Monday, 4 November 2013

Why should taxpayers subsidise wages?

I gather it is the anniversary today of Soviet troops marching into Hungary in 1956.  A good day, in fact, to think about the consequences of ideologues - especially as I heard the most irritating ideologue on the Today programme this morning, talking about the living wage (starts at 1hr 40 mins).

The Living Wage, as most people know, is the amount calculated that people need to earn to survive economically without recourse to benefits.  It is, inevitably, rather higher than the minimum wage.

So enter the ideologue, in this case Steve Davies from the 'free market' think-tank the Institute of Economic Affairs.

I put 'free market' in inverted commas on the grounds that I also regard myself as being in favour of free and open markets, as one of the guarantees of liberty (yes, I remain an old-fashioned Liberal).  But I am not a true believer - I'm not a heretic, defined in religious terms as someone who pushes one doctrine to the point of absurdity.

Unfortunately, the Today programme is still subject to the Law of Confident Economists.  Which means that you can apparently silence interviewers and conversations on almost any subject by mouthing economic doctrines in a confident tone of voice.

Davies explained that Ed Miliband's wheeze to encourage companies to pay a Living Wage through the tax system was a bad idea, on the grounds that only increased productivity can genuinely raise wages.  Otherwise it will lead to job losses as businesses become unprofitable.

All of which is true, and that would indeed be the end of the argument - until you look at the other side of the coin.  Who exactly does the IEA imagine will subsidise the salaries of these people who are in full-time work but not paid enough to get by?

Presumably the taxpayer - but why should the government subsidise business in this way?  And isn't it ironic that a supposedly free market think-tank should praise a situation where businesses have their payrolls subsidised by the state?

No, the situation where companies pay salaries which are impossible to live on is not sustainable for so many reasons.  What the IEA needs to do is to raise its eyes from the articles of holy writ and see the world as it really is - and get to grips with the way that life is becoming unaffordable for so many of us, even when we are in work.

Blame monopoly.  Blame inequality.  Blame the banks, but something else is going on which breaks all the rules of the kind of free market that the IEA espouses.

And if you want an example of it, take a look at the World Development Movement's data about the five mega-banks which have made $2.2 billion from speculating in food over the past two years, making it increasingly expensive for the poorest people in the world.

That's what happens when you hand economics over to ideologues, true believers and fundamentalists.


Adam Corlett said...

"The Living Wage, as most people know, is the amount calculated that people need to earn to survive economically without recourse to benefits."

That's wrong for a start. The calculation is of the wage needed to provide the minimum income standard AFTER tax and benefits.

For example, the London living wage was £8.55 (until today), but without benefits would have been £10.70 (though in reality it varies from family to family - those with children would need a far higher living wage without child benefits etc.).

The living wage can be brought down fairly easily by increasing benefits or the provision of public services. Or it could be increased by cutting these. How far do you want to go to avoid 'subsidising business'? (And that's without discussing taxes.)

Anonymous said...

Can you share this with Vince cable please - who stated in the evenig standard a few weeks ago that London Living Wage would discourage business!

Laura Willoughby

boggits said...

This is a universal issue, the free market doesn't like a minimum or living wage even when companies show the benefits

Neville Farmer said...

The principle of "trickle up" in action.