Labour screws over the working poor, shoots self in foot (part 94)

Hurray! The National Minimum Wage has gone up from £5.52 to £5.73! According to the TUC, "More than one million workers will benefit"

Right. Let's assume that there are 1 million people on the NMW, working 25 hours a week each, all claiming Tax Credits (let's ignore Housing Benefit and Council Tax Benefit, or the calculations are too horrendous).

On a static basis, each of those workers will earn an extra £5.25 gross per week (25 hours x 21p), but net incomes only go up by £1.58 per week because they will pay an extra £1.63 tax/NI and lose £2.05 Tax Credits.

Next: the dynamic effect. The demand for labour is almost certainly price-elastic (in other words quantity demanded goes down by more than 1% for every 1% increase in cost), but for simplicity let's assume that quantity demanded goes down by the same amount as the increase in the cost to the employer of 3.8% (£5.73 ÷ £5.52), so 3.8% of those one million workers are made redundant.

OK, so 962,000 of the lowest paid workers will be £1.58 a week better off; and 38,000 - who previously had post-tax, post Tax Credits income of about £160 a week - will be getting £60 a week JSA instead. Collectively, those one million workers will be over £2 million worse off (962,000 x £1.58 minus 38,000 x £100).

It gets worse, of course.

The government will collect extra net taxes of £2.69* for each of those 962,000 workers who stay in work, but instead of paying £22 in Tax Credits less tax/NI to the other 38,000, it will be paying them £60 JSA. The Exchequer will benefit by over £1 million a week (962,000 x £2.69 minus 38,000 x £38).

What a storming result; the total income of the poorest households falls by £2 million a week, but the Exchequer collects an extra £1 million in taxes to pour into a Black Hole labelled Northern Rock/Bradford & Bingley/PFI/EU payments/Quangocracy etc**!

* Extra income tax/NI = £5.25 x 31%; Tax Credits withdrawn £5.25 x 39%; extra Employer's NI = 12.8% x £5.25, less corporation tax relief on the higher gross salary £5.92 x 28%. Tot those up gives me £2.69 per worker per week.

** Choose your own particular bugbear.