Britain's slow wage growth could be to do with the taxes upon wages paid

It's a standard and completely unsurprising economic point that taxes levied upon the employment of labour come out of the wages paid for that labour. The employer is interested in the total price to be paid to gain the work desired, how that is divided between, say, national insurance and wages, is of no consequence to said employer. They're both part of the total costs, raise the NI portion and you'll lower the wages part.

Thus we might have a useful explanation for slow wage growth recently:

The Apprenticeship Levy, which came into effect last April, forces companies with a wage bill of more than £3 billion to pay 0.5 per cent of it to the Education and Skills Funding Agency (ESFA), which is part of the Department for Education.  

The companies have until April 2019 to draw down the funding, which they must use to take on new apprentices, or train existing staff.

As is the nature of these things a flat rate tax will largely produce revenue from those on higher wages. As is also the nature of these things apprentices are generally paid rather low wages. To tax the higher paid to produce lower wage jobs - and, as above, the total charge coming out of wages, it ain't the employers carrying the economic burden - will tend to reduce wages, won't it? 

What is one of the major complaints about the British economy currently? That there's not much wage growth.

Gosh, we wonder why?

Once again the new economics foundation fails economics

Nef, the new economics foundation, has a new little campaign running. That there should be affordable rents of businesses working in the railway arches which permeate London. This is to entirely misunderstand the purpose of prices:

In many cases, traders are being replaced by cafes and workspaces designed for people working on laptops.

Of those that remain, many are struggling for survival, as business rates also went up substantially last year for the first time in seven years.

Frances Northrop of the New Economics Foundation says: “Imagine Londonwithout the small businesses of Portobello Road, Brick Lane, Columbia Road and Chinatown. They are being driven out by the cold logic of ever-increasing rents.”

Many small independent businesses are based in railway arches across London, often owned by Network Rail or Transport for London.

As their press pack notes:

This campaign is really important and closely linked to the London Living Wage. If it can be established what a person needs to earn to live in London, it must be possible to establish what a small business can afford to pay in rents and rate.

As we say, this is entirely to misunderstand prices. For that's exactly what they do for us. Tell us how much a business can afford to pay in rent and rates. More than that, railway arches are a scarce resource. There's a limit to the number of them and a larger number of people who would like to occupy them. We thus desire them to be occupied by those who are adding the most value - that will be those who are able to pay the higher amounts in rent and rates.  

The market in property, the associated rent and rates costs, therefore do the job for us - sort through those who will add the most value by occupying a railway arch and also make sure that those who do add the most value do the occupying. Huzzah, job done and all that.

If that turns out to be cafes and workspaces instead of artists then so be it. We might not like what prices are telling us but they don't lie all the same.

All of which is just another instance of that great truth first revealed by Giles Wilkes. Nef stands for not economics frankly.

Today's economics lesson comes from Myles na Gopaleen

One of the great comic writers or journalists of the past century might not be thought of as quite the place to find an economics lesson, nevertheless it is so:

"This is the first time a newspaper article was started in brackets. Innovation, you see. The homeric task of creation. Bringing into being a thing hitherto not here, much more exhausting than building pyramids in Egypt."

And there we have the explanation of why the poorer countries should be growing faster than the richer. For we lucky enough to be in those rich countries are up and around the limits of the technological envelope. For economic growth to occur we have to do that homeric creation thing, work out how to add more value through some process or another.

The poorer countries - a useful definition of being poorer being not at that limit of the technological envelope - can copy what is already being done elsewhere to add value and thus growth is easier. Or at least should be easier.

In one sense this is what has been happening these past few decades as our beloved neoliberal globalisation has been spreading. It should be true that poor countries grow faster than rich. It should be that global inequality falls as this happens. Back when we were trying to plan that global economy, to plan those local and poor economies as so many did, it wasn't happening. It's since we've stopped that planning and direction, allowing markets to take much more of the strain, that what should have been happening has been.

Or as we might put it, that neoliberal globalisation has been more about not doing things to stop it than anything else.

Paternity leave doesn't solve the gender pay gap

Given the reporting that's going on about the gender pay gap currently there are, naturally enough, a number of ideas floating around about how to close it. We don't think it needs closing, coming as it does from people exercising their freedom to live their lives as they wish but still, worth examining the ideas proffered.

One of which is more and better paid paternity leave. This idea has the advantage of at least understanding a modicum of the underlying problem. It is the change - on average of course, not particularly of any one individual - in working patterns after the arrival of children which causes that gap. Women tend to be the primary child carer more often than men do and that's the cause and nub of the basic problem, if anyone even wants to call it a problem.

OK, makes logical sense, if more men took more paternity leave then more fathers would interrupt careers as mothers so often do and the pay gap would shrink. But, well, we do have to test logic against reality:

Forget "ladies who lunch." In Sweden there are "latte dads."

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Latte dads aren't so commonplace because of their taste for caffeine. They're a direct result of Sweden's parental-leave policy, one of the most progressive in the world. The Swedish governmentsays that parents of both sexes are entitled to 480 days (16 months) of paid parental leave at about 80% of their salary (with a cap), plus bonus days for twins, and they must share — Swedish dads must take at least some of those 16 months. The days don't expire until the child is 8 years old.

...

"Men with prams have become such a familiar sight since shared parental leave was first introduced in 1974 (a full 41 years before parents are scheduled to get it in the UK under the government's proposals) that there's even a name - 'latte pappas' - for the tribe.

Excellent, Sweden has those policies which are advocated for here. Our reality test being do they close that gender pay gap? Well, no, not really. By the method the EU uses to measure it it's 15% in Sweden as opposed to 16% across the EU. As opposed to 6% in Italy which most certainly doesn't have any cultural tendency to latte dads.

Oh well, another of those plans which look good on paper but fail on exposure to actual human beings.

We're entirely happy to agree with the most vociferous of feminists that the gender pay gap is the result of deep seated cultural discrimination. It's just that we're entirely certain that it is discrimination by parents themselves over how they'd like to organise life to raise their own children. As such that gap - better to call it an earnings gap as well - is an outcome of people exercising their freedom and liberty. Something we thoroughly approve of ourselves even as it drives certain people entirely up the wall.

Wanted: A Gerald Nabarro to kill import tariffs

Sir Gerald Nabarro was a splendid figure. An immaculate dresser with a huge handlebar moustache, his three Rolls Royces were numbered NAB 1, NAB2 and NAB3. He appeared at every budget day, when such things mattered, in morning suit with top hat.

He killed the Purchase Tax by a series of relentless questions over the years: “Why was a budgie mirror with a bell taxed at a lower rate than one without a bell? Why was a 10-foot ladder taxed at a lower rate than a 12-foot one?"

My grandmother’s mantelpiece had two identical flower vases. The one marked “celery” on the base was 25% cheaper (essential) than the one that did not (luxury). Sir Gerald made the lives of successive chancellors such a misery that they eventually gave up and abolished it. We need someone to do the same for the Trump tariffs.

If we are to be silly enough to compile lists of those goods we choose to make more expensive for our customers, we need someone with Sir Gerald’s style and stamina to ridicule them. Step forward a backbencher looking to make a name for herself (or himself) with relentless questioning to expose the absurd and arbitrary nature of tariffs. Why are jeans with famous squiggles on the back pockets subjected to a higher tariff than those that do not? Why are bourbon whiskeys in the top ten of popular brands taxes at 35% more than the others?

I am sure that an army of unpaid volunteers would supply our backbencher with reams of examples with which to bombard hapless trade ministers. Eventually, as with the purchase tax, they might just throw in the towel (assuming it is not made prohibitively expensive as an import luxury).

There would be no money in this, and maybe no ministerial promotion, but there might be a knighthood, innumerable appearances on media shows, and the thanks of a grateful nation. Would a latter-day Sir Gerald kindly step up to the plate…

Book review: Profiting from Integrity by Alan Barlow

If you believed the Left, you might think that people in business are all cutthroat crooks. This book aims to demonstrate—through hard evidence—that when a corporation is run with integrity, it delivers better financial performance too. As the most successful and robust capitalists, like Charles Koch, already know. "Conducting all affairs with integrity,” he says,  "is the first principle because it is the basis for trust and the foundation for mutually beneficial relations with our constituencies - employees, customers, suppliers, partners, communities and governments."

The book’s author, Alan Barlow, illustrates the integrity-based management approach from his own experience in running a multi-national corporation. To him, integrity in business means: transparency in what management and staff say and in what they do and how they behave; management and staff taking a proactive stance as to what is acceptable and unacceptable behaviour; integrity as a prerequisite of how CEOs go about leading and managing their corporation, not an afterthought; and making integrity a core business process.

His recommended approach has several elements. Feedback, for example: making sure management and staff share things honestly. Stakeholders: identifying the people who matter. Vision: setting out a vision that motivates staff and meets the wider community’s needs. Integrity: embodying integrity and honesty into the business. Leadership: ensuring the moral direction is set from the staff. Staff: delivering real engagement and communication. Barlow devotes a chapter to each of these headings, showing how—and why—they lead to greater business success as well as moral satisfaction. And using the Culture Audit survey developed by the Great Place to Work Institute, he shows how each of these approaches also makes integrity-led businesses great places to work.

Barlow highlights some of the superior financial performance that his own company experienced through the integrity approach. Record growth in excess of targets; a doubling of size; profits growing 18% compound for seven years; revenue growth at double the market sector average; a 20% premium when the company was sold. 

But was that all due to integrity? Could it have been more about the quality of the management and staff, or grasping opportunities, or taking market share from others, or more and better R&D, or good networks? Maybe, says Barlow: but if so, that was precisely because the commitment to integrity encourages all all of these things—such as making the business a place that attracts first-class employees.

And again, is integrity perhaps something that works in some businesses—those like service industries that have very direct relationships with customers, for example—but not others? Barlow insists it benefits all, as the survey evidence suggests: America’s top companies to work for come from all sectors, and their financial performance is better than others too. Barlow concludes that companies can achieve greater profitability, be great places to work, and benefit the community through acting with integrity in everything they do. That’s possible if CEOs have the right character, mindset and intrinsic belief in themselves and the quality of what they create. And it is a million miles away from the dog-eat-dog fast-buck parody of capitalism imagined by the left.

It’s not just Paul Drucker’s idea that ‘culture eats strategy for breakfast’. Rather, ‘integrity eats strategy for breakfast’. People, it seems, want to work for and do business with people they trust, and avoid those they don't. Who apart from Charles Koch would have guessed?

You can buy Alan Barlow's book, Profiting from Integrity, here.

It's only ever the excuse for economic planning which changes

Time was when that scientific socialism was going to make us all richer though planning - eliminating that waste and competition of undirected free markets. That one worked so well as 1989 showed. Sadly though, the passion for planning remains, it's only the excuses which change:

The Climate Change Act should now become the model for the new sustainable economy act. At its core would be a legal requirement on the government to set environmental limits, and to produce economy-wide plans to achieve them. Over time these limits should include air pollution, soil degradation, resource depletion, plastics pollution and biodiversity loss. All together they would bring the economy within a sustainability constraint.

For each major environmental impact, the act would establish a long-term goal and require the government to set shorter-term targets and plans. So, for example, the 25-year goal of eliminating non-recyclable plastics would be implemented through a series of five-year plans to cut plastic waste by a specific number of tonnes. A long-term goal of restoring biodiversity to, say, a 1980 benchmark would be implemented through successive five-year targets for individual declining species.

The goals and targets would be based on the advice of an expert and independent sustainable economy commission, modelled on the climate change committee, which would in turn report to parliament.

The logical mistake being made here - over and above the one that planning doesn't in fact work - is the failure to realise that the environment is not an absolute good. Sure, we'd prefer not to choke the whales, we'd like not to boil Flipper and we're eager the beasts of the fields  multiply. But how much would we prefer, how much would we like, how eager are we?

That's a balancing match there. For our other consideration - among many others perhaps - is human utility. That we 7 billion of us get to enjoy this life and planet to the maximum amount we can without actually bursting from the joy of it. We therefore need to understand the cost of the varied desirable things.

Fortunately we have a method to do that. Those markets so derided in fact. Yes, it's true, there are some things which markets don't contain - the answer is to put them into markets with Pigou Taxes. Absolutely not to try and plan, even the Stern Review pointed out that that was the wrong way to do it.

Crowbar the price system if we must, but how much pollution, resource use, biodiversity, we have is an outcome of the rest of the world, not a plan which can be imposed upon it.

Passport to free trade

In this week's Madsen Moment, Dr Pirie takes on the issue of why a global and free trading Britain should be happy to buy its passports from the highest quality and lowest price bidder – no matter where in the world they are. 

De La Rue's passports and the political allocation of contracts

De La Rue is complaining bitterly that someone else - that is, not them - is getting the contract to print the new post-Brexit passports. There're a number of things that can be said about this:

The passport manufacturer De La Rue is set to announce it will challenge the government over its decision to manufacture new blue British passports in France.

The company will formally launch an appeal against the decision to award the £490m contract to the French-Dutch firm Gemalto on the grounds that it believes it had the best offer on quality and security, though not on price, according to the Financial Times.

...

The Home Office has previously said changing the contractor would save UK taxpayers £120m but the decision has been met with a storm of criticism from Brexit-backing MPs, as well as Labour and trade unions.

...

De La Rue’s chief executive, Martin Sutherland, has previously expressed outrage at the decision to award the contract to the rival firm, telling the BBC that Theresa May should “come to my factory and explain to my dedicated workforce why they think this is a sensible decision to offshore the manufacture of a British icon”.

One thing to say is, well matey, if we're to say that something British must be printed in Britain then where does that leave your global contracts to provide both passports and money for other countries then? You'd be happy to lose all of those contracts to their national champions would you? 

But enough of the snark. What this really shows us is how bad politics is at allocating contracts. It's just a bad way of deciding economic matters. Sure, we don't know how this is going to turn out, don't know if the government will cave to the shouting here. But look at what the political demand is.

The taxpayer should be gouged for an extra £120 million because politics. Politics being the only argument actually there to justify that extra gouging. That is, having failed at every other argument, like cost, efficiency and so on, politics is being appealed to.

Now think on the implications of that for every politically awarded contract. It's not an efficient manner of producing goods and services for the consumer, is it? The very point of using politics to assign being to award to the politically favoured, those who would lose out under any consideration of price or efficiency.

Obviously, there are some things that simply have to use the political process but that very definition of it, that it is subject to other than cost effectiveness arguments, means that we should only use it where we must.

A stunning finding - low pay is less than average pay

We'll all be most shocked by this finding, that low pay is less than average pay. No doubt about it really, that just is a stunner. Although perhaps we might think that the part worth remarking upon is that anyone would make this complaint. Yet here it is:

The government’s own official number cruncher, the Office for National Statistics, also warned the new government minimum falls short of average family spending. It reckons mums and dads working full-time would earn £212 per week less than the average amount spent by all households with two adults and two children last year.

Put simply, the living wage rise is not what it says on the tin.

That is an interesting thing, one worth remarking upon. If the "Living Wage" does not bring all up to average disposable income then it's not a "living wage"?

We do seem to have changed from that original definition of what a living wage is. Something that used the logic of Adam Smith's linen shirt to ask people what people should be able to do in order not to be considered poor in our current society. That was something which only indirectly talked about inequality. We got to a cash number (that £8.75 an hour figure today) which was based upon the populace's gut feel of what inequality in disposable income was fair and/or just.

That has just morphed into the idea that the living wage is not doing its job if disposable income is unequal.

That the poor in a rich society have something is just one of those things society should aim for. That there be none on less than average income isn't something any society has ever achieved. Probably better therefore that it not be set as a goal, eh? Nor used as a complaint?