Andy Burnham’s very strange £11 minimum wage

Gosh, isn’t Andy Burnham showing himself to be a strong leader?

Firms have been warned by Andy Burnham that they could face penalties including higher national insurance payments if they failed to pay a proposed new higher living wage of around £11 an hour.
In a fresh push to make up ground on surprise left-wing Labour leadership frontrunner Jeremy Corbyn, the shadow health secretary said he would seek to use a “carrot and stick” approach to force up wages if he led the party to power in 2020.
At the start of the final 10 days of campaigning, Mr Burnham will set out his proposals at a campaign event in Pudsey, a Yorkshire constituency that Labour failed to win at May’s general election.
The national rate – which would rise to over £12 in London – would apply to all age groups and be adjusted for the loss of tax credits and linked to the cost of housing, food and household items.

Such a strong leader that he can simply divine the price of something and 65 million people and the markets that are their interaction will simply buckle under and obey. Sadly for such price fixing games that’s not in fact how things work.

More specifically, the level of the minimum wage has an impact upon how many people actually have jobs to earn a wage from. It’s entirely true that low minimum wages have little effect on employment: simply because very few people earn very low wages. The higher that minimum is compared to the general wage level the greater the unemployment effect. There’s no cut and dried limit here, but the rule of thumb is that a minimum wage higher than 50% of the median will have substantial such unemployment effects.

Currently the median wage is around £13 an hour meaning that the proposed £11 is around 85% of that median.

This isn’t going to work out well, is it?

“It will be based on the simple principle that the same hour’s work deserves the same hour’s pay, regardless of your age. So I will abolish the youth rate minimum wage, apply the higher rate to everyone and give incentives for companies to go even further.”

And there is where the real effects will be felt. For those the minimum wage is most binding upon are those who are young and untrained. And if someone fresh off the educational production line must be paid that same £11 an hour as someone with a decade of experience of turning up to work on time and sober then that teenager just isn’t going to get employed is she?

We thus return to our long stated position. Which is that if we are going to have a minimum wage, something we don’t think should exist at all, then whatever that minimum wage is must be the same as the tax free allowance for both income tax and national insurance. For if there is, as is claimed, some moral amount that an hour’s work is worth then there can be no justification for the state taking some of that amount to pay Andy Burnham’s salary.

Or, if you prefer, if you’d like the working poor to have more money then stop taxing them so damn much.

Time for Time Limits

A new ASI report, Time for Time Limits: Why we should end permanent welfare, finds that a 5-year limit on Jobseekers’ Allowance (JSA) across workers’ lifetimes could save the Treasury £300-350m per year, as well as boosting labour markets and putting a break on self-fulfilling cycles of dependency.

The paper, authored by Peter Hill, a lecturer at the University of Roehampton, reviews President Bill Clinton’s ‘Personal Responsibility and Work Opportunity Reconciliation Act’ (PRWORA) which coincided with a massive decline in welfare rolls from 5 million to less than 2 million families by 2006. The act is credited for saving the US government over $50bn between 1996 and 2002.

In some states, there was a decrease in benefits caseloads of 96%, as well as an unprecedented drop in female unemployment and improvement in their financial status even in low paying jobs, and a drop in child poverty. Furthermore, comprehensive econometric analyses suggest that 6-7% of decreases in unemployment counts (and 12–13% of those in female-headed families) are as a result of the introduction of time limits. Although difficult to estimate the exact impact on the UK labour market ex ante, a similar effect on Claimant Count Unemployment could be expected; this translates to an estimated reduction in the benefit bill of £300–350 million based on current spending.

Though Universal Credit is innovative in tackling benefit withdrawal cliffs that make working very unattractive to some households, it does not put any limits on its unemployment insurance provisions. More radical reform like time limits has potential beyond the government’s current schemes.

Just as the US ended welfare as an entitlement programme, the paper argues that the UK should also take the radical step of ending JSA being funded from general taxation and instead return to a form of ‘Unemployment Insurance’ funding from NICs. This would mean operating the welfare system as a genuine self-funding insurance scheme managed through the UK Government Actuary’s Department.

Click here for the full press release.

Perhaps it’s time to abolish statutory holiday pay

We can imagine some getting a little outraged at this suggestion but perhaps it’s time to remove one of the great distortions in the labour market: it’s time to abolish statutory holiday pay. Currently:

Almost all workers are legally entitled to 5.6 weeks’ paid holiday per year (known as statutory leave entitlement or annual leave). An employer can include bank holidays as part of statutory annual leave.

Self-employed workers aren’t entitled to annual leave.

From the US we hear that these sorts of rules are killing parts of that gig economy:

This is one of the first startup casualties as a result of the worker classification issue that has gripped the tech industry. Many companies in the gig economy, such as Uber, Postmates, Luxe and Sprig, classify their workers as contractors instead of employees. As a result they don’t have to foot payroll taxes, social security benefits, vacation time or other fees. But workers have filed lawsuits over the issue, and it’s now become a heavily debated talking point among the presidential candidates.

Loading the employment of labour with all of these things (and we could add maternity and paternity leave and so on) makes labour cost more to employ. Well, obviously. but insisting that people take a defined bundle of benefits reduces the value of selling our labour. For if we receive instead just the cash we can decide ourselves, according to our own personal utility maximisation calculations, how we are going to allocate the rewards of our labour over children, retirement, leisure and other forms of consumption. what this problem in the gig economy is doing is making those costs plain to all: some people are willing to do things in exactly that all cash manner and do the allocations themselves. Insisting that they take the defined bundle destroys those jobs they’re quite happy doing.

Of course, some will say that everyone must therefore be forced into that standard bundle. But we think there’s a liberty argument to be made for instead destroying the very idea of that standard bundle being imposed. Let wages be paid in cash, only cash and purely cash and everyone then gets to decide how they’re going to structure their leisure, retirement, child rearing and everything else.

Why should the State insist on either a minimum or maximum amount of leisure for us?

Where is David Cameron getting his information from?

It’s distinctly uncomfortable to find the country being run by someone who is not well informed. Worrying even. And David Cameron does seem to be remarkably ill informed on the subject of the gender pay gap:

“Today I’m announcing a really big move: we will make every single company with 250 employees or more publish the gap between average female earnings and average male earnings.
“That will cast sunlight on the discrepancies and create the pressure we need for change, driving women’s wages up.”

For, as we’ve explained many a time here we don’t really have a gender pay gap. There’s a motherhood pay gap, most certainly. And men and women do tend to cluster into specific professions and jobs: pay not being equal between all jobs of course. And that’s about it. Once anyone takes a close look we can’t find any difference at all (perhaps, maybe, a one or three percentage point residual) between wages of men and women simply on the grounds of their being men and women. The rest of the difference is explained by job choices, hours worked, qualifications, education and so on.

We can even show that it’s a motherhood pay gap, not a gender one. For there’s a point at which women go from earning more than men to earning less. And that point, that age of life, has been advancing pretty much in lock step over the decades with the average age of primagravidae. And let us be honest about this. In a viviparous mammalian species we’re really just not that surprised that there’s some gender differentiation in the care and raising of the next generation, are we?

And there’s something more worrying too:

However, women on average still earn 19.1 per cent less than men – equivalent to 80p for every pound earned by a man.

That is using mean wages and not median. And Harriet Harman was rapped over the knuckles by the Statistics Commissioner for doing that. Medians are what we should be using here, that use of the mean is grossly misleading.

And, well, you know, surely we can expect a Prime Minister to better than Harriet can’t we?

Why does George Osborne hate women and Northerners?

George Osborne is actually boasting about how it will be women and Northerners who lose their jobs as a result of his national living wage:

The chancellor, George Osborne, will respond to claims his budget welfare reforms hit the poor hardest by saying women and those based outside London and the south-east will be the main beneficiaries of the government’s new national living wage.

The point being, in other words, that a rise in the minimum wage can only affect the incomes of those upon whom it is binding. And a rise in the minimum wage is also only going to cost the jobs of some of those upon whom it is binding. Thus the claim that the incomes of specific groups will rise, women and Northerners, is the same as stating that the rise in the minimum wage will cost someone women and Northerners their jobs.

The general rule of thumb is that a minimum wage of over 50% of median wage starts to have significant unemployment effects. And it’s not just the general median wage either: it’s of the wages of whichever group is under discussion. Wages in the North are rather lower than they are in the SE: thus the jobs losses will hit harder in the North. Female wages are rather lower than male: so more women will lose theior jobs than men. And this £9 an hour idea is actually higher than the median private sector part time hourly pay (from ASHE) which means that one of the glories of the UK labour market, the plethora of part time jobs providing that life/work balance and flexibility, is going to take one darn great big hit.

As we’ve been saying, instead of raising the wage a vastly better idea would be simply to stop taxing the working poor so damn much. For we’ve not in fact got low wage poverty in the UK, we’ve got tax poverty.