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Osborne’s ‘living wage’ will help richer households the most

1 November 2015

3:09 PM

1 November 2015

3:09 PM

Last week’s tax credit debacle has highlighted how even well-informed people believe that the £9 minimum wage (misleadingly dubbed ‘living wage’ by the government) is a progressive measure that will help the poorest the most. The low-paid are being hit by tax credit cuts, it’s argued, but don’t worry, soon they’ll get a £9 minimum wage! In fact, the minimum wage only affects the lowest 4pc of workers, and a surprising number of them are second earners in wealthier households. So the biggest cash gains will go to the richest households.

The reality of the minimum wage always has been more complex than its proponents believe This problem was pointed out by the Office for Budget Responsibility on the day that George Osborne’s plan was published – but, perhaps understandably, the Treasury didn’t want to draw attention to it. I thought it worth a blog now.

Here’s the OBR document, showing which households will gain the most from a £9 minimum wage. The poorer households are on the left, and the richer are on the right.

 As the OBR explains:-

Although the [£9 minimum wage] boosts individuals’ earnings towards the lower end of the individual income distribution, it is expected to have a more even effect on the distribution of household incomes, since many workers affected will be households’ second earners. Indeed, around half the cash gains in household income may accrue to the top half of the household income distribution, in part because workers in higher income deciles that do gain from the measure will receive a larger average cash amount

Another problem with a £9 minimum wage is that it renders unemployed those whose skills are worth less than £9 an hour: the OBR calculates that 60,000 people – equivalent to the population of Aldershott or Margate – will out of work as a result of this measure. Again, here’s the OBR:-

We have assumed that the increased labour costs will lead to a reduction in total hours worked of around 0.4 per cent – split equally between reduced average hours and around 60,000 fewer people in employment

I’ve been struck by how there has been virtually no discussion about the fate of these people; they’re the soon-to-be-forgotten. Their losing their jobs (or never finding jobs) is seen to be the price worth paying for the minimum wage.

It’s also said that tax credits subsidise low wages; that supermarkets get away with paying far less because government tops it up. There is a certain logic to this, and I believed it at first. But I’ve since found out, to my surprise, that not a single economic study shows that wages are in any way lower because of tax credits. People will still move jobs for a higher wage.

This implies that wages will not rise when tax credits fall, contrary to the logic of George Osborne’s reform. Yes, he can up the wages of the few on the minimum wage. But the others will just lose out. Like the 60,000 soon to be dumped on the dole, they’re the casualties of this reform. They are the “price worth paying.”

Ed Miliband’s plan for an £8 minimum wage was a bad idea because it would cost jobs, increase immigration pressure and was a very bad way of tackling poverty. Far better reduce the effective tax rate on such people: under Osborne’s proposed tax credit system, some workers will end up keeping just 4p in every extra pound they earn, an effective tax rate of 96 per cent. But that’s a hard concept to grasp: a minimum wage is an easy concept. Deceptively so.

Just a few months ago, most Tories would have shared the above analysis: Miliband’s £8 minimum wage sounded generous, but wasn’t. Now that Osborne stole the policy and made it £9, most Tories now say it’s a good idea. This is what’s depressing about politics: the tribalism has a lobotomising effect. Policies are not scrutinised. There is a consensus behind the very bad idea of £9 minimum wage; even behind calling it a “living wage”. And a consensus means no debate.

It’s often asked why, if Britain is such a rich country, there is so much poverty around. The answer lies, at least in part, in the dismal quality of the debate. We could see this with Osborne’s tax credit cuts: a policy that would affect the lives of millions, passed by MPs who did not properly understand the impact that it would have. As Paul Ryan recently told his fellow Congressmen in his first speech as Speaker

When we do not follow regular order—when we rush to pass bills a lot of us do not understand—we are not doing our job. Only a fully functioning House can truly represent the people.

Amen to that. Successive politicians and policymakers have taken a superficial approach to poverty and reform, passing bills that they do not understand. There is much interest in policies that generate applause lines in speeches and (now) much interest in a power struggle with the Lords. But not nearly as much interest in how these policies affect those at the bottom.

 


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