Sunday, 5 July 2015

The Living Wage vs. Earning Subsidies

Is the Living Wage campaign just counterproductive?

There has been much discussion recently about the Living wage, or the lack thereof in many cases. The living wage represents the idea that the current UK minimum wage does not always provide enough to give people an adequate living. Living wage campaigners have two routes open to them – to argue that the minimum wage should be raised to living wage levels or to shame companies into paying their staff a living wage.

I am doubtful that either will succeed, but also that success with either would make a huge difference to the people at the bottom of the wage scale. The campaign to shame (and presumably boycott) companies would have to be pretty universal in order to overcome the competitive disadvantage such firms would face if they start paying their workers more than their competitors. This is a point Engels pointed out 150 years ago. Customers would have to voluntarily shop in the more expensive shops which pay the living wage instead of their cheaper rivals.

This explains the problem with imposing a higher minimum wage as well—that this will be passed on to consumers, many of whom are the low-paid people we wanted to help in the first place.

One recent line of attack is to highlight how much some major companies have been benefitting from the tax credit system. This is calculated by working out how much tax credit money is paid to assist the staff of the company in question.

The comparison is between the current situation (where companies with low-paid employees receive tax credits) and an alternative in which they would be forced to pay more and therefore the state would not have to pay as much.

This is a simple equation but it isn't a meaningful one. The question we face is about policy: Should we use tax credits to raise the living standards of low-paid workers or use minimum wage regulations?

If you change from one policy to the other it wouldn't simply mean that a cheque for the difference would be due. The important question for such an exercise is what represents the relevant counterfactual. If there were no tax credits this would not mean that firms would pay their staff more to get them to this income level. Their workers would just have less money in their pockets.

What about the alternative counterfactual that firms would be forced to pay the living wage? If companies were forced to pay their workers more then they would make all kinds of different decisions. Some would go out of business as they could not compete with foreign competition while some others would cut their workforce and replace them with machines.

But what about those businesses, like Tesco, which would survive and would not be able to employ robots or other technology to do the work? Firms would not respond by just paying their workers more and their shareholders and managers less. Firms might invest in labour saving equipment to reduce the number of staff they need, putting people out of work.

This would cut the tax credit bill, but it would not indicate any ‘subsidy’ to the corporations. The costs would pass mostly onto their customers, but also onto the unemployment bill where workers have lost their jobs.

Whichever way you look at it, tax credits don’t represent a simple subsidy to corporations (except in the cases I mention in my next blog). Some corporations will benefit from them of course, but at most a small fraction of the total cost of the tax credit scheme.

Some of the cost will go in administrative costs, lost incentives and economic inefficiencies. If any unintended group is likely to benefit it will be consumers (which means everyone) who get cheaper stuff, but mostly the scheme will help low-paid workers.

One reason some people are distrustful of the left is that they deem them incoherent or incompetent when it comes to economics and policy and I fear that campaigns like this do not do the egalitarian cause much good.

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