This is a great spot by the FT’s Elizabeth Rigby:
George Osborne raised hopes the national minimum wage could be restored to its pre-recession value of £7 per hour before the election, despite the Treasury’s own analysis that such a rise would cost an estimated 14,000 jobs, the FT has learnt.
When the chancellor said that he thought Britain could afford a higher minimum wage, it was canny politics wrongly interpreted as a commitment to raising low pay.
In its submission to the Low Pay Commission, the organisation that recommends rate changes to the government, the business department includes Treasury calculations about the fiscal effects of an increase in the adult rate of the national minimum wage to £7 per hour in 2015/16 from its current rate of £6.31.
One of the arguments made by proponents of a higher minimum wage or a “living wage” is that it would raise more revenue for the Exchequer. Higher wages would, they argue, mean higher income tax and National Insurance receipts, and lower spending on tax credits; the state would pick up less of the employer’s wage bill. It is an argument that encourages some fiscal conservatives to support a wage hike.
But the government disagrees. The table below summarises why the Treasury thinks that it would not receive lots of extra revenue in the case of a wage rise.
The analysts make five assumptions about what would happen after a rise in the national minimum wage to £7:
- The impact on wage bills would be felt almost immediately;
- Higher wages would reduce employment (as per Beth’s story);
- Everyone made unemployed will apply for benefits;
- Higher unemployment would put downward pressure on wages;
- Businesses would make any adjustments over three years;
They then look at what would happen to spending and revenue under three scenarios, labelled in the three columns on the right hand side of the table – where businesses absorb the costs through narrower profit margins (“profits”), through passing on price rises to consumers (“prices”), and a combination of the two (“profits & prices”).
This post is not about these assumptions but there is an extensive literature showing that the minimum wage had less of an employment impact than feared. There is also evidence that the minimum wage led to productivity improvements. The worries implied in the analysis might well be overblown. (Of course, this is unknown.)
Nevertheless, the table does suggest that the fiscal impact of any minimum wage rise is less than many estimate – in part because of policies introduced by the coalition.
Take the “triple locked” state pension. Not only does this equate to about half of the “welfare” budget – a share set to grow – but it is now undermining the case for a minimum wage rise. The Treasury analysis assumes that state pension costs would increase as a result of the higher prices or higher earnings from any wage rise.
Or take the amount that could be raised through additional income taxes. The rise in the personal allowance – the Liberal Democrats’ flagship coalition policy – means that there would be a smaller tax take from any increase in the minimum wage.
I still think a minimum wage rise is a good idea but the fiscal impact is less clear. That might explain why the chancellor’s “announcement” was less than it seems.
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