The Laffer Curve

From today's City AM Forum (I can't find the article online yet, so I had to copy type. Please forgive any typos.)

By Harry Phibbs, a journalist at ConHome:

Hammond's virtue signalling on low wages is hypocritical

... There are alternatives the government could take that would help the low paid, and would also help reduce unemployment, rather than endangering jobs.

The first priority should be a sharp rise in the threshold for national insurance contributions.

Employees have to hand over 12 per cent of their earnings to the government on anything over £166 a week, so somebody on the national living wage working a 40 hour week has a significant tax bill [not to mention the 13.8% that the employer has to pay].

Raising the threshold would require the chancellor to find some savings in state spending. That's more challenging than just imposing a requirement on someone else and claiming the credit for it. But it would not be impossible to achieve.

Another priority to address is the Universal Credit earnings taper rate. Changing this would help make it more rewarding to be in work, rather than on welfare.

Before the Universal Credit reforms, people who accepted work really did end up with less money. This is no longer the case, but the taper rate means that for each £1 earned, 63p in benefits is [sic] lost. That is simply too steep a taper. After all, the Laffer Curve applies to the poor as well as the rich, so reducing the taper would reward work just as tax cuts do.

There is something awfully hypocritical about Philip Hammond and the government decrying "unacceptable" levels of low pay by employers, then grabbing a chunk of a salary so that it is even lower when it finally gets to the employee."

I've been saying all this for over a decade, but it's reassuring when others say it. The 67% overall marginal rate on wages over £100,000 a year* seems too high too me, but far less troubling than the 80% or 90% overall tax/taper/withdrawal rates faced by people on wages up to £20,000.

* Do the maths, this is mentioned even less often.

Economic Myths - imposing a minimum wage will always lead to falls in employment and output

Opponents (broadly, "right wingers") say that wage levels are set in a competitive market, so if the minimum wage is higher than this, this will cost jobs and reduce output. Defenders of minimum wages (broadly, "left wingers") say that it levels the playing field between exploitative employers and exploited workers and insist that any small fall in employment is a price worth paying.

Each side puts out their studies which purport to prove their theory. I'm not really convinced by either set of 'facts' as people are highly selective and tend to find what they are looking for.

(I personally am heartily indifferent about the National Minimum Wage, my view being that the best guarantee of workers' rights is a growing economy and full employment - i.e. get rid of VAT and supertaxes on employment income such as National Insurance Contributions. We can back this up with a Citizen's Income, which strengthens the bargaining position of potential workers slightly, especially when it comes to low-wage jobs.)

I have recently stumbled across a theory that says, evidence shows that the negative impact on employment and output was not only nowhere as bad as the doom-sayers predicted, but that in some situations, imposing a minimum wage can actually increase employment and output.

Sounds very counter-intuitive, but actually it makes sense. This is because most businesses have some monopoly/monopsony power (they are two sides of the same coin).

Let's start at the very beginning with a business in a perfectly competitive market where labour is the only variable cost with a given supply curve and a given demand curve. The level of output of the business in question would be 9 units, wages £10.40 and selling price £11, being the highest level of output before the business tips into losses:



The columns for marginal cost and revenue are the total cost/revenue at that level of output, minus the total cost/revenue if one unit less were produced and sold. The relevance of this will be explained further down.

(I am perfectly aware that no business knows exactly what its marginal costs per unit are, let alone what its marginal revenue per unit it, and that most businesses do some sales at a loss, whether by accident (budget overrun or customer doesn't pay) or by design (loss leaders). Nonetheless, businesses must have some collective intuitive grasp of this or they'd all be bankrupt. 'Home builders' are the crassest example of this, in the short term, more supply depresses prices and costs would increase rapidly).

So if a minimum wage of £12 is imposed, the business in a perfectly competitive market has to reduce output to 8 units, wages £12 and selling price £13, being the highest level of output before the business tips into losses. This is bad, and what the opponents predict:



As we well know, most businesses have some monopoly power (can restrict supply) and, especially if there is permanent un- or under-employment, a stronger bargaining position than potential employees, which we shall consider monopsony power for the purposes of this debate.

Such businesses (or industries) do not end up setting prices at just above costs, which is the optimum position for the economy as a whole. They choose the level of output which maximises profits, and you can't fault them for that. Some interpret this to mean that businesses (should) set output at the level at which any further increase in output means that marginal costs would exceed marginal revenue.



So this business restricts output and employment to 5 units sold for £16 each, total profits £44, wages of £7.20 per hour. There's no point going to 6 units - marginal costs £12 exceed marginal revenue £10 and profits would fall.

What happens if the minimum wage is set at £8 per hour? While average wages go up, the marginal cost goes down to a flat £8 for the first six units of labour. The new profit-maximising level of output is now 6 units sold for £15 each, total profits £42, wages of £8 per hour.

Higher wages, more jobs, more output, lower prices and monopoly profits (rent) shaved back a bit. What's not to like?



Yes, I know this is all hypothetical, but there are simply too many studies showing that there is no measurable negative impact of minimum wages on employment levels to simply be dismissed out of hand, however biased the authors. So I think that there is something in it, however difficult it is to explain.

Or maybe both sides (left wingers and right ringers) are half-right and the extra jobs in monopoly businesses cancel out (or outweigh) job losses in competitive businesses. This would still be a good thing, if those competitive businesses are only competitive because wages are depressed.

Free Lunch

Well, not much of a surprise...

Caffe Nero will no longer provide its staff with a free lunch while on shift following the introduction of the new National Living Wage. 

Employees at the coffee chain were told in a letter that the perk would end on 11 April following the introduction of the new minimum wage for over 25s of £7.20 per hour.

The company said the change in wages, which came into force on 1 April, will have a “significant financial impact of the business”  and they are therefore looking into new ways to cut down on costs. 

The thing with employee perks is that they're mutually beneficial. You can give people a sandwich which costs you x pence, but which the employee values at a higher value (which can be called y). And you give them that instead of z pence, which is somewhere between x and y. There's also some hard to calculate but useful things, like you can get product feedback from staff, and in the case of cafes, they stay on the premises.

Or, let's put in some made up numbers...

Let's imagine the current remuneration is:-
Wage: £6.50
Lunch Cost: 70p

But the employee sees it as:-
Wage: £6.50
Lunch Value: £1

If the government forces Nero to raise the wage to £7.20, and they want to keep their costs down to avoid raising prices, their only option is to replace the "lunch" with wage. You've removed their flexibility to replace a cash benefit with something else.

Great Analysis Deserves a Wider Audience

From the Cobden Centre, here.  I quote:

'What this exposes is that the principal determinant of productivity is not the relative skill and dedication of workers as suggested by the OECD’s figures, but the cost of employment.

An employer after paying employment and income taxes can less easily afford to pay a living wage in France and Italy. It seems bizarre that official indicators of productivity ignore employment costs, which is after all far more relevant to prospective employers.'

So, is that it then for witless Osborne's 'living wage' bollocks?

Sigh. Not again...

From here.

No, the 'living wage' won't cost Council's a single penny. However it will cost tax and rate payers.

Update.

Actually thinking about it a bit more carefully, what this is is an increase in 'benefits'….

Great! Now she knows what the do with the £300 a week she always seems to have left over...

The Problem of Minimum Wages

Paul Kirby, the former head of No 10s Policy Unit has written on his idea for raising the minimum wage. Here's his justification:-

Before I nail my colours to the mast on the right level for the Minimum Wage, here are some of the reasons why I believe it can be radically increased without backfiring:

1) Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage. 

But what everyone is always doing is competing with others in all but the most essential services. Give me £20 and force me to spend it on a luxury, I'd opt for either a takeaway curry feast, a blu-ray or some kindle books by PJ O'Rourke. Right now, I'd probably go for the first or 2nd choice. But if you raise minimum wage, it's going to push the price of the former up quite a lot, and have little effect on the latter two. Most of the cost of those is going abroad. Raising the minimum wage means that the foreign, automated option looks better.

Even regarding the industries he mentions (and actually, manufacturing does have some min wage jobs, how much does he think cleaners in factories earn?) you can consider the following:-

• Shops - more use of internet shopping
• Cafes - buy a Dolce Gusto machine when you want a nice coffee, use a Costa machine at a garage.
• Hotels - more use of automation such as electronic checking in systems. Cleaners replaced with Roombas.
• Cutting hair - buy a pair of clippers, opt for shorter haircuts to do them less often, have mums doing kids hair, choose the "dry cut" rather than "cut and blow dry" option.

2) Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need. 

But why do we need a minimum wage for that? If an employer can see it's worth investing in someone to improve productivity, why won't they just do that? The rest is basically garbage with the only correct thing being that it raises prices to consumers (so, yay, inflation!)

3) Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggests sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants. 

So what? It still raises costs. Still means you're going to send more manufacturing jobs abroad. Maybe people decide they'd rather have a dirty weekend in Paris instead of Brighton because it's tipped over into Paris being a better value proposition.

4) The current Minimum Wage is a very low baseline. Since it was created 15 years ago, the Minimum Wage has largely eliminated the exploitative wage rates ( in some cases only £1 per hour) which used to exist. A good, but limited job. But it is now just £6.31 and its value in the last few years has declined. It only covers 4% of employees, just 1m people. This rises to 6% in the North East and falls to 2.5% in London. 

It only covers a small percentage of employees because it's going to only be for jobs around that rate. If someone's labour is only worth £1/hour, their job no longer exists, replaced by either a robot or the work going to China. Or just not happening. Someone isn't going to pay someone £6/hour if the return on labour is £3/hour.

We don't know how many jobs at the £4-5/hr aren't being created.

5) We do not need to continue with a single National Minimum Wage. This has held down the wage to the lowest common denominator. Concerns about the impact in, say, Sheffield have left the Minimum Wage meaningless in London. We can and should have more than one geographically based level. 

No, we just don't need one. Give everyone a citizen's income and let the market sort it out. If someone can afford to live in London because they've got a massive inheritance from their aunt but like working in a Notting Hill bookshop for £5/hour because they can pick up intellectual chicks what's it to you? Why shold they move to Sheffield?

6) The Minimum Wage is an hourly rate, rather than a weekly wage. So it impacts on how many hours an employer wants to buy, rather than forcing a binary decision between hiring someone or not. The same is true for workers deciding how much to work.  Just over a quarter of employees are part-time ( nearly 7m people), but over 5m of these are women. More than 4 out of 10 women work part-time. Hourly rates for part-time workers are much lower than for full-time workers, e.g. the median hourly rate for full-time women is £12.00, but only £8.12 for part-time. So the Minimum Wage hourly rate could be a big deal for part-time workers.

It's the same problem whether you have 2 part-timers doing half a day or 1 full-timers.

7) There are a number of ways that the Government can compensate employers, if it wants to. Increasing wages helps the Treasury. It reduces the cost of in-work benefits and increases taxes. Moving to the Living Wage would make government nearly £4bn better off. For every £1 increase in low wages, the Government will be 50p better off. (Some say less because they have to pay public sector staff more. But I wouldn’t give into this. The public sector has many of the flexibilities of the private sector to soak it up – e.g. restrain pay growth for the better-off or improve productivity). Government could give some or all of this 50p back to employers. This could be across the board (e.g. via a cut in employer NI contribution). Or it could be highly  targeted. There are only two sectors which are seriously challenged by an increased Minimum Wage – retail/wholesale and hotels/catering. A key cost for both sectors is business rates. This could be reduced by a discounted rate specifically for their type of premises. 

But that assumes you've going to keep all the jobs, rather than losing some due to automation and global competition.

7) This is the right time to do it. Growth and optimism are back in the economy. Jobs are growing. Wages are rising. Those with the broadest shoulders were asked to take the strain of deficit reduction (e.g. reducing child benefit to higher rate taxpayers).  It is equally right that as the country gets richer again the poorest of the hard working families gets a bigger share of the new wealth. 

No, there's never any right time for a minimum wage. Not now, not ever, because minimum wages at the most fundamental level are a bad idea. If John is offering Bill £5/hr for his labour and John will pay no more, and no-one else will pay more than John, that is the value of Bill's labour. Saying "well, John should pay more" just isn't going to happen. John won't. You can appeal to his sense of morality or Christian goodness and if he still won't pay more, he won't. So, if you're then going say that John should pay Bill £10/hr, well, maybe John won't bother doing that thing. Or maybe he'll do it himself. Or he'll hire a company in China to do it. It's simply a problem that can't be solved.

Which doesn't mean we think that people shouldn't be looked after or that people shouldn't be living on more than £5/hour, but that's imposing society's moral views on an individual, which is a form of tragedy of the commons. If society wants Bill to live on more than £5/hour, society can pay Bill extra (and use CI rather than incentive-destroying means-tested benefits).

And it troubles me that the ex-policy unit bloke of No 10 can even think like this, and makes me wonder just what sort of cretinous thinking generally goes on in cabinet.

Just Fancy That - or "compare and contrast" - a déja vu edition

1. The Manchester Gazette yesterday, singing the praises of Hazel Blears’ work experience scheme.

2. The Manchester Gazette yesterday, on the subject of "A Fair Day’s Pay For A Fair Day’s Work" complete with a special mention of the work being put in on this important campaign by one Hazel Blears...

It further coincides with a renewed call last month by Salford and Eccles MP Hazel Blears for all employers, including her fellow Parliamentarians, to end the practice of offering unpaid internships. Not only are they unlawful, Ms Blears believes that they are morally wrong because they give an unfair advantage to young people from better off backgrounds who can afford to work for free.

She took to the floor of the House of Commons to ask Prime Minister David Cameron to ensure that the National Minimum Wage was enforced, and that there would be no “exploitation” of students graduating from university in her constituency, and from across the country, this summer. As the law stands, anyone who works set hours and has set responsibilities is entitled to be paid at least the National Minimum Wage.

So according to Hazel and apparently the Manchester Gazette it is (still) definitely the case that forcing graduates to take unpaid internships in order to gain experience is very very wrong, but having unemployed non-graduates do unpaid work experience under a scheme to which Hazel attaches her name is fine... especially if it offers up a "photo op" or two...

See also Just Fancy That - or "compare and contrast"

Just Fancy That - or "compare and contrast"

To be found at the personal web site of Hazel Blears MP

Item 1: Name and shame firms which use unpaid interns says Hazel

Hazel is calling on treasury chiefs to name and shame companies found to be employing unpaid interns.

Her Majesty’s Revenue and Customs has revealed that during 2012/13 it ordered nine firms to pay £200,000 to people who had worked for them as unpaid interns. But it has refused to identify any of the companies involved.

Under the law, anyone with set hours and responsibilities should be paid at least the National Minimum Wage.

Hazel called for Treasury officials to do more to enforce the law when she met with Treasury officials and employment minister Jo Swinson about the problem in January...

Item 2: Kids Without Connections was launched by Salford and Eccles MP Hazel Blears last year when young people did placements with local firms.

Ms Blears began the scheme after becoming increasingly concerned by the number of young people who told her they had missed out on jobs because they did not have the experience, but they could not get the experience because they had not had a job.

But within a couple of months of celebrating their involvement in the first Kids Without Connection at a special Parliament reception, around half of the 23 young people involved had found meaningful jobs.

Ms Blears is now inviting companies interested in offering a young person up to four weeks of unpaid work experience during the second Kids Without Connections scheme to learn more about what is involved...

Obviously some types of "unemployed people" deserve to be paid at least national minimum wage whilst gaining all important work experience and some - those from poorer backgrounds, whose families may not have connections among relatives, friends and colleagues to help them get work experience, it would appear - don't.

No doubt Hazel can explain why the distinction?

Please get all your ahem "interns" via approved methods like the Work Programme ...

as it has special rules to protect employers from visits by HMRC heavies acting on our instructions ...
  
Employment Minister Jo Swinson acts over 100 firms 'using unpaid interns' the Indie informs us, because Jo seeks to crack down on employers who are breaking the law by filling full-time positions, that would be subject to national minimum wage rules, with unpaid interns and the article ends with an especially wonderful quote from a BIS Departmental spokesperson ....

A spokesman for the Department of Business said: "The law on the National Minimum Wage is clear. If somebody on a work experience placement or internship is a worker under NMW legislation, then they are entitled to the minimum wage.     Internships can be a valuable way of helping young people get into work and realise their ambitions. Anyone who feels they are being exploited should contact the Pay and Work Rights Helpline. Their call will be fast-tracked to HMRC who actively investigate any claims of NMW abuse."

No doubt those manning the Pay and Work Rights Helpline have been given a handy crib sheet so they can weed out and send packing with a firm but friendly 

"it doesn't apply to you, **the organisation which is public spiritedly taking part in the Work Programme and giving you vital work experience at huge cost to themselves doesn't do that sort of thing, unless you are undertaking work experience with Homebase of course, seeing as they were stupid enough to let documents that admit that they do see work programme placements as a handy alternative to actually employing people and have reduced the number of full and part time staff working in some stores and substituted WP provided staff for them get into the public domain" 

to any misguided Work Programme participant, in particular those undertaking Mandatory Work Activity, who seeing the Indie article takes the BIS spokesperson's comment at face value before consulting the handy government web advice on the national-minimum-wage  where they will find workers on a government employment programme, eg the Work Programme aren't entitled to the national minimum wage.

** obviously everything after it doesn't apply to you wouldn't appear on the crib sheet, I was just idly referencing something that made its way into certain media outlets recently ....

Can people please stop yapping on about the "Living Wage"?

FFS, whether we scrap the National Minimum Wage, leave it as it is or increase it to the Living Wage, it will make precious little difference to anything.

The main driver for low earners' net incomes (which is what really matters) is the amount of means-testing and taxation, and as a rule of thumb, if you're on the various benefits, then up to something like the median wage of £20,000 - £25,000 a year, you actually only keep about 20p for every £1 you earn. So whether you keep 20% of £6.19 (£1.24) or 20% of £7.45 (£1.49) is more or less irrelevant in terms of work incentives.

Do these people not realise this? And do they not realise that means-testing is more or less exactly the same as taxation? So whatever the revenue-maximising tax rate is (top of the Laffer curve) is also the cost-minimising benefit withdrawal rate? We'd probably end up paying out less to current welfare claimants if the means testing were made less savage, because more of them would be working.

And then there's the point that higher net wages just flow through into higher rents anyway, but that's best dealt with by replacing as many taxes as possible with LVT, or in the short term, just building more council housing. For sure, low-rent council housing is a kind of weird indirect subsidy to low-paying businesses in high-rent areas, but so be it, I'd rather subsidise businesses and their employees than banks and landowners.

Philip Davies and reported speech

The MSM and various 'charities' are up in arms about the fact that Philip Davies said that the disabled are second class citizens who should work for less than the National Minimum Wage etc etc. blah blah blah.

Only he never said either of those things, did he? Philip Davies simply stood up in Parliament and reported what other people had said to him. His speech is included right at the beginning of this YouTube clip* (it's not in Hansard yet):
It seems highly unlikely to me that Mr Davies would make such a claim if it weren't true, so the whole thing is a storm in a tea cup.

If, for example, an MP were to report that some of his constituents had told him that they would like cannabis to be legalised, or that some of his constituents wanted to "send all the darkies back" (and I'm quite sure that most MPs will have heard just about everything), would that MP then be castigated as a drug fiend or a racist?

Probably he would, and that's the worrying thing. How are you supposed to have a debate if you aren't even allowed to report what voters actually think and say? Whether you agree with those sentiments or not is a separate issue.

* As to the substantive issue, discussed in the rest of the YouTube clip, Philip Davies is completely right of course - there shouldn't be a National Minimum Wage in the first place. If we want to alleviate poverty, then do it via the welfare system, funded out of everybody's taxes, and don't try to fob it off onto individual employers.

Ten reasons to hate the Tories (6) Part 1

Point 6 from Cameron's Blueprint for Britain was this:

"We will cut corporation tax to create jobs (1), reform inheritance tax to encourage saving (2) and build a stronger society by rewarding families in the tax and benefit system (3)."

They've jumbled three topics into one here, so let's take ruthlessly pragmatic look at part 1.

Right now, in the teeth of a recession, it's more important to worry about preserving existing jobs, i.e. keeping existing businesses afloat, than it is to dream about businesses miraculously creating new ones. So in order of administrative simplicity, political resistance etc, here's my hit list:

a) Businesses will stay afloat as long as they are making net profits. And to make net profits, a business has to make gross profits. As the results of Sainsbury's and Wm Morrison's clearly show, reducing VAT is a good way of improving gross profits, out of which salaries are paid. Seeing as VAT swallows up 3/23 of the turnover of a VAT-able business and is payable whether or not a business makes net profits, why not resist any suggestion that VAT be increased back to 17.5% or even higher?

Unfortunately, the UK cannot reduce VAT below 15% until we leave the EU, as 15% is the minimum standard rate.

b) The optimum number of jobs (whatever that is) would exist in a tax-free world. Seeing as that is a pipe-dream in the short term, the next best position is where the tax rate on business profits is the same as that on employment (neither higher nor lower). The main rate of corporation tax in the UK is 28% and the usual rate of PAYE is 31% (20% income tax plus 11% Employee's National Insurance), which are pretty close. It is Employer's National Insurance (another 12.8% of salaries) that drives in the wedge.

So the next-best quick-fix must be to reduce Employer's National Insurance. Taking all the dynamic effects into account, it is quite possible that such a move would be revenue neutral, as it happens.

c) Those who are already out of work and claiming welfare face enormous administrative hurdles if they go back to work, and because of means testing are barely better off unless they find anything short of a full-time, permanent job on a median salary. So how about scrapping the distinction between out-of-work and in-work benefits and scrapping means-testing? It's called "Citizen's Income" and is the oldest idea in the book.

d) The next barrier against job-creation is the National Minimum Wage. At present, this is set at £5.73 per hour gross, to which the employer adds 12.8% National Insurance (soon to be increased to 13.3%) so it costs him £4.65 per hour after corporation tax relief. The employee on the other hand will probably be on means-tested benefits, so only nets 30% of the gross amount = £1.72, or barely a third of what it costs his employer.

So let's imagine we scrapped Employer's National Insurance; scrapped means testing so that a benefit claimant in part-time or low-paid work only paid PAYE at 31%; and scrapped the National Minimum Wage, and that the new gross hourly wage settled down at £4. That costs the employer £2.88 after corporation tax relief (40% cheaper than before) and the worker nets £2.80 (60% more than before). Does anybody in their right mind dispute that this would lead to higher employment levels?

e) Next up, we ought to scrap all the silly regulations that dampen economic activity in general and employment in particular, but that's a bit heavy for this time in the morning.

f) Oh yes, let's not forget corporation tax. What sort of effect does reducing corporation tax on employment levels? Not much, actually. A lower rate encourages a few marginal business to relocate to the UK (or discourages others from not emigrating). But a lower rate also means that the business owners retain a larger share of profits, so encourages them to cut costs as far as possible. In the long run, economic progress is largely only possible because of business processes being automated or outsourced to cheaper countries, of course (in other words people being made redundant, i.e . cost cutting), which is pretty unpleasant in the short run, but hey, if minimising job-losses is a short- or medium-term aim, cutting corporation tax rates has got to be pretty much at the bottom of the list of priorities.

Arguments in favour of the National Minimum Wage

From this comment

7. Different taxes have different effects. NI [National Insurance] is a tax on employment and therefore deters the use of labour and encourages efficiency and automation. It doesn't put businesses in general out of business, it puts high-labour businesses out of business and encourages low-labour businesses (and the businesses that supply the equipment to reduce the labour, or, to put it another way, increase the productivity).

You could say much the same about the National Minimum Wage, which discourages low value added activities. That doesn't put "businesses in general out of business" it puts certain specific businesses out of business and adds to unemployment; pretty much like National Insurance.

Some may see this as A Good Thing, but quite why completely escapes me.

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.

"Female migrant workers most at risk of not being paid minimum wage"

Here are two highlights from new research carried out by the No Shit Sherlock! Department:

1. Migrant workers are more likely to be working as temps or in insecure work (for example not having a written contract) than any other workers.

2. Recent migrant workers are more than twice as likely as other workers to be earning less than the appropriate NMW for their age.

We could have guessed the first factoid - from simple observation of The World Around Us or by applying commonsense*. As to the written contract, are employers supposed to spend £100 million on translation services?

The second factoid is meaningless - are 1% of such workers paid less than the NMW? 10%? 50%?

Anyway, I'm not allowed to say "They can always go home, can't they?" without risking arrest or losing my job. So I wont't.

* Economic migrants tend to be people with the lowest earnings potential in their own country, so as long as our worst-paid jobs pay a lot more than in their home country, they are still 'happy' to come here.

Business taxation 2 - full employment

OK. Let the right wingers yap on about reducing corporation tax (the second least-worst tax*) and increasing taxes on consumption (like VAT, the worst tax of all - see Business Taxation part 1); let the lefties yap on about increasing Employer's National Insurance Contributions to force employers to pay towards the Welfare State and increasing the National Minimum Wage**. As usual, they are all talking crap, the truth is much more mundane than that.

In the absence of any taxes, we would have 'full employment', which unfortunately does not mean that everybody would have a job, it just means that we would have the optimum/equilibrium level of employment and output, as follows:

Now, on a simplistic (and probably correct) level, employees work for their net salaries. An employee is indifferent between between £100 gross taxed at 33% (22% income tax plus 11% Employee's NIC) or £67 tax-free. So the tax is actually borne by the employer. But the employer gets corporation tax relief on the gross salary, so if we had a truly flat tax of (say) 31% for corporation tax and income tax/Employee's NI, the tax borne by the employer and the corporation tax relief thereon would cancel out; we would still be somewhere close to 'full employment':

Unfortunately, we also have Employer's NI Contributions of 12.8% of salaries. So a gross wage of £100 costs the employer £78.96 (£100 plus £12.80 Employer's NI less 30% corporation tax relief); but the employee nets £67, so that's an additional 18p lost in tax for every £1 that passes from employer to employee. So businesses are encouraged to use machines, automation or imports instead (in itself not a bad thing, different topic). So the net cost to the employer increases, the net salary received by the employee goes down and we have totally unnecessary unemployment:

As ever, things are even worse than that. The demand for labour is relatively price-elastic (look up 'determinants of price elasticity of demand') but the supply of labour is far less price-elastic. To put it bluntly, the most of us have no choice but to work, however low our net wages. Thus the reduction in overall employment levels is far closer to 18% than 9% (which it would be if demand for and supply of labour were equally price-elastic), as follows:

Now, here's that same diagram again, with the corners labelled A, B, C, D, E. (for clarity):

Right, let's expand those areas and put names and values to them:

Conclusion:
If we scrapped Employer's NI, the government would lose £37 bn Employer's NI, but it would save (up to) £20 bn welfare payments; collect (up to) an additional £17 bn income tax/Employee's NI and collect at least another £11 bn in corporation tax. The deal would be more-or-less self financing!; it'd save employers a huge administrative headache; it'd help us towards full employment; and it'd enable us sack a few tens of thousands of civil servants.

Who's up for it?

Workings:
Employer's NI is total NI of £97 bn from here x 72% (28% of workers are directly or indirectly employed by the state anyway, see Column M) x 54% (Employer's NI is 12.8%, Employees' NI is 11%, so Employer's NI is about 54% of the total).

Income tax is £149 bn from here again, less a fifth that relates to investment income and taxable pensions, plus Employees' NI (£97 bn x 46%).

Total working age welfare payments per DWP's Table 3 is £19.6 bn, plus £14 bn Tax Credits, plus £7 bn notional cost of below-market rents in social housing, makes £40 bn, knock off half for the elderly, the truly incapacitated and the totally unemployable.

I have guesstimated the missing figure; the additional income tax/Employees' NI that would be collected at £17 bn, or 10% of current receipts of £165 bn.

Scrapping Employer's NI (assuming it is borne by employers) would increase their profits by £37 bn, so the additional corporation tax would be 30% of that, or £11 bn, even assuming no increase in economic activity.

* Along with flat rate income tax, obviously. I fail to see any real difference between income tax and corporation tax.

** Of course, I would scrap the NMW and reduce the level of means-testing of benefits instead, different topic. And Working Time Directive and Maternity Leave regulations will go straight on the bonfire as well.

"Minimum wage will rise to £5.73"

They are not just stupid enough to do this, but pathological liars who don't understand their own rules:

Business Secretary John Hutton said ... "Before it was introduced, some workers could expect to be paid as little as 35 pence an hour...".

I have no idea how many people worked for 35 pence an hour*, but glossing over that, somebody on the NMW and Tax Credits has a marginal tax/withdrawal rate of 70%, so in October 2008, their net hourly salary will rocket from £1.66 to £1.72. If they're claiming Housing/Council Tax Benefit as well, their marginal rate is 95.5%, so their net hourly pay will whizz up from 25 pence to a 26 pence an hour!

Dave Prentis, Unison general secretary [said] "A much more realistic figure would be a minimum wage of £6.75 an hour, which would lift many more families out of poverty and off means-tested benefits."

OK, let's assume Mum's at home with two kids and Dad is slaving away 48 hours a week on the NMW of currently £5.52 = £265 gross, per Table 1.6b the family's net income after housing costs is £259. Increase the NMW to £6.75, and assuming he doesn't lose his job anyway**, their net household income increases by a modest £18 to £275, so the family is hardly lifted out of poverty. At this stage he's paying £71 tax/NI a week but the family is still entitled to Child Tax Credits worth £76 a week, so they are very much still on means-tested benefits.

* But our hard working Dad in the above example is actually working for £1 an hour net; if he were to pack in working, the family's net income after housing costs would only fall to £209 (Table 2.1a). For comparison, in the early 1980s, up in Leeds, I earned £1 an hour working at a printer's and in a café near the market, so 35p must be decades ago.

** Because of course, a £1.23 rise in NMW would cost the employer £1.39 once you include Employer's NI; as against the extra 38 pence an hour our 'hard working Dad' would be getting. So the odds are 4-to-1 that the total net incomes of those people currently on the NMW would fall overall, once you net off the modest wins and those who become unemployed.