Why the 10p tax might speed up welfare reform

When Gordon Brown decided to abolish the 10p tax rate, he was calculating that there wouldn’t be much of a political fuss.

After all, a large part of the workforce that benefited from the 10p tax rate were immigrants working in low-paid, unskilled jobs: factory workers, farm hands, restaurant staff and so on. These workers are conveniently unable to vote in parliamentary elections, and lack much political clout.

They are also increasingly important to the UK economy: it is estimated that 40% of EU migrants to the UK work in unskilled jobs – 96,000 EU immigrants took up unskilled jobs in 2006 alone.

While the rest of the country seemed oblivious to Mr Brown’s 10p tax reform following the 2007 budget, migrants from the EU appear to have been quietly taking note. According to research from the IPPR, about half of EU migrants have now left the UK, increasingly unimpressed by the economic opportunities offered by Britain. This trend is set to accelerate.

However, before Migrationwatch get too excited, this exodus of unskilled labour could bring with it a host of new problems: a tighter labour market, with increased upward pressure on wages and consequently greater general inflation.

As we know, inflation clobbers the lowest earners in particular, as essentials such as food become more expensive. So yet again, it will be Labour’s core voters that bear the brunt.

Fortunately, there are some 1.1 million people of working age on incapacity benefit who could feasibly be working. These people could fill the gaps left by our vanishing migrants, thereby easing inflationary pressures.

Time to put those welfare reforms at the top of the in-tray, Prime Minister?

...
written by Arthur, May 13, 2008

Interesting piece but could someone tell me why a "tighter workforce" leading to higher wages at the bottom is a problem. I would have thought this was to be welcomed. After all, is this not just the labour market doing what it is meant to do. In a tight labour market companies are encouraged to do several things: First they need to reallocate pay costs from the top to the bottom to retain workers and some would argue this was a social good as well as an economic good enabling more people to spend more on consumption. Second, companies are forced to look for more cost saving measures and higher productivity to keep profit margins high, another bonus for the UK economy I would have thought.

Would the economy not also find its own solution by reallocating labour from peripheral activities for those that the market considered more important. Equilibrium here is the word. I am not aware that countries with populations considerably lower than ours have disproportionate exposure to inflation. The logic then says that we need to continually expand the labour force to avoid inflation and this is clearly nonsense.

Can somebody also explain why these other effects are undesirable. If labour costs are higher in the UK then would there not be more pressure on reducing taxes and other 'social costs' we impose on our economy if we are to remain competitive in the global economy. And if the tightening of the labour market has the effect of reducing the difference between high and low pay then there would surely be less requirement for that Labour nonsense called tax credits - another bonus I would have thought.

And finally, I thought that inflation was more to do with money than just supply and demand of labour. The cost of labour at the bottom might well rise but at the end of the day, we can only spend what we have so just as long as we do not continue to expand the money supply then rather than being a bad thing, wage increases at the bottom will not be paid for by a general rise in inflation but a combination of lower wages at the top, better productivity and lower tax and social burdens in the country.

...
written by Mark Wadsworth, May 13, 2008

Well said Arthur! To every argument there is an equal and opposite counter argument.

The mystery of inflation
written by Tom Papworth, May 22, 2008

Arthur,

You raise an interesting question. If "Inflation is always and everywhere a monetary phenomenon" (Milton Friedman, A Monetary History of the United States 1867-1960), how come we continue to talk about rising commodity (esp. oil) prices and public sector wage demands as "inflationary".

Assuming GB can keep his hands off the printing press, public sector wages either compete with other public spending or require higher taxes (which will be struck down in the long run by voters). Rising fuel prices will simply encourage efficiency and the use of alternatives (public transport or non-fuel consuming alternatives) and rising food prices will merely displace other spending (from luxuries to essentials).

Written by Phil Stevens
Tuesday, 13 May 2008
When Gordon Brown decided to abolish the 10p tax rate, he was calculating that there wouldn’t be much of a political fuss. After all, a large part of the workforce that benefited from the 10p tax rate were immigrants working in low-paid, unskilled jobs: factory workers, farm hands, restaurant staff and so on. These workers are conveniently unable to vote in parliamentary elections, and lack much political clout. They are also increasingly important to the UK economy: it is estimated that 40% of EU migrants to the UK work in unskilled jobs – 96,000 EU immigrants took up unskilled jobs in 2006 alone. While the rest of the country seemed oblivious to Mr Brown’s 10p tax reform following the 2007 budget, migrants from the EU appear to have been quietly taking note. According to research from the IPPR, about half of EU migrants have now left the UK, increasingly unimpressed by the economic opportunities offered by Britain. This trend is set to accelerate. However, before Migrationwatch get too excited, this exodus of unskilled labour could bring with it a host of new problems: a tighter labour market, with increased upward pressure on wages and consequently greater general inflation. As we know, inflation clobbers the lowest earners in particular, as essentials such as food become more expensive. So yet again, it will be Labour’s core voters that bear the brunt. Fortunately, there are some 1.1 million people of working age on incapacity benefit who could feasibly be working. These people could fill the gaps left by our vanishing migrants, thereby easing inflationary pressures. Time to put those welfare reforms at the top of the in-tray, Prime Minister? Bookmark Comments (3) Subscribe to this comment's feed ... written by Arthur, May 13, 2008 Interesting piece but could someone tell me why a "tighter workforce" leading to higher wages at the bottom is a problem. I would have thought this was to be welcomed. After all, is this not just the labour market doing what it is meant to do. In a tight labour market companies are encouraged to do several things: First they need to reallocate pay costs from the top to the bottom to retain workers and some would argue this was a social good as well as an economic good enabling more people to spend more on consumption. Second, companies are forced to look for more cost saving measures and higher productivity to keep profit margins high, another bonus for the UK economy I would have thought. Would the economy not also find its own solution by reallocating labour from peripheral activities for those that the market considered more important. Equilibrium here is the word. I am not aware that countries with populations considerably lower than ours have disproportionate exposure to inflation. The logic then says that we need to continually expand the labour force to avoid inflation and this is clearly nonsense. Can somebody also explain why these other effects are undesirable. If labour costs are higher in the UK then would there not be more pressure on reducing taxes and other 'social costs' we impose on our economy if we are to remain competitive in the global economy. And if the tightening of the labour market has the effect of reducing the difference between high and low pay then there would surely be less requirement for that Labour nonsense called tax credits - another bonus I would have thought. And finally, I thought that inflation was more to do with money than just supply and demand of labour. The cost of labour at the bottom might well rise but at the end of the day, we can only spend what we have so just as long as we do not continue to expand the money supply then rather than being a bad thing, wage increases at the bottom will not be paid for by a general rise in inflation but a combination of lower wages at the top, better productivity and lower tax and social burdens in the country. ... written by Mark Wadsworth, May 13, 2008 Well said Arthur! To every argument there is an equal and opposite counter argument. The mystery of inflation written by Tom Papworth, May 22, 2008 Arthur, You raise an interesting question. If "Inflation is always and everywhere a monetary phenomenon" (Milton Friedman, A Monetary History of the United States 1867-1960), how come we continue to talk about rising commodity (esp. oil) prices and public sector wage demands as "inflationary". Assuming GB can keep his hands off the printing press, public sector wages either compete with other public spending or require higher taxes (which will be struck down in the long run by voters). Rising fuel prices will simply encourage efficiency and the use of alternatives (public transport or non-fuel consuming alternatives) and rising food prices will merely displace other spending (from luxuries to essentials). Write comment This content has been locked. You can no longer post any comment. Powered by Azrul's Jom Comment for Joomla!