Government and Institutions

What’s wrong with Osborne’s ‘Living Wage’ proposals? Ask me what’s right about them.

I had a Telegraph blog published this morning detailing my initial reaction to George Osborne’s new ‘National Living Wage’ (NLW) for over-25s announced yesterday. In it, I emphasise that the policy is based on two faulty pieces of economic thinking: that tax credits primarily subsidise employers and that raising the minimum wage is a good poverty reduction tool.

I then go on to suggest its implementation – that is changing the National Minimum Wage (NMW) to a NLW target of 60% of median hourly earnings for over-25 year olds – will have two negative consequences. Firstly, directly reducing hours of labour demanded, and hence employment. Secondly, in changing the whole perception of what the minimum wage is such that it is compared to the Living Wage campaign calculation, which could be very damaging in the long-term.

I don’t want to repeat these arguments again here. Indeed, I am sick of making them having done so on a daily basis for the past two months. But having read more detail about the new proposed policy, here are 7 more very brief thoughts:

1)   The Low Pay Commission’s role is now bizarre. If the OBR’s explanation is now correct, the LPC will still set the NMW as it does now for all over the age of 21. But then the National Living Wage for over 25s will be like a premium to this, with a target of hitting 60 per cent of median earnings by 2020 for that group. But given the LPC is now effectively just setting the NMW for 21 to 25 year olds, why would it set the NMW according to the same framework as now – i.e. considering the employment effects on all over 21? Why wouldn’t they set it just considering the employment effects of those affected – i.e. 21-25 year olds?

2)   Some fiscal trickery with the personal allowance. One reason why I’m guessing they’ve tiered the NLW in this way is because the government have pledged to link the personal allowance to the income level of someone working 30 hours on the NMW. By defining the 21-25 year old rate as the NMW, this becomes less fiscally costly.

3)   Up to 6 million workers will be affected, according to the OBR. This is comprised of 0.75 million people aged 25 who would be expected to earn what the NMW would have been in 2020, 2 million earning between the likely NMW and the projected NLW and 3.25 million further up the income distribution due to ‘spillover’ effects. This is highly significant.

4)   Barely any fiscal gains. We’ve been hearing for months that a much higher minimum wage would bring substantial fiscal savings. The OBR has shown this to be completely wrong. As I kept saying, once the effects of higher wages on employment, hours, prices, profits and then as a consequences pensions, benefits etc are considered, there are no savings to the public purse.

5)   Yes, some productivity improvements – the French way. The OBR makes the point that average hourly productivity may increase due to this policy, simply because the number of hours worked by low productivity workers may fall. Something to celebrate?

6)   This is not the Living Wage that campaigners want. In appropriating the name National Living Wage, Osborne has opened his new NLW to always be compared to the Living Wage campaign, which is higher than he plans and will be much higher still given tax credit cuts (which are included in its calculation). Already the most moderate Labour candidate Liz Kendall is slamming Osborne for misleading on the Living Wage claim. There’s hypocrisy here too from Labour of course – they are now lamenting a minimum wage higher than what they were proposing, and have never indicated they are in favour of a statutory ‘Living Wage’. But here’s the thing. Whilst lots of conservative commentators all sing the praises of Osborne for being politically astute, the actual evidence is that he’s just started an arms race on this with people that will always want to go further than him. That doesn’t seem wise to me.

Ryan Bourne is the IEA’s Head of Public Policy.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

2 thoughts on “What’s wrong with Osborne’s ‘Living Wage’ proposals? Ask me what’s right about them.”

  1. Posted 09/07/2015 at 14:03 | Permalink

    A truly ghastly idea; all it will achieve is to lop (a bit more) off the bottom of the labour market, leaving even more low-productivity workers permanently out in the cold and putting marginal enterprises that rely on low-cost labour out of business.

    We are told it was “politically astute”. Well, a lot of things may be politically astute in that they appeal to a mass of ignorant voters who will always welcome some “free stuff”. But this doesn’t alter the fact that yesterday’s budget was piece of demagoguery is unworthy of a responsible government.

  2. Posted 09/07/2015 at 16:47 | Permalink

    If this country in the future should ever end up with a government which isn’t by some miracle of an extreme far left disposition, or at least not as abysmally economically ignorant as this one is, then this tragic tomfoolery will hang around their necks like an immovable millstone such is emotional appeal of the minimum wage. Appalling stupidity of the kind the Tory Party soft left (Cameroons) seems to pride themselves in.

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