Saturday, 12 September 2015

Someone's gonna have to pay

In his budget in July, George Osborne announced that, from April next year, the National Minimum Wage would rise to £7.20 an hour for over-25s, and that by 2020 he intended to raise it to a “National Living Wage” of £9 an hour. Some accused him of stealing Labour’s clothes, but there can be no doubt that this represented a major commitment to raising the living standards of poorer workers.

A large number of employers have spoken out against this, claiming it will damage their business, and Tim Martin of Wetherspoons has lent his weight to their campaign. Obviously it will increase the costs of labour-intensive businesses, such as any in the catering sector, but arguably across the whole economy it will be beneficial. I’ve not so far seen any beer bloggers raise this issue.

I’m not trying to start a general debate on the merits of minimum wage policies but, as with other things such as minimum alcohol pricing, the issue is not so much the principle as the level at which it is set. Some people seem to think that an increase in the minimum wage is in effect conjuring money out of nothing, but in reality it would be a transfer of resources from one group to another, and someone would have to bear the cost. This would be a mixture of:

  1. Customers, through higher prices
  2. Employees, through reduced hours, job losses and restriction of fringe benefits
  3. Business owners, through reduction of profits and dividends
This article in the Financial Times (free to view, but you have to register) suggests that larger companies will have the power to decide where these effects are allocated, and thus will only be affected to a limited extent. However, most pubs are either tenanted or leased, or independent freeholders, not part of massive national firms, and small businesses will be damaged much more. Independent pub operators aren’t exactly rolling in money as it is.

If a company is large enough, it will have the flexibility to make choices over where the costs of the minimum wage will be met. And although big businesses may squeal — or wish they could in the case of many large retailers, who bemoan the change in private but fear speaking out publicly lest they alienate customers — it is small businesses that have a much more legitimate gripe.

After all, among people who work at large companies, fewer than 4 per cent are paid the minimum wage; at businesses employing fewer than 50 people the figure is more than one-third. The national living wage is targeted to be worth 60 per cent of the UK median by 2020. But, if you look only at people employed by “micro” businesses that have fewer than 10 workers, even the current minimum wage of £6.50 an hour already meets that objective. For these companies, the new £7.20 figure looks particularly out of whack.

Small businesses have less than a year between the announcement of the NLW and its implementation. And that is not the only new financial and administrative burden with which they are grappling. The summer budget included a change in the tax on dividends, which will hit small business owners. So will their obligation to enrol all workers into a pension scheme, unless they opt out. Small business owners argue persuasively that the NLW will force them to cut jobs and even push some into bankruptcy.

It is sometimes argued that the increased costs of a National Living Wage will be redistributed through the economy, and thus stimulate demand. However, the costs will be mostly borne by labour-intensive businesses such as pubs, whereas the benefits will be spread across the board.

It is also claimed that the current minimum wage is set at a level some way below that of a “living wage” which allows someone to live independently. Well, people have always had to make their first steps into the job market when living at home or sharing houses. It’s also not widely appreciated that many minimum wage earners are second earners in a household, or people such as the partially retired who already have another source of income. For people in that position, earning £6 an hour for 16 hours a week in an undemanding job may be an entirely rational decision. It’s estimated that well over half the benefits of an increased minimum wage would accrue to households in the top half of income distribution.

As I said, it may well be that raising the minimum wage brings benefits across the whole economy. But it can’t be denied that it would have a detrimental effect on labour-intensive businesses such as pubs. It’s not a pain-free policy. There must be some way that Osborne could relax or delay it to help small businesses.


  1. Before the minimum wage was introduced the usual parade of big employers, Tories and tabloids made all of these arguments.

    It was stated again and again in apocalyptic opinion pieces that it would cost the UK 2 million jobs.

    It didn’t. Unemployment fell after it was introduced.

    Its long beyond time that politicians faced down big business, told their lobbyists to sling their hooks, stopped accepting corporate hospitality and made a plain statement that the tax-payer does not exist to subsidise their low wages.

  2. If you can't afford to pay your staff a wage you wouldn't be happy to live on then you've no business being in business. A bit simplistic but there you go - That's the way I see it.

  3. And so unemployment wouldn't rise regardless of how high the minimum wage rose? Why not increase it to £20 an hour, which would eliminate all in-work poverty?

    And, who is gonna have to pay? Customers, workers, or licensees? You tell me.

  4. You have conveniently overlooked the economic benefits of the increased disposable income when low paid workers get more money. Disposable income that they can spend in pubs and other service industries

    But 'mudge, in common with many right wing thinkers, has difficulty understanding the more subtle aspects of economic theory

  5. Err, I said above that the economic benefits would be spread across the whole economy, whereas the costs would be concentrated in labour-intensive sectors. Like pubs. It's robbing Peter to pay Paul - it doesn't generate any extra wealth.

    And maybe you would care to explain why a £20/hour minimum wage would not be a good idea.

  6. The current minimum wage is set at a level some way below that of a “living wage”.

    The bit that's missing here is that the taxpayer currently tops up the low wages paid by employers through the tax credits system to the tune of around £30 billion a year. The rationale was to make low-paying jobs worth unemployed people and single parents taking without raising the minimum wage. That subsidy is about to be cut sharply with the introduction of Universal Credit so as you say, someone has to pay. I'd much rather large, profitable companies like Wetherspoons be required to pay something like a living wage than the taxpayer continue subsidising them in paying below that.

  7. @Matt, couldn't agree more. Employers - large and small - in low-pay sectors such as hospitality rely on paying minimum wage which is effectively subsidised by taxpayers. They do it because they can. Paying a living wage and removing the necessity for benefits for many people would eventually reduce the overall tax burden but of course many larger companies wouldn't agree due to the culture of corporation taxation avoidance having already reduced their 'burden' down to the ridiculous. The Vodafone debacle being one good example.

  8. What constitutes a living wage is also being pushed up on the costs side. If it wanted to, the Government could reduce those costs by restricting housing, transport, childcare and energy prices.

  9. If Spoons have no actual business if they can't pay there staff a living wage, us tax payers should not be subsidizing low pay to keep Spoons going.

    Let business pay it's staff proper.

  10. I'd say a lot of people working in the minimum wage service industry are students or otherwise under-25. So the full £7.20 won't apply to them.

    Plus, a lot of those companies are deliberately setting up the vacancies (say a 12 hour a week contract) to make them deliberately unappealing to the over 25s. Where you'd once have had one person doing 36 hours, you now have three at 12.

    These companies didn't get where they are today without being about to figure out a workaround.

  11. A lot of people on minimum wage don't qualify for tax credits, though, including students, people with occupational pensions and second earners in a household.

    And I don't really see tax credits as being a subsidy to employers. If there were no tax credits, the same workers would probably be doing the same jobs will less overall income - they wouldn't go off and do something else. A subsidy would be paying companies directly to employ people.

    I think there's a widespread confusion between personal value and economic value here. A minimum wage worker is no less valuable as a human being, but it's a fact of life that no employer will give someone a job unless that person can add value to the business in excess of his pay.

  12. No one anywhere has mentioned £20 an hour, that's a canard that you set up.

    The current rate is £7.20, rising incrementally to £9 by 2020. People under 25 get substantially less.

    Big business always whines, its what they do. They expect minimal regulation, they send their profits offshore to evade tax and they whinge and make threats. Financial institutions argued against any form of sensible regulation for years, they won that argument and used the latitude they were given to tank the world economy in a splurge of insane gambling and outright fraud. Most of them have walked away from that scot-free and the rest of us have to pick up the pieces.

    Small business would be better helped by:

    * Shifting the VAT threshold way out (to say 200 - 250K)

    * A massive simplification of the flat-rate VAT scheme/cash accounting scheme for all businesses with a turnover under £1 million.

    * No business rates whatsoever on the first 2000 sq ft of any business and a taper up to 5000 sq ft. This to be combined with an increase above that level to make the measure revenue neutral.

    * A mandatory and eye-watering penalty for late payment where large concerns refuse to pay their invoices to small businesses hence destroying cashflow.

    * All businesses subject to local authority regulation having a powerful ombudsman/small business advocate to quickly deal with the arbitrary decisions of over-zealous Blakey types at the council.

    * Businesses under the VAT threshold being able to claim back VAT on the first 100K of purchases (including their legal/accountancy bills) in the first 2 years.

    * A mandatory limit (with stiff penalties) for delays in issuing permits/licenses/planning decisions and for things like business MOTs plus legislation making it illegal for public bodies to profit from such activities.

    Few of those would get the support of the CBI or IOD but would certainly stop anyone in small business caring about their obligations under the (very reasonable) minimum wage requirements.

  13. The effect of tax credits is not only to subsidize low pay but to create a high marginal rate of taxation on additional income for the poorest. You not only pay tax but lose benefit. They are a political creation to put large numbers on benefits that Gordon thought would keep people voting Labour to keep them.

    How can the Tories scrap them without being nasty? Increase the minimum wage and transfer the cost from the taxpayer to the employer. Simples.

    The really good bit, the bit of politics that you have to applaud Gideon for. It's the renaming of minimum to living wage. That is brilliant. That is bantering the opposition. That is getting away with it with style. That isn't just nicking policy, that's sticking it back up there own arses. I love it. So what if Timbo doesn't. A bill that was coming to me, Jonny taxpayer, is now on Timbos door mat. Let him put 10p on a pint.

    Those that already pay a decent wage have no reason to put 10p on a pint and the competitive gap is narrowed. Competition for my punter pound can be on quality and price, not a race to the bottom on staff wages.

  14. The £20/hour thing is an extrapolation, not a canard. The point is that there comes a point when further increases in a minimum wage become counterproductive and start to lead to inflation and job losses. As far as many small, low-tech businesses are concerned, that may well be reached at £9/hour.

    Some of your other suggestions have a lot to be said for them, although AIUI EU regulations would rule out a significant increase in the VAT threshold. Indeed many in the EU bureaucracy would like to see a major reduction in the figure.

    And it's important that tax and regulatory concessions to small businesses don't end up creating a barrier to further growth - as we have seen with Progressive Beer Duty.

  15. The economy of a nation is not the same as our own personal finances, even though that economic illiterate, Margaret Thatcher, insisted on confusing the two. If you give those without much money a bit more, they will most likely spend it, as they still won't have enough to save very much. Give rich people more money and they'll salt it away in tax-efficient (to use the euphemism) schemes. The former situation benefits the economy; the latter doesn't. This is a bit of a simplification, but the general point still stands.

    It's the same mindset that believes that cutting benefits saves money, when it simply ensures that a lot of people have even less to spend, which has a knock-on effect on all aspects of the retail sector.

    Our economy has been based on low wages for a long time. This is the economic equivalent of anorexia nervosa, and the result is similar: things might look good for a while, but sooner or later the deprivation is seriously damaging.

    Let's not be taken in by Tory largesse in going for the living wage. With cuts in tax credits, they are simply transferring the cost of the low wage economy they and their predecessors have fostered for decades to the employers: many people stand to be much worse off. That major change in direction will have some adverse effects on many businesses, but you can't turn the ship of state around in such a short time without damage. This is not a benevolent initiative by the government: it's just a way of cutting the benefits/tax credits bill, and nothing more.

  16. Compliance with EU law is always an issue, unfortunately some countries comply more than others. Of course my ideas are back of a fag-packet musings.

    The point is that that we could make things much less onerous for small business without altering the overall tax take that the state needs and that there are many things that could be done that would still allow the country to have a reasonable minimum wage.

    The first principle must be that private businesses in a free market cannot expect on the one hand that the state subsidises their profits, while on the other hand maintain that they should be free of any responsibility whatsoever toward the society that they operate within.

    The level at which the minimum wage is set is a matter for debate, however the principle that it should exist needs to be accepted by all as an moral imperative in a decent, stable society.

    Some jobs will always pay crap wages, that is the way of the world. However no-one who puts in a 40-60 hour week should be reliant on state benefits in order to subsist.

    Personally I think that anything above £9.50 is unwarranted and potentially damaging.

  17. It's an interesting debate. As M.Lawrenson said: the fact that the National Living Wage doesn't apply to under-25s means that the impact on pubs will be somewhat limited. With most workers in the industry on zero-hour contracts, it will be fairly easy to manage staffing so that under-25s make up the majority.

    An easy enough loophole to step through...


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