Tuesday, 20 October 2015

International Business Times: George Osborne's national living wage is 'magic money tree' thinking

International Business Times: George Osborne's national living wage is 'magic money tree' thinking

The chancellor's logic is this: working tax credits "subsidise" firms by allowing them to pay their workers less. Reduce the subsidy, and raise the minimum wage, and firms will be forced to pay their workers more. The government spends less and firms spend more, and workers don't feel the difference.

Virtually none of this is true. Tax credits do not subsidise firms, raising the minimum wage does not magic more money from firms to workers and even if it did it would hardly offset the tax credit cuts at all. Osborne is cutting one of the best kinds of welfare we have, and adding insult to injury with a minimum wage hike that may do more harm than good.

In-work poverty is a significant and probably growing problem for developed countries. Although globalisation and automation raise living standards overall, unskilled workers in developed countries, who could previously rely on industrial jobs to provide a decent wage, are now finding these jobs going overseas. At least for the time being the jobs they are finding instead are not as good.

That means that the old welfare state, designed to act as a temporary safety net to support people in between jobs, is outdated. We now have a large and growing number of people who are not economically productive enough to earn the wages that most people think are necessary to have a decent life even though they are in full-time work.

Tax credits, which are really a form of direct cash transfer to low earners, are designed to remedy this problem. The principle here is that is that a job may not be enough, and giving poor people money to top up their incomes is the best way to improve their standard of living.

I hate to criticise Conservative policy, but George Osborne's economics seems really flawed.

I have a suspicion that George Osborne is actually Machiavellian enough to realize that the 'Living Wage' will result in increased unemployment. Perhaps he believes that the employment rate is too high and a smaller workforce would be more competitive and productive. Could it be?

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