This bizarre argument that in work benefits are subsidies to companies

This is becoming an increasingly common mantra, that the payment of in work benefits is a subsidy to the profits of companies.

Who wins, when the government makes up the shortfall, between the poverty pay a shelf-packer earns and what he or she needs to live on? Not the worker, evidently; not the taxpayer, who may get a certain empathy boost from the fact that nobody\’s starving, but reaps no economic advantage from this bizarre system; not the supplier to the supermarket, who often has his or her own case to make about deals so bad they often amount to a mugging.

The only winners are the chains themselves….

What?

How has anyone managed to get themselves so 180 degrees the wrong way around?

OK, so let us take it as being true in each and every particular. The solution is thus very simple. Stop all in work benefits , the supermarkets will pay their workers more and their profits will fall.

Is anyone actually suggesting this? No.

Therefore they obviously don\’t believe their own diagnosis.

Which is correct: the diagnosis is wrong. In work benefits are not a subsidy to the supermarkets (or any other employers). They are a subsidy to our own consciences.

Here is the market value of labour. It is what it is. We don\’t have monoposony at this end of the labour market. Retailers aren\’t able to deliberately hold down wages. However, we as a nation, a culture, say that (however hard some of us scream that it shouldn\’t be so etc, this is the general view) to be left to live on that market value of labour is unfair. So, we\’ve a system by which we all chip in a bit from our higher earnings to send money to those with a low value to their labour.

This comes in gradations of course: no one at all objects to the subsidy of the short bus riders whose labour value is near zero, who would be starving in the streets without some subsidy. Many object to the excesses of the other end of the spectrum, where some people gain more than the median income in purely housing subsidies.

But these transfers, these benefits, are subsidies to our sense of what is right and wrong, not subsidies to the profits of the corporations. It\’s compensation from those of us who have a high value assigned to our labour by the market system to those who have a low value so assigned. We might well argue about how much compensation is due, about the effects on incentives, about marginal tax and benefit withdrawal rates, but you\’ve got to get well over into Ayn Rand style stuff before you find anyone who thinks that there shouldn\’t be any such compensation flowing at all.

Thing is though, you can see many people nodding their heads when this \”benefits are subsidies to corporations\” line being trotted out. And what\’s needed is some punchy point to show the absurdity of it. Which I\’ve not really found yet.

If in work benefits are a subsidy to employers, then out of work benefits must be a subsidy to unemployment?

30 comments on “This bizarre argument that in work benefits are subsidies to companies

  1. She quotes this by Clem Chambers

    “If you subtract state spending from total GDP, then subtract the tax take from what’s left and then deduct government borrowings, what remains in most developed countries approaches zero. There is little or no GDP left for the private sector. No wonder there isn’t any economic growth.”

    Analysis?

    Tim adds: It’s nonsense. State spending (total that is, not purchases of goods and services) is 40-50% in most large advanced countries. The tax take plus borrowing is 40-50% in most large countries, must be, for taxes plus borrowing = spending. Adding the two together is double counting. They are the debit and credit for the same thing.

    Recall, GDP is value added at market prices. Govt consumes (or gets to distribute perhaps) 40=50% of this. Not the 100% implied.

    This might still be too high, I’d certainly say it is, but that’s very different from the idea that govt is taking all of GDP.

  2. If we stopped in-work benefits, supermarkets would increase the pay of their low-paid staff – they’d have to or the staff would quit, because marginal deduction rates can already be 95.5% for a not untypical household (http://pb204.blogspot.com/2012/01/welfare-reform.html).

    However, the supermarkets would want to pass on the increased wage costs in higher prices. The only thing that would stop them would be if the benefits change made smaller shops relatively more competitive, because they already pay their staff better (some of the staff own the shops). I’m sceptical that this would be an important effect (there’s an interesting digression here, but I’m resisting the temptation to follow it).

    So my guess is that these in-work benefits are mainly subsidizing supermarket prices.

  3. Re. the Clem Chambers thing in Forbes: all it’s saying is that in the developed world the government budget typically approaches half the GDP. And then he counts it twice, as Tim says. I find it vaguely discouraging that the internet is cluttered up with this sort of stupidity being repeated.

  4. So now, suddenly, on this one issue, incentives no longer work?

    BTW, unemployment benefits aren’t a subsidy to ‘unemployment’, since there’s no such entity. They are a subsidy to the unemployed.

  5. @Tim,

    I thought that in a previous post, you had suggested that social housing was a subsidy to companies that employed the occupiers as they did not have to pay employees a wage sufficient to pay market rent. Am I confusing two different issues?

  6. Well pace Tim’s regular references to Tax Incidence elsewhere, one would presume that any subsidies would accrue to some combination of shareholders, customers & workers, not the corporation itself, which introduces the interesting conundrum that subsidising the lowest paid employees enables them to enjoy better wages.
    And yes, low pay benefits are a subsidy to employers, as are subsidised commuter fares & various other forms of state intervention.
    Supermarket shelves need stacking. To get them stacked supermarkets should either be paying the sort of rates that attract stackers because they can live on them or to find some other solution to stacking them. OK, it may be preferable to having people stacking shelves than on the dole but, in the latter case, you can’t get round the fact that, essentially, you’re paying them to dig holes then fill them in again. The behaviour of the employer is changed because of the payment of the benefit.
    I mentioned commuter subsidies above because it’s a much clearer case. Their are advantages to companies in operating in certain locations, say Central London. Commuter subsidies enable the companies to recruit from a much wider field of potential employees without having to offer higher wages. It may be that it benefits the economy as a whole that companies can locate in places that enable them to operate with better effect but you can’t get round the fact that you’re socialising a portion of their costs of doing so.

  7. “If we stopped in-work benefits, supermarkets would increase the pay of their low-paid staff – they’d have to or the staff would quit, ”

    They would only quit if they had an alternative that paid better (low pay still beats no pay)

    “However, the supermarkets would want to pass on the increased wage costs in higher prices.”

    Not necessarily, retail prices are typically not set by the cost of inputs but by what customers are willing to pay. If supermarkets could increase prices and still sell the same amount they would already have done so. (Revenues are a function of p and q not only of p)

  8. It’s not entirely a bizarre argument, it’s just that it’s all part of a complex system of pressures pushing one way or another.. and the ‘conscience subsidy’ you highlight is one of them.

    Someone, above, reasonably suggests that in the case of a supermarket shelf-stacker the benefits are a subsidy to the consumer. If the benefits were abolished, the incidence would likely fall on the consumer.

    A worker in a productive job where the value of his job can be judged by reference to the value of his production fits perfectly well with your example.. if the market objectively values his labour at X, but society believes he needs X + Y to live, then Y is a conscience subsidy. If the benefits were abolished then the incidence would be on the worker (then onto society) as the employer would not be able to employ said worker on an unsupported wage.

    When it comes to the people who earn minimum wage cleaning offices in central London.. well this is where I think that the benefits are a subsidy to profits.. and the system serves to enable employers to pay far less than they’d be willing to if necessary. I’m pretty sure that they all value clean offices at more than they pay to get them, so if the benefits were removed then they would pay more. Where the incidence would eventually fall is, of course, difficult to predict.. and will depend on the ability of each employer to shovel it off to someone else.

    Those who simplistically argue that benefits are a straigh subsidy to corporate profits are the same who argue that the incidence of tax falls only on company profits. They are fools. So are the people who think that the incidence is all on labour. The incidence is always on the person least able/willing to pass it on.

    The issue with in-work benefits is that the need to ease our conscience in one instance, enables exploitative practices in another.

  9. Emil, I assumed we would leave out-of-work benefits untouched, because neither Tim nor Zoe Williams suggested otherwise.

    My understanding of supermarket pricing is that whereas people have to buy stuff somewhere, supermarkets compete vigorously with each other and with other retailers. So prices are at about the level where a typical supermarket makes a sufficient return on investment. Atypically efficient supermarkets will make more.

  10. Incidentally, it occurs, if you take a reductio_ad_absurdum argument to topping up wages with benefits & did it to the level that employers’ labour costs were zero then there’d never be any incentive to innovate at all. About what happened under communism isn’t it?

  11. Emil (#7) said “retail prices are typically not set by the cost of inputs but by what customers are willing to pay. If supermarkets could increase prices and still sell the same amount they would already have done so”

    But the supermakets are (hopefully) operating in a competitive environment, so one supermarket can’t increase its prices significantly.

    The customer may be willing to pay more, because the product is worth more than the cost, but she won’t pay more if she can get it cheaper elsewhere.

    But if costs rise across the whole sector because of a change such as this, then all the supermarkets would be putting their prices up, so prices could rise.

    Yes, there’s a cap on that price rise, the value of the goods to the customer, but for many supermarket products that’s probably a lot higher than the price today (how much would you really be prepared to pay for food? Or soap?).

    As PaulB said (#2), prices might not go up in all shops because of family-run shops where employees aren’t so big a part of the cost base, but I can’t see that’s going to have a big impact (too small a part of the sector, and their prices tend to be higher anyway).

    Tim adds: “prices might not go up in all shops because of family-run shops where employees aren’t so big a part of the cost base”

    Slightly bizarre argument. Small shops are more labour intensive than supermarkets.

  12. Whenever I can steel myself against the desire to make myself feel good for no good reason, I have for 15 years refused to tip waiters and others of that Ilk. My reasoning was always that the employer should be paying that person properly, and if that had to be reflected in a higher price paid by me for a meal, or whatever, then so be it, I refuse (at least whenever I can resist the aforementioned desire) to be guilted into giving money to people where the obligation to give them money properly falls elsewhere.

    Is this off-topic? If not, what’s the sentiment towards this approach?

    Tim adds: As an ex-waiter I think it stinks.

    There’s something called the tax wedge. If the restaurant increases prices so as to have more money to pay higher wages then on that higher revenue they must pay: 20% VAT, 25% NI and then the waiter pays 20% income tax. For each £1 more you spend the waiter gets 35 p more money.

    If you tip then only the income tax is payable. So out of each £1 you tip the waiter gets 80 p more.

  13. Tim said: “If in work benefits are a subsidy to employers, then out of work benefits must be a subsidy to unemployment?”

    I thought they were. If we had no out of work benefits, wouldn’t we have less unemployment? Or have I missed something?

    In fact, isn’t that how the subsidy to employers actually works?

    If we don’t give in-work benefits (while still having out-of-work benefits), fewer people will be willing to work for low paid jobs (because the net benefit is less), and so the supply of low-paid labour will be smaller. So either demand has to fall (by supermarkets being more efficient) or the price (wages) has to rise.

    OK, I’m not saying it’s a 100% benefit to the employers, but surely some of it?

  14. @PeterRisdon

    If we’re not going to pay a ‘citizen’s basic income’, then we have to stop paying benefit as someone goes from unemployed to employed. Unfortunately a perverse incentive has to appear somewhere: because we give free jam to people earning nothing, and extract jam from those earning a lot, at some point we have to decide to take it away.
    I presume we don’t want to claw back all out-of-work benefits as soon as someone finds employment (with the ‘trap’ of perverse incentive that would create), so we have to taper benefits off as people earn more (to give a marginal tax rate of 50% or 70% or whatever).

    I agree that this might induce employees not to push so hard for higher pay (especially as that marginal tax rate rises towards 100%), but the incentive comes from the taper, not the existence of the benefit per se.

    @Alastair
    I think the difference wrt housing benefit is, as Emil says, the existence of alternatives. If it is expensive to live in SW3, then employers there will have to pay more for it to cover employees living in or travel to the borough, else they’ll be better off taking a lower paying in a cheaper part of town.

  15. “But if costs rise across the whole sector because of a change such as this, then all the supermarkets would be putting their prices up, so prices could rise.”

    Not necessarily, it depends on substitutes and price elasticity

  16. I’ve been a waiter as well as a tightwad.

    I’ve also been a kitchen porter, a scaffolding erector, an office temp, a data inputter, a removal man and God knows what else 20-dd years ago, and I wasn’t tipped in any of those jobs. I was paid properly, albeit poorly. Not sure I see the difference

  17. Emil (#16), yes, but the effect of substitutes will be less than usual because the supermarkets will also be trying to push up the cost of most of the substitutes.

    Of course there’s more radical substitutes such as growing your own veg, or not washing.

    I’m not saying the costs will rise 100% to cover the extra cost, but that there’s scope for significant price rises.

  18. Richard:

    there’s still the option of choosing relatively cheaper products than what you did before (which often tend to have lower gross profit per unit), dining out (McDonalds, luxury restaurant, whatever)

  19. Government spending includes a lot of transfer payments – pensions, welfare, child benefits, unemployment benefits. Transfer payments are not included in GDP, so the arithmetic wildly exaggerates government size in relation to the real economy.

  20. Let’s see – we have 1 million unemployed youth who get £50-odd per week while looking for work (which most of them do). Shelf-stackers get £200 for a full working week in a busy store or around £100 part-time in a quieter one.
    So why does anybody think Tesco wouldn’t be able to find shelf-stackers if everyone who demanded a “living wage” walked out?
    Well?

  21. John77, Knowing someone who used to be a shelf-stacker, it’s apparently hard work – need to get a lot stacked in the time. The million unemployed youth might not be up to it.

  22. John77

    The question is what would happen if Tesco had no choice but to pay a ‘living wage’.

    Would they pass the cost on to customers? Would they cut staff numbers and make people work harder? Would they depress other wages? Would they cut dividends? Would they take the hit on retained earnings and, thus, cut future investment?

    What we do know is that they wouldn’t stop stacking the shelves.

    That contrasts with, say, a manufacturing company which might stop manufacturing, or move manufacturing to an overseas elsewhere, if the minimum cost of employment in the UK was too high it to be economical for them to manufacture here.

    In the Tesco case, the benefits are (if we accept the premise that the stacker could not afford to live without the benefits on top of the wage) subsidizing something… as well as our consciences. We just don’t know what.

  23. @ Richard
    Not even the top 5% of them?
    Or were you trying to make a joke?
    @ The Thought Gang
    “The question is what would happen if Tesco had no choice but to pay a ‘living wage’.”
    “What we do know is that they wouldn’t stop stacking the shelves.”
    NO, we don’t. They might just leave stuff in cartons around the store for customers to pick up, as Kwik-Save used to do. Or they might only stack shelves overnight. Most likely shelf-stacking would be done wholly or partly by other staff in quiet periods (nil net wage cost). If it’s going to cost them more than the selling price of a tin, let alone the gross margin on that tin, to put it on the shelf at mid-day, Tesco just won’t bother. You may not have noticed but they have different ranges of goods in different stores because that is how to maximise profits.
    And if you check the data you will find that a lot of self-employed people earn less than the Unions’ definition of a “living wage” – in fact some definitions of “living wage” are higher than median income.

  24. John77

    I made no comment as to the adequacy of a ‘living wage’, or what it is, or what it is comparable to.. so whatever your issue is with the concept, it’s nowt to do with me,

    Re. the stacking of shelves, I took a wild leap of faith in assuming that Tesco would not adopt the Kwik-Save approach. Yes, they could.. though even that involves employing someone to move boxes around or somesuch. The rest of your potential responses all involve someone still stacking the shelves… which was kinda my point.

    Of course, Tesco will do whatever they think will maximise the profits. If it’s not worth paying someone a higher wage to stack shelves, they will not do it. If it is, then they will. Right now, given that Tesco (for it’s they who we seem to be focusing on) are quite the masters of ‘cost management’ and it’s fair to assume that they’ve done all their sums and decided that all the people they currently employ at ‘non-living’ wages deliver value for that wage. If they had to pay more then they’d do more sums.. but it’s fair to assume they wouldn’t just install 100% self-serve checkouts and expect customers just to pick their stuff off the back of the delivery truck.

  25. @ The Thought Gang
    OK, my issue is with the concept that you cannot live decently on less than this amount (£15k p.a. – £17k in London). Adjusting for inflation, the wage in my first job was less than half the current minimum, let alone “living”, wage and I was saving out of that.
    My issue with you is that you seem to swallow the idea that the minimum wage for shelf stacking could overnight come to exceed the *median* wage for females working in “sales and customer service”. Tesco can do a lot of things but not keep its skilled staff happy if they suddenly find they are getting paid less than a shelf-stacker.

  26. From the Guardian: “The only winners are the chains themselves….”

    In work benefits are a subsidy to consumers and a means for the government to try and influence inflation. Prices are lower and taxes higher than they might otherwise be.

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