Published:

40 comments

Here are two headlines.  The first is from the Independent: “Tories could raise minimum wage in effort to dispel their image as the ‘party of the rich'”. The second is from the Telegraph: “Minimum wage could be frozen or cut if it starts to cost jobs or damage economy, Government suggests.”

It is perhaps unfair to bundle the mimimum wage in with the Living Wage, because one is statutory and the other voluntary, but those contrasting stories go the heart of the debate about both.  One view holds that the state can usefully intervene in private wage arrangements, because some workers are hard-pressed, some employers can afford to pay them higher salaries, and there are benefits if they do both for the firms themselves and for the wider economy: the employees work harder, spend more money and raise more tax.  The other view is such interference by government usually does more harm than good and that, if employers end up paying wages that productivity doesn’t justify, profits will fall (and tax receipts with them) and unemployment will rise, as firms find themselves unable to afford to hire new workers.

Either way, economics is one thing and politics another.  Both Peter Hoskin and Peter Franklin have written on this site recently about the melancholy, long, withdrawing roar of the post-war growth in white collar jobs, and the higher wages and employment security than came with it.  As Rohan Silva, the former Downing Street adviser, has put it: “if the last century was about technology replacing brawn, this century could be about technology replacing brains.”  Average earnings in Britain have been falling since 2002 – back in the pre-austerity days of New Labour, when Gordon Brown had “abolished boom and bust” (remember that).

Ed Miliband, his pupil and successor, has a plan to get out of the mess which Brown only make worse – namely, to induce businesses to pay for higher wages, since taxpayers are more resistant to stumping up for tax credits in this age of austerity.  Robert Halfon, Guy Opperman and a small band of Conservative MPs disagree with Miliband about his particular means, but agree about the end.  “When did it become a hindrance rather than a duty for a business to look after its employees?” Opperman has asked, citing gains in staff retention by firms that pay the Living Wage.  On this site, Halfon has floated the possibility of a regional wage top-up.

In the Commons on Monday, Richard Fuller, the Tory MP for Bedford, made the case for using the Government’s recently-introduced employment allowance as a means of encouraging firms to pay the Living Wage.  Meanwhile, Ryan Shorthouse of Bright Blue has suggested some minimum wage regional and sector rises, and Policy Exchange is studying how it might be raised, if at all.  However, even a supporter as enthusiastic as Opperman has conceded that the whole enterprise is far from plain sailing: there is, he wrote, “a lack of detailed analysis of the effects of a living wage on individual sectors”.

This is where the Telegraph’s report come in.  “The level of employment is now above its pre-recession peak, but the employment rate is below the pre-recession peak,” a Business Minister told the paper. “This means that we believe that caution is required – particularly as the minimum wage rate is now at its highest ever level relative to average earnings for adults, and remains high for young people.”  In other words, the minimum wage may, at least in some cases, be stifling job creation. That Business Minister, by the way, wasn’t a Conservative. It was the Liberal Democrats’ Jo Swinson.

Fuller argues that a purposeful use of the Employment Allowance would be a better way of boosting the Living Wage than Miliband’s “12 month tax rebate”. (And if paying the Living Wage is so important, why does the Labour leader propose a scheme lasting only a year?)  There may indeed be merit in making a targeted use of the tax system to encourage employers to boost their employees wages.  But a tax cut in one place means a tax rise elsewhere, unless the growth in public spending is to be constrained further – always less popular in practice than in principle.  Furthermore, big business can bear burdens that small businesses cannot.  The same applies to government, which can always turn to the taxpayer, and frequently does.  Boris Johnson is a champion of the Living Wage, and good for him. But there is a limit to the degree to which the taxpayer should support public sector wages.

The thrust of Halfon’s argument is that while encouraging employers to pay wages may be a good thing, cutting the taxes of lower-paid people certainly is – “ensuring a fair minimum wage, lower tax for lower earners, and simplifying the tax system”, as he pus it. Amen to that.

40 comments for: The best way to help poorer workers is to cut their tax bill

Leave a Reply

You must be logged in to post a comment.