Actually it\’s a moral issue Polly

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.

6 thoughts on “Actually it\’s a moral issue Polly”

  1. Where the state also tops up wages with tax credits and benefits, there’s a subsidy in operation for bad employers, those who want to set wages uneconomically low, in the sense that nobody earning such wages could survive.

    This is not to disagree with you – taking the poorest out of taxation is of course the simplest and most moral way to act. But the employment market is distorted by benefits that subsidise bad employers at the expense of good ones.

  2. >for every 10% the minimum wage rises, the state saves between £560m and £680m in credits and benefits

    Fantastic! If that’s really true, then we can save the economy. Raise the minimum wage by 100%, and we save 5.6 to 6.8 billion. Raise it by 1000% and we save 56 to 68 billion. Hallelujah!

  3. Where the state also tops up wages with tax credits and benefits, there’s a subsidy in operation for bad employers, those who want to set wages uneconomically low, in the sense that nobody earning such wages could survive.

    Well, no. They would survive, only under conditions which society would find intolerable. Hence it is society which should pick up the bill, not an employer who is merely paying for the work done and not assuming responsibility for a person’s entire welfare.

  4. I hate the three main parties.
    However I did like the LibDem idea of raising the tax threshold to 10,000 .
    You earn less than 10,000 you don’t pay income tax.
    For example a couple on 10,000 ea get 20,000 pa.
    That will increase the incentive to work and get a lot of people off benefits.
    Simples

  5. Yes, the Lib Dems have got this almost right. But the £10k threshold seems to have been arrived at by taking £5.91, multiplying it by the average 1541 hours per year (equivalent to 46 weeks of 33.5 hours), then rounding up to the next thousand. Of course, the tendency on a low hourly rate is to have longer hours than that and rather fewer than 30 unproductive weekdays: a better multiplier would be around 2000, not 1541, with that suggesting a personal allowance of £12k.

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