Tucked away in last month\’s Low Pay Commission report is research by the Institute for Fiscal Studies, estimating that for every 10% the minimum wage rises, the state saves between £560m and £680m in credits and benefits. With the minimum at a puny £5.91, the taxpayer is subsidising employers such as those signatories to pay people non-survivable wages.
Let\’s start at the very beginning shall we?
Wages are, by and large, set in a market. Some think that some of those wages are too low. Therefore some action must be taken to increase the incomes of those making those low wages.
No, you don\’t have to believe all of this, this is just laying out what some people do indeed believe.
OK, so who should pay the cost of increasing those incomes?
It is possible to raise the minimum wage, certainly. However, there are two points here. The first is that there are indeed unintended consequences of doing so. Yes, a minimum wage does increase unemployment….the level we\’ve got now doesn\’t cause all that much of it to be sure but we can see the effects where we\’d expect to see them: in the unemployment rates among the young and untrained.
However, a minimum wage of less than around 40%-45% of the average wages seems not to have large such effects. The same research also shows that a minimum wage of more than 45% of average wages does have large such effects.
Median wages in the UK are around £12 an hour. The current minimum wage is £5.91 I think. We\’re already over our danger limit there but not by much. Raising it to the living wage of £7.60 an hour (63% of median wages) would presumably have large such effects.
The second point about raising the minimum wage is who pays? It will be some combination of those employing low wage labour losing profits and customers of those businesses paying higher prices. As Chris Dillow has pointed out the consumers of products made with low wage labour tend to be those who themselves make low wages.
Or there\’s an alternative. We could simply give money to people who don\’t have enough. Could be a minimum income, could be tax credits, benefits, whatever.
(The third alternative which is to simply stop taxing the incomes of the poor is apparently regarded as beyond the pale. That income tax and NI are in fact the entire difference between the current minimum wage and the living wage is simply a numerical coincidence but an interesting one all the same. Working 37.5 hours a week for 52 weeks of the year would, if this income were not taxed, provide almost exactly the Joseph Rowntree Trust\’s estimation of the income required to not be living in poverty.)
But here\’s where the moral issue comes in. If we, as a society, state that an income of below whatever is immoral then it is up to us as that society to pay the higher incomes. It is not moral for us to dump the costs on some subset of employers or consumers. We have to put our money where our mouths are: that is, these higher incomes need to be provided through the tax and benefit systems, not through the minimum wage.
Which means that only options two and three are in fact moral. and of those two options the third seems to me to be by far the best. Simply raise the tax free allowance to the full year full time minimum wage and we\’re done.