Misunderstanding in wage benefits

In comments from earlier:

The aim is to remove the burden from the taxpayer of tax credits and housing benefit as subsidies to employers who don’t pay their staff enough to live on. If an employer can’t afford to pay their staff properly then they don’t have a viable business.

Out with subsidies! Nobody earning a “wage” should receive benefits – this can only work if employers pay what the job is worth. And for the record “no” jobs in marginal businesses are not worthwhile

This is getting the idea of in work benefits entirely arse about tit.

What someone gets paid for going to work is determined by those market processes. The supply of labour with those skills and the demand for labour with those skills.

It is indeed possible to construct models where this does not hold: monopsonist employers for example. But that\’s not a condition that holds in the UK at present. We really do not have one or two employers who are able to dictate wage rates. We have millions of employers who really are not colluding on the wages they offer.

In the absence of that workers are being offered the wages their labour is worth as determined by the market.

Now, as it happens, as a society we\’ve decided that for some people those wages \”aren\’t enough\”. Through some combination of morals, squeamishness, charitable impulse, whatever, we\’ve decided that trying to bring up a family on £6 an hour just isn\’t on. Therefore we\’ve set up a system whereby these people get an addition to their wages. Maybe this addition is too much and maybe it\’s not enough.

Two examples as to why we do this. Clearly, we don\’t expect someone with severe disabilities to pay their own way through life. That Down\’s Syndrome (serious case, not minor), quadriplegic, chronically ill person. They\’re just not going to earn the wages they need so we all chip in to help them.

Or say the family with many children: their wages are set by how valuable their work is in hte market. Their spending requirements by the size of their brood. We don\’t say that the employer should pay more to the man or woman with 6 children than to the couple with none. Thus it is us, as the society, that chips in to pay those higher costs, not the employer.

And that\’s the point of in work benefits. It isn\’t a subsidy to the employer. It\’s a subsidy to the employees. Your labour isn\’t worth what we think it ought to be. Thus, here, have some of our money.

We can test this quite simply. All those who think that in work benefits are a subsidy to employers. Obviously, if this were so, then cutting off such subsidies would lead to employers raising wages. Thus we should simply stop paying in work benefits and wages would rise.

Does anyone advocate this? No, they don\’t: they advocate that wages must be forced up first (that Living Wage) and this will reduce in work benefits. So the actual campaign itself is agreeing: these are not subsidies to employers. They are to employees.

As to jobs in marginal businesses not being worthwhile. Well, if the wages are raised and the business goes bust then, erm, there aren\’t any jobs at all and those who previously were getting £6 an hour will now be getting £0. I tend to think that\’s some value myself.

27 comments on “Misunderstanding in wage benefits

  1. By & large agree with you, Tim.
    On the other hand:
    Earlier this year I had the experience of steering an E.European lass through the benefits system. She was on minimum wage doing one of those low skill agricultural jobs. Managed to get enough tax credit etc to make the employment produce enough for her to eat as well as pay for accommodation. But I did start wondering what’s supposed to be achieved here. The employer can get away with offering minimum wage because there’s a vast oversupply of people like her who’ll graft very hard for very little. It’s a better option than living worse in Poland. So are we providing outdoor relief to Poles? Subsidising wealthy farmers? Subsidising the cost of fresh vegetables in the shops?

  2. Just to make things clear, that’s your tax credit system not ours. Here Moroccans do the same job for half minimum wage*, which figure I just Googled at 641€ per month. 641€/120 hours=5,34€ p/h or roughly £4.45

    *!!!?. Yes but this is Spain, remember.

  3. All those who think that in work benefits are a subsidy to employers. Obviously, if this were so, then cutting off such subsidies would lead to employers raising wages. Thus we should simply stop paying in work benefits and wages would rise.

    I think that’s a non sequitur, quite honestly. The cost of labour would rise, certainly, and those employers that could pass on the cost would do so, those that could not would go bust.

    It’s quite possible for it to be a subsidy to employers without its removal causing wages to rise.

    To take a similar case, if the subsidy to wind farms was removed, would the cost of electricity go up? No, it would not, because there are alternate sources of power. Land owners would just stop wind farming because it would become uneconomic.

  4. Tim, I don’t agree. If markets are efficient, the market price of labour will reflect rational expectation of in-work benefits. In other words, if employers know that workers’ wages will be topped up with benefits, they will bid down wages to below benefits level. That’s why a minimum wage is needed as a complement to in-work benefits – it prevents employers bidding down wages to the floor. I agree we have some inefficiency here, because the minimum wage also applies to those who don’t qualify for in-work benefits – notably young single men – and I don’t think it’s any accident that those are the people with the highest unemployment levels. But in general, if you have in-work benefits you must also have a minimum wage.

  5. Frances, do employers really set wages on the basis of knowing that an employee gets benefits. How much information do employers get of their employees benefits. Is it really worth the effort of the employer to adjust the wages they give for their employees, considering that every employee will have different benefits. Wages are advertised before a person gets the job, so unless the employer has a crystal ball, how will they know that the potential employee gets benefits. Some people can work on low pay without benefits because they have other sources of income, either family, savings, or low overheads.

  6. SBML

    The sort of benefits paid to average households at different pay levels are a matter of public record. So yes, I would expect employers to take into account the likelihood of benefits top-up, and to adjust the general wage level accordingly. Obviously they wouldn’t do so for each employee, but that’s not what I’m suggesting.

    It does not matter that wages are advertised prior to employment. People will apply for the job in the expectation of benefits top-up, too. Rational expectations apply to employees as much as employers.

  7. Can I make this a bit clearer? If the effect of in-work benefits is that the market clearing price of labour is lower than it would be without those benefits, then both employees and employers are pricing in the effect of benefits. Saying that only employees price in the effect of benefits is tantamount to saying that workers offer their labour at a lower price and employers tamely accept – which is clearly bonkers. If anything it is the other way round: employers offer work at a lower price and workers accept.

    It’s not true that in-work benefits only benefit workers, either. If the market clearing price of labour were higher, then we would also expect the rate of unemployment to be higher as firms that can’t afford the higher price cut employment or go out of business. However, firms that can afford a higher price but are at the minimum employment level required for efficient production would suffer reduced profits due to higher production costs, assuming those costs can’t be passed on to customers. Therefore employers (or rather shareholders) also benefit at the margin from in-work benefits paid to employees.

  8. Frances @ 9. I think you’re answering the question I posed at the beginning of the comments but “If the market clearing price of labour were higher…” is simply not going to happen. Not whilst there’s a continuing inflow of immigrants to stop the labour market clearing. The ‘benefit to workers’ as a whole is only a real benefit if the ‘workers’ are a closed supply. If it’s open the only workers benefiting are those entering the market & securing employment. Apart from that, the entire benefit passes to the employer.

  9. “Or say the family with many children: their wages are set by how valuable their work is in hte market. Their spending requirements by the size of their brood. We don’t say that the employer should pay more to the man or woman with 6 children than to the couple with none. Thus it is us, as the society, that chips in to pay those higher costs, not the employer.”

    WHAT?

  10. @ Frances, bis et al
    The major UK in-work benefits post-date rather than pre-date the National Minimum Wage.
    NMW is not a solution to the problem it is the cause of the problem by causing a major rise in unemployment which leads to a queue of applicants for every job.

  11. @ MellorSJ
    We live in what is supposed to be a democracy.
    Mrs Do-as-you-would-be-done-by is more popular than Mr Gradgrind. Live with it or emigrate.

  12. I’m sure I read somewhere (might have been Chris Dillow) that Gordon Brown brought in the minimum wage because he realised firms would reduce wages to account for tax credits.. Not sure if I’ve got that exactly right but near enough I think?..

  13. @ KJ
    Difficult since NMW was introduced in 1998 and working tax credits in 2003.
    That would mean Gordon Brown could predict the future.
    Just as he predicted the gold price, the banking crisis etc

  14. BIS

    If you are right that competition from cheaper external labour would prevent the market-clearing price from rising if benefits were ended, then in-work benefits can only be a Government subsidy to employers to employ British people instead of Poles and keep work in the UK instead of sending it to India. They amount to deliberate rigging of the labour market to discriminate against people who are legally here but don’t qualify for benefits. I think the EU might have something to say about that.

  15. KJ,

    thanks. I hadn’t read that from Chris Dillow but I’m pretty much in agreement with him. NMW is an essential counterpart to in-work benefits – not to protect employees or employers, but to protect taxpayers from being ripped off by both.

    I do realise that most people commenting here consider NMW to be the work of the devil, so they might find it a little difficult to accept the possibility that it could actually be a Good Thing.

  16. @ Frances

    You’re most welcome.. and I can say from direct personal experience (as one of Timmy’s *thick Northern lads*) that the NMW has indeed been a *Good Thing*.. for me and my family, at least..

  17. @ Francis
    Yes, I do think it to be the work of the devil’s disciples since it has put thousands of people out of work and reduced GDP/GNP hence impoverishing the country and especially those already poor. For, example, it has destroyed the UK Textile/clothing industry, partially directly and partially indirectly by making it impossible for M&S to sell goods while sticking to its previous policy of sourcing 99% from the UK.
    To prevent Asian women being underpaid when working part-time to supplement their family income it made sure that they earned *nothing*

  18. National Minimum Wage was part of New Labour’s 1997 manifesto and the Act was passed in 1998.
    WFTC was added and took effect in 1999. WTC, the main in-work benefit took effect from 2003.
    NMW is NOT a consequence of tax credits.

  19. NMW has mainly boundary effects.

    If you are worth a bit more than £6.08 an hour, it makes not a jot of difference. (Although I don’t earn a great deal, I’ve fallen into this category for at least the last 6 years)

    If you are worth a significant bit less (say £4.50 an hour), then in most cases it means you are unemployed, and on £0 an hour.

    If you are worth a fraction under the NMW, (e.g. £5.90/h), then it probably sees your wage bumped up a fraction, and you end up 18p/hour up on the deal. If you are worth a fraction over (say £6.15), you probably lose out, as odds are your employer will just lump you on NMW.

    I suspect there are more significant losers than winners for the whole business – but there we go. People who win out are happy, the losers generally don’t realize whose fault it is. (Thus it is that politics has operated for many years).

    As for tax credits, frankly I think its a stupid and wasteful system. It distorts the labor market by subsidizing nonviable jobs, and jacks down wages for those who don’t qualify for said credits because the fall into the wrong social engineering category (i.e. no kids and under 25).

    It wouldn’t be quite so galling if it wasn’t for the fact that most of said tax credits is just money that was taxed away in the first place.

    As for the labour market not clearing because of immigrant labour – welcome to the gobal village folks… either they come here and push down wages, or they stay where they are, and we send the work to them, reducing UK employment and thus pushing down wages – ultimately, it works out much the same.

  20. NMW all well and good, I earn in my day job quite a bit more per hour than that. And quite a bit less in a week than a full timer on NMW.
    Plenty of us part time workers who qualify for tax credits due to low total income. Not the fault of the employer paying low rate of pay, employer wanting only a part timer in my post as they do not see the need for a full timer.

  21. @John77

    I refer you to 3.28 (Page 23)

    Administering a tax credit system using employers also raises issues of
    confidentiality. This is partly because confidentiality is seen as valuable in itself. But a
    particular concern is that if employers were part of the information gathering and
    assessment process, they would be in a position to use the information to depress wages.
    To a large extent, however, the minimum wage will protect employees by establishing a
    floor for wages.

    http://www.hm-treasury.gov.uk/d/120.pdf

  22. @ KJ
    And *I* refer *you* to the date of the report. NMW was in the Labour Party Manifesto for the 1997 election. This report was drafted *after* the election.
    NMW was *not* introduced to support tax credits. Tax Credits were dreamed up after New Labour committed itself to NMW.
    Doctor Who is *fiction*

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