David Cameron once described himself as the "heir to Blair." However, whereas Blair tried to combine the best features of left and right, yesterday's Budget combined the worst.
We saw the worst form of right-wingery in the attack upon low-paid workers. Let's be clear here. The proposed rise in the living wage - from £6.50 an hour now to £9.35 by 2020 does NOT offset the reduction in tax credits. The OBR estimates that the higher living wage will add £4bn to total annual wages by 2020, assuming no change in hours or employment (I'll come to this). But the cuts in tax credits are worth £5.8bn (measures 39-43 of table 2.1). £5.8bn is more than £4bn.
Those working part-time will suffer some massive losses even if they benefit fully from the proposed living wage. Monique Ebell at the NIESR estimates that a family with one child where one adult works 30 hours a week at the current NMW will lose £492 per year by 2020. The Resolution Foundation estimates that a single parent working 20 hours per week on the NMW will lose £1000 a year. The SMF agrees.
£10-20 per week might not seem much to those of us who are well-off - but it's a massive amount for those struggling to make ends meet.
Mr Osborne has contrived to combine this impoverishment of the worst off with one of the worst vices of the left - an under-appreciation of the role of incentives.
One way in which this is the case is that he has worsened incentives for the low-paid to work more or get better jobs. Ms Ebell points out that the increased taper rate for tax credits now means that a family earning more than £11000 per year but getting tax credits faces an effective marginal tax rate of 79%.
There is, though, another way in which Mr Osborne has paid insufficient heed to incentives: he is under-rating the fact that if you raise the price of something, you give people an incentive to buy less of it. It's for this reason that most advocates of a living wage saw it as an aspiration rather than something that could be enacted by law.
Raising the effective minimum wage by 44% over the next five years will encourage firms to reduce employment and hours. By how much?
The OBR (pdf) estimates that the living wage will cut 60,000 jobs.
This, though, is only half the damage. It estimates that the other half of the adjustment will come from cuts in hours.
And even this might be an under-estimate. It is based on the assumption of a price-elasticity of demand for labour of minus 0.4 - one based upon this paper (pdf).
However, it's likely that the elasticity of demand for sub-groups of workers is higher than that for the workforce as a whole, simply because employers can substitute between one group of workers and other groups more than between workers and capital alone. The NIESR's Rebecca Riley has estimated (pdf) that, for unskilled workers, the price elasticity of demand is 0.9 for over-30s and 1.6 for 15-29 year-olds. Applying the former elasticity more than doubles the cost of the living wage relative to the OBR's estimate. That implies a cut in labour demand equivalent to over 250,000 jobs.
Note here that the living wage will not apply to under-25s. It's possible therefore that employers will substiute away from workers in their late 20s to those in their early 20s. Whilst this might reduce youth unemployment, it could hit hard people with young families.
Some of the more honest right-wingers see this for what it is. The IEA's Mark Littlewood calls it "intellectually bankrupt."
I agree. We cannot give ourselves pay rises merely by legislative fiat. Instead, we need a more skilled workforce and companies who want to use those skills. Achieving this requires much more than despatch box rhetoric.
I know these are not original observations but ... tax credits are out of Milton Frickin Friedman's playbook and the min wage out of Red Ed's.
Right wing newspapers should be tearing it to pieces.
http://www.dailymail.co.uk/news/article-3154139/Fearless-George-slays-dragons-Osborne-puts-Left-sword-9-living-wage-taking-9bn-axe-bloated-tax-credit-hammering-high-earners-pensions-super-rich-too.html
Oh.
Posted by: Luis Enrique | July 09, 2015 at 12:22 PM
Arguments for minimum wages which you don’t seem to have addressed here.
1. Lots of studies suggest negligible impact on employment. The OBR study, although specific to this particular minimum wage rise, is but one.
2. Even if it does increase unemployment a bit, most unemployment is temporary. People might prefer waiting a bit longer for a better paid job.
3. Higher minimum wages might improve productivity by setting the bar higher – staff and managers have to find things for staff to do that are worth the minimum wage. (Why aren’t they doing that anyway? Because they don’t have to. People are lazy. It’s analogous to making it more difficult to sack workers so managers have to focus more on improving their staff)
Posted by: Donald | July 09, 2015 at 12:31 PM
Ignoring the fact that he took the money all back in tax credits, I am not sure that the study you quote of price elasticity of demand is reliable.
Meta studies should always be used for this type of analysis. This one here gives a good summary:
http://www.cepr.net/documents/publications/min-wage-2013-02.pdf
It suggests that increases in minimum wage are largely, as an economy, absorbed by decreases in profit margins and small rises in prices. As well as, presumably, the positive impact of extra demand caused by more money going to people who will spend it all rather than keep it in their pension funds.
If George Osborne really wants to raise wages, however, he should increase demand in the economy by more government spending. As I discuss here, http://www.notesonthenextbust.com/2015/06/the-uk-employment-miracle.html
more than 100% of the increase in employment during the Conservative government has been in jobs paid under the living wage. Pushing up the minimum wage should be supplemented by policies that increase demand and make it affordable to employers.
Posted by: Ari Andricopoulos | July 09, 2015 at 12:52 PM
Also no one talkinga bout the fact that local council semploy large numbers of people near the minimum wage (teaching assistants, care workers etc), but their budghets won't be adjusted to allow for these higher costs.
Posted by: Jeremy Beckwith | July 09, 2015 at 12:53 PM
((Why aren’t they doing that anyway? Because they don’t have to. People are lazy.)
Donald - you are an idiot. The problem is actually that people are not lazy enough. Laziness is a great incentive for progress and increases in productivity. Every great invention is the result of laziness. In the old days it would take almost the entire day to catch and prepare food, and then wash and clean. We then invented things that reduced the time it took to do these things. Laziness won out yet again.
But the problem is when a workforce is relentlessly hard working (which is a period we are in and reaping the negative results). These hard workers are so diligent, so focused and so subservient to the ruling class they set society back decades.
We should start a campaign against hard working people. And laud lazy people to the heavens.
On the Tories, what do we expect? Their policies are always designed to stick it to the most vulnerable and poorest in society. They do this because they are a evil, heartless and sadistic party supported by evil, heartless and sadistic people.
Posted by: BCFG | July 09, 2015 at 06:46 PM
Shouldn't you call it the 'Living Wage' in quotes since it actually isn't high enough, or, Living Wage in capitals as a title rather than lower case?
Posted by: Felix | July 09, 2015 at 08:24 PM
"We cannot give ourselves pay rises merely by legislative fiat."
Can too. Alternative job offer at the living wage open to all paid for by the state, using their transferrable skills set. Done. Shite jobs eliminated. Unemployment eliminated forever. Workers drop onto this fixed buffer instead of NAIRU, retain skills.
Next question?
Posted by: Bob | July 09, 2015 at 11:35 PM
"But the problem is when a workforce is relentlessly hard working (which is a period we are in and reaping the negative results). These hard workers are so diligent, so focused and so subservient to the ruling class they set society back decades.
We should start a campaign against hard working people. And laud lazy people to the heavens."
What a load of complete victim blaming bullshit.
This is what is wrong with the left.
The vast majority of people WANT to be told what to do and work. That's why the military are never short of recruits.
This also shows "you are with us or against us." Well, I'm against you, as are most people.
Posted by: Bob | July 09, 2015 at 11:40 PM
"We saw the worst form of right-wingery in the attack upon low-paid workers."
Drop the emotional bullshit, Chris. Tax credits are literally the worst idea in the world - an idiotic Labour Party idea.
They are simply corporate welfare.
Would you prefer:
No minimum wage and a lot of tax credits.
High minimum wage and no tax credits.
Posted by: Bob | July 10, 2015 at 12:13 AM
BCFG - you're a numbskull!
We're talking about different kinds of laziness. I'm talking about management being able to make money by paying low wages. A higher minimum wage can force them to increase productivity to make money (and not by making people work harder doing exactly the same thing).
I agree it can be a race to the work life balance bottom. But that's a separate issue, I think
Posted by: Donald | July 10, 2015 at 07:39 AM
"The vast majority of people WANT to be told what to do and work."
Problem: political/managerial classes haven't created a compelling vision of where exactly our work is taking us. Please, yes! Somebody tell us what the hell we are actually doing! Where are we going?
Osborne promised to spend 2% of GDP on defense. Spend it on defense - not with any specific aims in mind, not details - just spend it.
That is the Osborne fallacy - work. Just do some work. It doesn't matter what you do, and there is no reason why - just do it. And... ?
I saw Grant Shapps on question time a while back rhapsodising about work. Hmmmm... If it is a choice between a hard working Shapps or a lazy person, I'll pick the lazy person - obviously best of all would be a system in which it was easier for people to work hard at something *worthwhile* - but for that, someone needs to stick their head above the parapet and present a vision for the future.
Posted by: Mark | July 10, 2015 at 12:27 PM
Most US studies show the impact of the min. wage is small on employment. I have not seen a study that tracks the impact an increase has on demand in a depressed economy. Seattle and LA enacted a 15 dollar minimum wage. See how that plays out.
Posted by: David | July 10, 2015 at 01:39 PM
No Donald you said people were lazy and they are not. Quite the contrary actually.
You're an idiot.
Posted by: BCFG | July 10, 2015 at 05:09 PM
"Please, yes! Somebody tell us what the hell we are actually doing! Where are we going? "
Yes now you are starting to get it. We need New Deal 2.0. Jobs funded nationally and created locally/nonprofits.
What jobs could there be - a start:
Social care and childcare.
Working with the elderly, meals on wheels, etc.
Environmental work - this is high labour low capital e.g. river valley erosion.
Allotment management.
Jobs helping integrate immigrants.
Use of higher skills if there - pro bono lawyers, builders building churches, etc.
Posted by: Bob | July 10, 2015 at 05:21 PM
I should note we can include other work e.g. open source software development, community musicians, etc but the electorate may want hard labour jobs. Ultimately the end of this is having job and income guarantees and then BIG when society becomes sufficiently sophisticated.
Posted by: Bob | July 10, 2015 at 05:26 PM
BCFG - okay then.
Posted by: Donald | July 11, 2015 at 10:40 PM
Mark Littlewood is a lot of things, but honest isn't one of them.
Posted by: Gregory Stokes | July 12, 2015 at 12:56 AM
"However, whereas Blair tried to combine the best features of left and right, yesterday's Budget combined the worst."
Typo? It always seemed to me that Blair combined the worst features of the right (crony capitalism: PFIs and financialisation) and the wacky right (neoconservative foreign policy).
If viewed through the prism of Minsky, the Blair years were economically quite close to a Ponzi scheme (an economy over reliant on artificially inflated asset prices providing an illusory wealth effect), while his foreign policy has proven to be not only dangerous but lunatic in the extreme.
Fortunately for him, Blair got out of town just before the whole show collapsed, leaving him able to boast, in that unhinged way of his, that he oversaw an economic miracle. As awful as he was, it is most unfortunate that he was dislodged, so not having to deal with the economic and financial crash that his illiterate economic policies wrought between 1997 and 2007.
If Blair had still been in the hot seat until 2010, he'd surely be considered the worst PM in history. The hostility that was showered on Gordon Brown should have been Blair's. All the John Rentouls in the world would have a hard time whitewashing a legacy of economic incompetence and foreign policy madness.
Posted by: John | July 15, 2015 at 04:50 PM