The Living Wage Fantasy has a viable alternative

Christopher Gage November 7, 2012 2
The Living Wage Fantasy has a viable alternative

 

This week in the political schedule is a hectic one. Just over the Atlantic, our colonial cousins are busy electing which representative of Goldman Sachs they would prefer to plunge their decaying society further into the financial quagmire. The guy with the hopey-changey agenda won the dubious honour.

The US election can be viewed often as a microcosm of the polar opposites of political thought. Democrats prefer to digest the more quixotic and whimsical of candidates; those who have intangible ‘visions’ and ‘dreams’. The Republicans tend to be representative of the dour, straight-edged hopeful who prefers not to promise such wild and intangible proposals but to keep their feet, and their voters’ heads, in contact with the ground.

A similar distinction of expectation can be witnessed here in the UK. Dependant on political affiliations, people tend to have vastly different expectations when it comes to politics. The debate this week on the Living Wage highlights this.

The Living Wage Foundation has designated this week, 4th-11th November, as living wage week in order to promote their cause. The basic idea here is to encourage (and pressure) businesses to pay their employees a living wage which is determined at £7.45 per hour. This figure is £1.25 an hour more than the legally-protected National Minimum Wage for adults.

The idea behind this is simple: paying better wages will lift many of our poorest paid out of poverty and into some other realm of relative financial comfort. If that is the case then why stop at £7.45, why not make it £10 per hour, £15, £20? Why can’t government just print infinite amounts of cash and stuff it into the bank accounts of the most deserving? It just doesn’t work like that.

It is not the idea of the lowest paid people having more money in their pockets that I disagree with, of course not. What I am opposed to here is the practicalities of this scheme actually working.

At a time when businesses are struggling to survive in an economic climate that refuses to improve, I don’t think that burdening them with extra requirements and employment barriers is the way forward. Hiring people at £6.20 an hour is difficult enough, being expected to pay £7.45 is suicidal. This difference in psyche is where left and right tend to dissect most greatly.

Despite the impractical nature of the living wage, it has obvious vote-winning qualities. Both Ed Miliband and Boris Johnson have been rather vocal and quick to be heard doing just so. Don’t be surprised to see a commitment to the living wage become a key element of Labour’s 2015 election manifesto. I don’t envisage many people scraping by on a pittance to reject a handsome increase in their salaries.

If we are to promote the main tenet of welfare reform being that ‘work pays’ then making people actually benefit from their labour is paramount to any of the crucial welfare reforms proposed by Iain Duncan Smith. The scandal of the ‘working-poor’ was sadly not consigned to Victorian Britain.

Although the living wage campaigners have, no doubt, the best intentions at heart, the problem with regulation and legislation such as this is that they often have unintended consequences. To put it simply: If a business owner is looking to hire some labour then the barrier for this to materialise into actually employing someone must be as low as possible; any increase in the amount expected to be paid to workers will have the undesirable effect of lower employment opportunities. Any job is better than no job, especially to those who are struggling to find work. During dismal economic environments such as today’s increasing the barriers to employment is the opposite of what actions we should be taking.

An arbitrary increase in the minimum wage or an expectation to pay the £7.45 living wage would damage business and the economy. But keeping the status quo completely intact doesn’t solve the problem of low wages and hard working people struggling to live decent lives.

The best, and least discussed, method of ameliorating this problem is to increase the tax threshold. If we care as much about the poor as we claim then let’s stop taxing them into poverty.

The recent TaxPayers’ Alliance 2020 report advocated a raise in the threshold to £12,500. This is all well and good but in the interests of a viable alternative to the living wage then this threshold must be slightly raised to £12,875 in line with a forty hour week paid at the National Minimum Wage level. This would mean that a person currently earning £12,875 would take home £11,304 at current tax levels. If this person was lucky enough to receive the living wage of £14,976 then their take home packet would be £12, 715. The same person earning an untaxed minimum wage would be slightly better off with £12, 875. All without increasing employment barriers and regulations.

The most viable option is clear here. With the coalition government already looking to increase the tax threshold to £10,000 this proposal is no pipe dream. The mooted financial benefits of the living wage are reported to be to the tune of £6 billion per year in increased taxes going directly to the government. As this proposal is a tax cut then that would not be the case, obviously, but the savings made from decreased Working Tax Credit expenditure could go some way to financing this move. At current we take with one hand and then pay an army of busybodies to give it back to those who qualify.

Let’s take the poor out of tax. It makes sense.

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