Innumerates, Innumerates

The Guardian, over at CiF, is celebrating the rise in the minimum wage by asking what people would do with the extra 21 p per hour. They simply haven't grasped the fact that the rise in disposable income will be nothing like that at all. For, not only must tax and NI be paid on it (absurd though it is that the personal allowance is so low), there will also be the withdrawal of the various means tested allowances and credits.

...somebody on the NMW and Tax Credits has a marginal tax/withdrawal rate of 70%, so in October 2008, their net hourly salary will rocket from £1.66 to £1.72. If they're claiming Housing/Council Tax Benefit as well, their marginal rate is 95.5%, so their net hourly pay will whizz up from 25 pence to a 26 pence an hour!

(Note that what is meant by net hourly pay is the difference between income when in work and income when not.)

There will be a small rise in unemployment as a result of the rise, certainly, but probably too small to see in the gross figures.

But as you can see, the major effect is to reduce the levels of benefits, while raising the income from the business employing them, leaving the workers themselves only very marginally better off. It's a shift in who is paying those benefits in other words: from taxpayers to the business.

And that's something of a problem. We have market wages, that's simply what some people's labour is worth. It might be (and I share it to an extent) that we need a welfare safety net, or that we regard, at least sometimes, the market wages on offer to some groups as being too low.

Now, who should be paying the cost of remedying that situation? The businesses who are paying what the labour is worth? Should they be forced to pay more than it is worth? Or perhaps it is more honest to say that if we as a society don't like the results of that market, then we as the society should be paying the cost of mediating that result.

That is, we shouldn't be raising the minimum wage and making business pay the costs of our moral decision, we should be raising tax credits and making ourselves carry the burden of that moral decision.

Of course, there's a political problem with that. It makes it clear to everyone what is the actual cost of that decision, and that's something all too many would prefer didn't become obvious.