A rise in the Minimum Wage is an easy sale, but it won’t fix the “cost of living crisis”.

Alex MacDonald May 23, 2014 3

 

Calls from Ed Miliband to raise the minimum wage have united all of the major parties on a traditionally contentious topic. The exact increase remains to be seen, but whatever the amount, we know that the response will be broadly positive from the British electorate; with even Ukip’s Patrick O’Flynn claiming that he was a supporter of the minimum wage.

So is there any room to oppose an increase? Possibly; but perhaps not via on the old rhetoric. The traditional arguments which have been heard against the minimum wage are that it leads to an increase in unemployment, higher welfare spending, and the demise of small business; but they haven’t always been accurate. What is true however, is that a small increase – as it is likely to be – will not address the problems which are causing the “cost of living crisis”.

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Everything is becoming more expensive, and it will take a good deal more than a minimum wage increase to fix that.

Energy Prices

The energy market has been barraged with headlines of unfair hikes in its pricing, and in a bid to bring bills down, Labour have called for price freezes in the market.

But the fact is that energy demand is increasing at an unprecedented rate. Since the rise of the fast paced bull markets in China, South Africa, Brazil and a number of others, you can’t look at British energy without understanding the global picture. Demand is on the increase; therefore bills become more expensive. Plus, the source of British energy often comes from volatile regions in the East; the Iranian Strait of Hormuz, which only 2 years ago was on the brink of being closed due to political difficulties in the region, sees roughly 35% of the world’s oil pass through it.

So it shouldn’t come as a massive shock to learn that electricity and energy prices in the UK are set to significantly rise over the next fifteen years. Electricity is set to jump by 41% when we reach 2030, and the 5% hike in gas bills by 2020 will also put the squeeze in our wallets.

It’s all about to get very expensive, and as you may see, this isn’t something a small rise in wages can fix.

6 companies dominate the British Energy market, and despite the externalities and the demand pressures on the world’s energy supply, the lack of competition in the UK really doesn’t help things.

There hasn’t been a new energy company in Britain since 2002.

What this has produced is a market where 95% is dominated by an oligopoly named “The Big Six”; competition struggles to enter due to the established market, and the established market can’t really compete because 50% of its supply process of British energy (Distribution and Transmission) is handled by the regulator OFGEM – not by the companies themselves.

On top of this are the European energy targets which pledge to cut 40% of 1990 emissions for 2030, and for 27% of British energy to be produced by renewables. Many environmentalists will pay homage to the necessity of these targets, which they say, will combat the speed of Climate Change and the predicted rise in sea levels.

But it is also true that these targets place additional weight on the “Cost of Living crisis” in the UK. Current policies on energy are having an effect on our bills: by 2020 small to medium businesses are expected to be paying an inflated 23 – 26% over the standard rate due to market intervention. Wind turbines will of course get the biggest kicking from the public, and aside from their aesthetical deficit, they are also the producer of around 1-3% of British daily energy needs; despite all the funding.

Money ought to be diverted away from Wind Turbines and instead placed towards more pragmatic sources such as Nuclear Power, which is a cheaper and cleaner energy source than what we currently rely on with over sourced fossil fuels. I even know some young members in the Green Party who are pro-Nuclear, and because of the rise in bills and the unfortunate results from big renewable projects, it’s easy to see why.

 

House Prices

housing

News reports on housing are often focused on London, and a 17% annual increase in house prices in the Capital can quickly illustrate why. Not enough houses are being built to bring down the rocketing prices which we are seeing in certain parts of the South. But, it’s not just the South which is losing its grip on purchasing power, because the most recent ONS report illustrates that areas outside of London and the South East are up by nearly 5%.

It’s a steep climb for first time buyers, as we all know, but not nearly as steep as it is about to become. The reality of a “two-tier” society, separated between those that have and those that have not can be solely placed on the government’s decision to build too few homes. A 17% increase over a three year period would stop the vast majority of home owners from ever buying a house in London; that’s a picture being painted – albeit at a slower rate – in many areas of the UK.

The future has to be upwards. There is space in the UK to eat away at its green belt, but a more sensible approach would be to build upwards in cities – not necessarily outwards. In order to do this there needs to be careful deregulation of planning permission within cities, and also it needs an economy which is performing well with citizens who can afford the mortgage rates.

We have approached this point. The UK is now the fastest growing economy in the Western world, and there has been a rise in wages and a lowering of unemployment. There is more of a drive to start building houses than there has previously been under this government – so go on, let’s get private enterprise taking the initiative on this now, it’s time for the government to step back, carefully deregulate, and allow the housing market to reach 5th gear.

 

Food Prices

The supply-side issues with energy are an imprint on the issues with food production world-wide. The world’s population is booming, and of course, the food supply must keep pace. It isn’t doing that, and as a result food prices will continue to outpace wages until 2018.

We’ve been in stickier situations before. In the mid-1900s it was Norman Borlaug who revolutionised the wheat supply in famine-struck countries and stopped the death of millions through innovation and Science. We may be needing another burst of innovation soon.

Or will we? The answer may lie in trade. At present, the European Union is responsible for negotiating trade for its members, and its entry laws expect food to be of a particular standard in order to gain access to the European markets. There are many countries which we could be trading apples and oranges with, but are not able to because they do not meet the required standards. There may well be an argument for the EU to lower its barriers to entry to allow trade deals to be struck with developing countries, which crucially, will create wealth abroad and promote investment into agricultural sectors which are paramount for a long-term stable food supply.

If there is one thing that free-marketers dislike about the EU more than anything else, it’s the protectionist stance the monolithic bloc adopts on trade. We have the opportunity in Europe to trade with the world, yet we don’t because politicians decide that certain goods are not acceptable. That is a function of a market which should be placed firmly in the hands of consumers, and it’s a facet of the EU which contributes to rising food costs in the UK as well.

 

There seems to be a reoccurring theme here: Markets need to be opened, and trade needs to flourish. If the politicians still have faith in the ‘competition produces efficiency’ idea then they should act on it.

It’s a lie that any of these three sectors can be attributed to a market failure, because none of the circumstances allow a market to truly compete. This structural failure is not allowing competition to flourish, and it will completely undermine an increase in the minimum wage, because there are far bigger problems which cannot be solved by more meddling from the benevolent legislators.

 

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