Help the low-paid by slashing their tax and boosting education

Allister Heath

IT is clear that the working poor desperately need help. With the cost of living rocketing, they are being hammered. The situation in many cases is heart-breaking; the cost to taxpayers in terms of in-work and other benefits is large; but the solutions are hard to get right.

One option would be to hike the minimum wage (now £6.31 for those aged 21), perhaps by making the living wage (£8.55 in London) compulsory. But such a large rise would backfire disastrously and increase unemployment substantially among younger, low-skilled workers and other vulnerable groups. It would also accelerate automation – firms are already substituting machines for labour as quickly as they can, with supermarket checkouts in the vanguard of that revolution.

The problem is this. Workers who produce £7 an hour worth of value to their employers cannot cost them £8, or even £7.01; if they do so (in wages, benefits, tax and other expenses), they will lose their job. This has little to do with the overall profitability or otherwise of a business. A company that makes a lot of money still won’t want to employ or retain staff that cost them, rather than make them, money.

There are a few caveats. A handful of firm – such as large investment banks – employ very few low-wage workers and in roles that are hard to automate, and wouldn’t mind paying them more. Many have already signed up voluntarily to living wages; cynically, in many cases, the additional cost is deemed part of their public relations budget.

Take also the following scenario. If a worker is paid £7 an hour but is worth £9 to his employer, perhaps because of some feature of that industry’s labour market, a minimum wage of £8 won’t eliminate his or her job. But even then there would be no free lunch: £1 less in profit will have consequences over time – for example, reduced investment – even if they are tricky to pin down. Another possibility is that training would be cut – what matters to employers is total costs, not just wages. In any case, there are probably far fewer instances of such scenarios that some people would believe.

Companies can sometimes increase workers’ productivity by paying them above-market wages – either because they feel better valued or because they are more scared to lose their job. The problem, of course, is that this wouldn’t apply if every employee were paid more by law.

Labour’s tax break proposal to encourage some firms to pay some workers more would at best only have a marginal and temporary impact and will complicate the tax code further. It makes little sense. But the real story here is that Labour accepts that the living wage shouldn’t be compulsory, and that is a welcome development.

The best way to increase wages is to boost growth, which increases the demand for labour, and to bolster workers’ productivity, enabling them to sell their labour for more. Increasing a young person’s market value from £5 to £10 an hour would have more effect on his or her job and income prospects than any other policy; better education and training are critical.

It is also imperative to ensure that nobody who earns the minimum wage should pay any income tax any more, extending the reforms introduced by the coalition. The pre-tax income of somebody working full time on the minimum wage is similar to the post-tax income of somebody working full time on the living wage; the tax-free personal allowance should thus be hiked to £13,000 as soon as possible (benefits would have to be reformed to make sure the money wasn’t clawed back) to create the living wage’s outcome without destroying jobs. National insurance should also be cut.

Helping those on low incomes must become a national priority – but there are no cheap or easy solutions and no quick-fix legislative solutions. Better training and lower taxes will take time and effort but are the only sustainable solutions.
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