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.
