We need a Negative Income Tax, not a Living Wage

The new Living Wage rate was announced today. I’ve written a bit about the Living Wage already. If it’s private, it’s probably not a big deal, although it could still lead to unemployment. I suspect it’s done by big firms that don’t have many low-skilled workers as a PR move but I quite like PR moves that involve paying low skilled people more. And I worry that people will generalize from those big firms to assume that the whole market could bear a mandatory Living Wage, which is almost certainly untrue and would be very harmful to many of the people it’s supposed to help. What’s more interesting is the problem of low pay in general. Even though unemployment has fallen a lot in recent years in the UK, real wages have barely risen at all. Even as wages do begin to rise on average, it’s possible that wages for low skilled workers may not as jobs for them are outsourced to cheaper countries. The ASI has proposed raising the personal allowance (including National Insurance threshold) to the minimum wage rate, but this doesn’t do much good for part-time workers or currently-unemployed people who would earn below the minimum wage if we scrapped that, as I think we should.

So low pay may be a problem without any clear solution, for which most popular ‘solutions’ don’t actually work.

But there may be a fix that does work – a Negative Income Tax or a Basic Income. As I’ve written before these are actually very similar even though one is almost exclusively supported by right-wingers and the other almost exclusively by left-wingers. As ever in politics, we’re speaking different languages.

A Negative Income Tax is a form of income top-up that only looks at an individual’s income, not whether they are in work or not, and tops that income up automatically if they are earning less than a given amount. The extra money is withdrawn at a tapered rate, so that for every pound you earn from work, you lose (say) fifty pence in top-up, ensuring that workers always have a clear incentive to demand higher wages, and that work always pays more than joblessness for unemployed people.

This would replace lots of existing working age benefits, including Jobseekers’ Allowance, council tax relief, the Employment and Support Allowance and tax credits. You could probably implement a decent one without increasing total expenditure. The exact rates can be determined by running trials across the country.

A Negative Income Tax like this would almost certainly be a boon to people on low pay, and would avoid most of the problems that minimum wages and current welfare schemes face.

Indeed the main objection may simply be that it is redistributive. That’s where I break with many of my fellow libertarians – I want free markets because they make poor people’s lives better, and I am OK with redistribution if it’s done in a market-friendly way that makes poor people’s lives better too. If this sounds surprising, remember that this puts me in the same boat as Milton Friedman (who campaigned for a Negative Income Tax) and FA Hayek, and indeed in the same utilitarian philosophical camp as Ludwig von Mises.

I suspect low pay will continue to be a problem for many years, maybe becoming even worse as automation renders some people permanently unemployable. It is necessary but not sufficient to simply rebut other people's bad ideas.

In the Negative Income Tax we have a policy that can actually go a big way to solving the problem, and hopefully replace some of the harmful policies we have right now. Rhetorically, I think we free marketeers need more positive solutions to policy problems, and if we could get over our squeamishness about endorsing certain forms of 'good' redistribution, we may be able to surprise people into listening to and maybe even agreeing with us. If low pay is indeed the long-term problem that it seems to be, the Negative Income Tax’s time may finally have come.

Now Screening: A tragic drama of the London Living Wage

After months of campaigning, no less than 13 strikes and support from the likes of Ken Loach and Eric Cantona, Brixton Ritzy Picturehouse cinema staff have finally secured a commitment to be paid the London Living Wage.

Unfortunately, this means that a quarter of the payroll is now facing the sack:

Picturehouse Cinemas said that the cost of increasing basic wages at the Ritzy Cinema in Brixton to £8.80 an hour would be absorbed by reducing the number of staff by at least 20, with a redundancy programme starting next month.

Two management posts will be axed along with eight supervisors, three technical staff and other front-of-house workers from its workforce of 93.

Naturally, Owen Jones has some insight into the situation:

The message appears transparent: if you fight for a living wage and workers’ rights, then you face the sack. Or we will crush you if you dare to stand up for yourselves.

In fact, the message is even more clear than this. If wages are set higher than it is productive or profitable to do so, the firm will have to account for the cost in other ways. We often talk about the unintended consequences of things like price controls and wage demands, but in this case the consequence of such a pay rise was pretty damn clear. As the Picturehouse explains:

During the negotiation process it was discussed that the amount of income available to distribute to staff would not be increasing, and that the consequence of such levels of increase to pay rates would be fewer people with more highly paid jobs.

The Ritzy previously paid staff £7.53 an hour with a £1/hr customer satisfaction bonus—far higher than the National Minimum Wage of £6.31, whilst union pay negotiators pointed out the Ritzy staff do actually like working there. This makes the idea that job cuts are bitter, tit-for-tat 'payback' seem rather perverse. Indeed, to make something sound so heartless and threatening when it is basically Econ 101 is bordering on the petulant.

 In a perfect world low pay simply would not be an issue. In the meantime if employers can afford to give the LLW (or can benefit enough from the PR!), then fantastic. But paying 93 staff £8.80 an hour is no small commitment, and unfortunately pushing company policy in one direction all too often means something's got to give elsewhere.

Whilst the effects of a National Minimum Wage aren't always easy to spot, this is a concrete example of the London Living Wage actively putting Londoners out of a living. In personal experience Ritzy employees are friendly, intelligent and helpful, but sadly that's no guarantee of them getting another job. And if unions continue to push for the LLW in such an aggressive manner, this is unlikely to be the only casualty.

Curzon cinemas have just announced that they will pay their staff the LLW, even though it is loss-making. They say they hope that the cost will become self-financing through the better quality of work which paying people more will achieve. It will be interesting to see if that's the case.  In any case—grab the popcorn, this show's going to get interesting...

There's a serious problem with this living wage idea

The Living Wage Commission has pronounced: yes, it would be an exceedingly good idea if everyone got the living wage. Bit difficult to think of them saying anything else really, eh?

When this was all first announced, the existence of the Commission and the preparing of this report, I took the time to write to the Archbishop. To make my usual point that the difference between this desired living wage and the current minimum wage is entirely the income tax and national insurance that we, heinously, try to charge to the working poor. Clearly not much note was taken of this point for in the report they note that:

Savings and additional revenue An analysis of the impact of the fiscal impact and public sector cost of extending coverage of the Living Wage provided by Landman Economics for the Living Wage Commission shows that universal coverage of the Living Wage would result in a net increase in revenue to the Treasury of £4.2 billion. This is shown in Figure 3 and is made up of an additional £2.8 billion in increased tax and National Insurance receipts, together with a decrease in in-work benefit and tax credit spending of £1.4 billion.

It's not just that they've ignored the point it's that they positively revel in it. They really are saying that it's a good idea that we should raise the incomes of the poor so that they can pay more in tax. Completely missing the point that what we actually desire is that the poor have more money after tax, more money to consume with, meaning that we should be attempting to reduce the tax bill on those working poor.

This isn't just an economic point this has crossed over into being a moral one. They're glorying in the idea of taking more money out of the pockets of the poor: this is simply an inexcusable moral stance.