand it being proposed it is awful the squeezed middle are reacting to effective incentives presented to them.

Whereas the benefit claimants and and low paid are wicked ... for are reacting to effective incentives presented to them.

Indeed Tax credits are a mess, and should never have been put in place. However the tone of blaming "scroungers" is a little misplaced when the majority of govt. spending is in essence corporate welfare for multinationals (and much of the middle class - including those doctors lawyers and accountants everyone is fond of mentioning.)

As to Ryan's point about letting people starve - indeed there is an incentive there, and it would be valid as long as the govt didnt suck tax out of everything at 20% plus.

But we collectively prefer (whether wrong or not is a different question) to think of ourselves as having some sort of social structure. Reference to the pre-welfare state days ignores the massive changes to the cohesiveness in solcial structure (i.e. less) that have taken place in teh last 60 years. You may think you can 'nudge' peoples behaviour ithout any increase in criminality. I really wouldnt bet on it, people with less to lose have more to gain.

Ryan said...

Difficult to follow what you are saying Hovis, but I want to clarify that I'm actually on the side of the low paid. I just know that flattening the income structures in the way that Labour have done is outright communism and will fail to deliver a better life for the poor just as it is failing to do right now and just as it has always failed to do.

What I am saying is this: the so-called middle class (on £35000 per year income or more) make up just 10% of the population. In this class are the doctors and architects and engineers etc. They are paid more because they are scarce. Employers don't want to pay them more, but the market forces them to pay more. Because these people are relatively scarce we want them to work more not less. Taxing them till their pips squeak does not incentivise them to work more - it actually counter-acts the incentive of high pay from the employer and discourages them from working at all. This is actually happening to all the high earners living in my street - they are looking at working less or working less hard or not working at all. Many jealous people won't give a damn about that today - but when they can't get an appointment with a doctor they complain like hell. And of course, you can't tax them at all if they've given up work. And even if you do tax them all you are getting back is paper cash - not the stuff like a new house you really need them to give you.

At the bottom end you have working class people that need houses. Socialists seem to believe that if you bung them other people's cash this will allow them to buy houses. Of course if the houses haven't been built it will not allow them to buy houses - it will simply push up the prices of housing for working class people until it is nearly the same as for middle-class people, just as it is today. So socialist wealth transfer really doesn't work, does it?

What you need is more houses. But the doctors and lawyers aren't going to build them for you - they are busy doing their thing, which is what you want them to do. You need the working class to build more of their own housing and the government needs to get out of the way and let them get on with it. Nothing to do with socialism. Socialism is therefore a distraction. Transfer of wealth is a distraction. Stop doing it and let the people work themselves wealthier.

Now do you understand?

Blue Eyes said...

I don't think anyone is being intemperate or blaming scroungers. We are discussing a system which rational people respond to by working less.

£70k is how much you have to earn to reach escape velocity? That sounds plausible. What do MPs earn including expenses? Meanwhile the people who are actually sweating to sell stuff to the global market are being stuffed by this bonkers assumption that every household should have x pairs of trainers and y holidays per year.

I am happy to pay for a system that stops people from starving or freezing. I am not happy for the current system which entitles non-earners and low-earners to a higher standard of living than I can afford myself.

andrew said...

BE: Listening to Today this morning, it sounds like a good number of the French are starting to agree with you.

WhyDontIjustRegisterAName? said...

As Anonymous Ryan said @2.48pm :
"As I think I said before here, the system is a few years from collapsing. "

Who here subscribes to that view?

(If we dont get many replies here, could we have a CU post on the matter?)