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Pay

What did they used to call it? Ah yes, sharing the proceeds of growth. That was effectively what David Cameron asked of British companies, last week, when he urged them to pay their employees a little more. After all, business ought to be picking up now; outgoings should have fallen with the oil price – so why not spread a bit of that lovely, lovely money around? There has to be some upside to having our industrial concerns in the North Sea written off by the markets.

Besides, many workers deserve it. One of the most chilling effects of the downturn was the one it had on wages. Accounting for inflation, people’s pay-packets are still lower than they were before the crash – and the politicians know it. That’s why, as the election lumbers into view, there’s so much talk of minimum and living wages. Cameron added to it in that same statement. “Companies that can afford to pay the living wage should,” he said, “it’s good and helps to reduce the welfare bill.”

This has, for some time now, been the official Conservative position on the living wage: if you can, you should. It is less a policy and more an exhortation. There are, in truth, very few politicians who would legislate to make the living wage compulsory, as it could result in companies hiring fewer people or simply going under. And so the level of the living wage (£9.15 an hour in London, £7.85 elsewhere) remains little more than a guideline. If you can, you should.

But what about the other part of Cameron’s statement? That it helps to reduce the welfare bill? Cynics will say that this is the Government taking the “state” out of “welfare state,” and leaving it to business – but there’s no shame in that, particularly with the public finances as they are. The Institute for Fiscal Studies reckons that, around the level of the living wage, every extra pound in earnings gains the Exchequer 50p in taxes and recouped benefits. It’s an austerity measure that sounds like largesse.

Hang on a second. If the Exchequer gains money from people earning a living wage, then surely it could use some to incentivise the practice. This is what Boris more or less mooted, just before Christmas, when it was revealed that he’d taken an interest in Brent Council’s plan to cut business rates for those companies that pay the living wage. Introduce the same thinking to our national politics and, so long as the balances were correct, companies could save a little cash whilst the Government makes some.

This policy sounds jolly nice – who doesn’t prefer a carrot to a stick? – but it should come with health warnings attached. Not only would it reheat some of the problems of a statutory living wage: for instance, companies could shun young, inexperienced workers for older, more experienced ones, and all for the purpose of a tax break and some good PR. But it would also create some inconsistences of its own: companies that might have paid the living wage anyway could end up being subsidised to do so.

To these eyes, though, the greatest inconsistencies appear when you look at the tax and benefits system as a whole. This is what Tim Worstall has been doing for years. By his calculations, someone working fulltime on the living wage could expect a pre-tax income of about £15,307.50 a year. That contrasts quite favourably with the equivalent minimum wage income of £12,675.

But what happens when the Exchequer takes its toll? After paying income tax and making their national insurance contributions, the worker on the living wage would have an income of £13,364. That’s suddenly not all that much higher than the pre-tax minimum wage income. It could even be lower, on Mr Worstall’s account, when you consider the effect of employers’ national insurance on wages.

Of course, the minimum wage income is also subject to income taxes and national insurance contributions. But this just brings us crashing into an important question: why? We currently have politicians standing up for a living wage – the amount of money that people need to live on – but they’re still perfectly happy to suck funds away from people who earn less than it. By taking those who earn the minimum wage out of tax, the Government could introduce a de facto living wage at a stroke.

George Osborne is heading towards this by promising to raise the personal allowance to £12,500. The ConservativeHome manifesto advises him to go the whole hog, and bring the threshold for national insurance contributions up to the same level. Neither of these policies is likely to do much for the Chancellor’s bottom line. It should also be said that they won’t do much for those part-time workers on the minimum wage who already earn below the tax thresholds. Few policies are perfect.

But few policies make a point so well: low pay is about more than just pay. It’s also about the taxes that are imposed on people and the benefits they receive. It’s about the opportunities they have to earn more in their job, or simply to get a job in the first place. It’s about the cost of their weekly shop and monthly bills. And, yes, it’s even about the choices they make. Pay is relative to all of these things and more.

A living wage shouldn’t be dismissed out of hand – but, for now, the politicians should leave it to those businesses that can. If they really want to help people on low incomes, then take them out of tax. It they really want to reduce the deficit, then how about asking more of pensioners, for a change? The full and complicated tapestry of public policy can include both.

52 comments for: Low pay is about more than just pay

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