Sunday, 22 August 2010

So Ed Miliband is an economic illiterate after all! No surprise there then!

The are moments when I am tempted by the blandishments of the left – the sense of justice, the desire to right wrongs using the power of government, the noble cause of a better society. It’s rather like the moment Galadriel is offered the ring.

And then I am reminded of just how economically illiterate much of the left’s thinking has become.

Ed Miliband’s latest wheeze looks pretty ace doesn’t it? We get firms to pay a ‘living wage’ and make a saving by not paying in-work benefits. Plus offering those firms the incentive of a tax break (or rather not allowing the lower rate to apply to bad firms who don’t sign up to Ed’s jolly scheme). Now we know that minimum wages affect unemployment – marginally when the rate is very low as it is in the UK but to an increasing degree as the rate rises.

The impact of Ed’s scheme will be as follows:

1. Where the tax gain is equal to or in excess of the cost of the ‘fair wage’, firms will comply. Most firms would do this in any case as they employ few, if any, people at below the proposed £7.60 per hour. Obviously, for employers with large numbers of people paid below that rate the benefit is unlikely to exist and they will not take part – preferring instead to reduce tax exposure

2. Firms participating in the scheme will be less likely to take on new workers as this increases the cost and, at some point, is likely to take them to the point where the marginal cost of employing someone extra is negative. This will sustain levels of current unemployment and have a further negative impact on benefit levels

3. The main benefit is gained by firms who do not pay anyone the between £5.80 and £7.60 per hour. Most of these firms are paying higher wages because the market dictates that without higher wages they would not be able to recruit the skills needed to do the work

It all seems very sweet, the Guardianistas are frothing with excitement but, and this is a big but, it is crap economics and will act only to reinforce barriers to work and to sustain the benefits culture.

Maybe that’s what Ed wants?


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