Living wage - does good politics result in bad economics?

onlyroz

If prices rose due to the minimum wage, wouldn't our taxes fall due to the lower welfare bill? And therefore we'd all end up with roughly the same?

I really don't like the current situation where Tesco et al can get away with paying a pittance because they know their staff will have their incomes topped up by the state.

CLAPTON

onlyroz wrote: »

If prices rose due to the minimum wage, wouldn't our taxes fall due to the lower welfare bill? And therefore we'd all end up with roughly the same?

I really don't like the current situation where Tesco et al can get away with paying a pittance because they know their staff will have their incomes topped up by the state.

why do you think tesco et al would pay more if there were no WTC?

martinsurrey

michaels wrote: »

Social justice aside, would companies be forced to pay more to fill their vacancies if tax credits did not exist? If not I don't see how it can be called a subsidy?

And I think we are already agreed that the 'subsidy', if it does exist is not going to boost Tesco profits but to the reducing prices for those who shop in Tesco so it is far from clear what the redistributional effects of the 'subsidy' are - I would suggest that tax credits are paid for most by tax payers (generally the top 20% of the income disctribution are net tax payers) and their benefit goes directly to the lowest earners with dependents and (possibly) indirectly to consumers of goods associated with low wage (UK) employees which may well be those on below average incomes (for example fewer Waitrose employes are probably tax credit recipients).

This means that switching away from tax credits to a higher minimum wage is unlikely to be progressive.

A company (A) can make 100 widgets with 2000 units of input and 10 people (which cost the company the equivalent of 1000 units of input, the minimum they can pay).

A company (B) can make 100 widgets with 2100 units of input and 9 labour (which cost the company the equivalent of 900 units of input, the minimum they can pay)

Clearly both produce for the equivalent cost of 3000 units of input, but company (B) is more efficient in labour.

As a country we decide 1 labour should be worth 110 units of input as a minimum, and the government will make up the difference in the pockets of the labour.

Company (A) outputs 100 widgets for 2000 units of input, 10 units of labour (~1000 units of input) and 100 units of government labour support, total 3,100 units of input.

Company (B) outputs 100 widgets for 2000 units of input 9 units of labour (~900 units of input) and 90 units of government labour support, total 3,090 units of input.

but company A and B have exactly the same direct costs, so although B produces with the greatest efficiency for the country as a whole, it has no advantage as its labour efficiency is distorted by the labour support.

They both have 50% market share, selling their 100 widgets for 3300 + 10% VAT = 3,630, both making 300 profit and the government making 230 from (A) (330 vat less 100 labour support) and 240 from (B) (330 vat less 90 labour support), a total net government take of 470

Now the government realises this and sets the minimum wage to 110 units

Company (A) now can only produce for 3100, while (B) can produce for 3090

(A) folds, (B) produces 200 widgets for 6180 units of input (18 labour@110 and 4200 inputs) they maintain their 300 profit margin per 100 so sell widgets for 3390 per 100 (total sales of 6780).

The government maintains its net take of 470 by reducing the VAT rate to 6.9% (6.9% of 6780 = 470)

The consumers pay 3390+6.9% = 3,623 per 100 widgets, which is LESS than when company (A) was involved, and the tax take has remained constant.

We do however have one unit of labour spare, so if we get the minimum labour cost wrong, that unit could go to waste, however we hope that our new efficient allocation of scarce resources (labour) will spur job creation, the people with more money in their pockets by getting cheaper widgets will need more products to buy, the supplier of the inputs to the widget factory now needs to supply (B) with 100 more units than they were supplying (A) so they might need more labour.

At the minute though, labour is being inefficiently allocated, take it to its logical conclusion, the government guarantees a worker a set amount of income per week if they are working, though topping up their income with WTC's.

If there was no minimum wage, could an employer pay zero, and let the government pick up the entire tab? Does the employee care, as long as they get the minimum they expect? That employer could then employ thousands of people to do virtually nothing, we could all get cheap stuff, but taxes would sky rocket, is that efficient?

again, I'm not saying its a perfect solution, but I do believe that WTC's with a low minimum wage its a terrible idea, either remove WTC's and agree that we don't mind people at the bottom being poorer, or increase the minimum wage to make WTC's unneeded.

(well that escalated, if anyone manges to read that, a pat on the back)

MacMickster

To paraphrase martinsurrey's post above, the current situation allows zombie businesses to continue trading and distort the market. Whilst jobs may be lost from these zombie businesses this will leave a gap in the market to be exploited by the more efficient business which will expand.

martinsurrey

MacMickster wrote: »

To paraphrase martinsurrey's post above, the current situation allows zombie businesses to continue trading and distort the market. Whilst jobs may be lost from these zombie businesses this will leave a gap in the market to be exploited by the more efficient business which will expand.

damn it, why didn't I put it like that and saved me some typing (although I do love numbers!)...

CLAPTON

there is an underlying assumption that if WTC were withdrawn then people would refuse to work for the current level of wages

unless the level of unemployment benefits were set too high, then it would seem to me that people would still work for the available wages

so no zombie companies and no need to reduce employment levels

martinsurrey

CLAPTON wrote: »

there is an underlying assumption that if WTC were withdrawn then people would refuse to work for the current level of wages

unless the level of unemployment benefits were set too high, then it would seem to me that people would still work for the available wages

so no zombie companies and no need to reduce employment levels

No, its not about the withdrawal of labour its about, do we (as a nation) believe that the current minimum minimum wage without working tax credits is high enough to give working people an acceptable standard of living in our society.

If you think it is, scrap WTC and leave the minimum wage as it is, and let the lowest incomes fall.

If you don't, make WTC's redundant by raising the minimum wage, keeping the lowest incomes around the same, but with them coming for source rather than by the back door.

Edit
and zombie is a strong word, Productively inefficient is better, and its a fact that they exist and are supported by the status quo)

CLAPTON

martinsurrey wrote: »

No, its not about the withdrawal of labour its about, do we (as a nation) believe that the current minimum minimum wage without working tax credits is high enough to give working people an acceptable standard of living in our society.

If you think it is, scrap WTC and leave the minimum wage as it is, and let the lowest incomes fall.

If you don't, make WTC's redundant by raising the minimum wage, keeping the lowest incomes around the same, but with them coming for source rather than by the back door.

Edit
and zombie is a strong word, Productively inefficient is better, and its a fact that they exist and are supported by the status quo)

as I understand you are saying

- current minimum wage is unacceptable to you
-that politicians should decide how much the minimum income should be
-that the top up shouldn't come from taxpayers but from employers (personally I would call that a stealth tax)
-recognise that taxpayers (well all customers) will actually pay for the higher wages through higher prices
-you are content that if this means higher unemployment then that's a price worth paying

I don't accept that a company paying the going rate makes it a zombie

michaels

I bet whichever country you go to people, especially those at the bottom of the salary distribution, would tell you they deserve to be paid more...unfortunately total pay can not be more than total output. A higher minimum wage will price the least productive out of jobs reducing total output and mean there is less not more to go around.

CLAPTON

michaels wrote: »

I bet whichever country you go to people, especially those at the bottom of the salary distribution, would tell you they deserve to be paid more...unfortunately total pay can not be more than total output. A higher minimum wage will price the least productive out of jobs reducing total output and mean there is less not more to go around.

I do a little work for a charity


we employ a couple of people who aren't really capable due to being mentally disabled.
they are long term employees and their jobs are safe but at £9.35 per hour (2020 figures) they would never be recruited now.