THE VIEW FROM THE WRONG END OF THE TELESCOPE

There is no doubt that the closure of the steel works at Port Talbot would be a human as well as an economic catastrophe – particularly in an area like South Wales which is already very deprived. And so government ministers are scrambling to find a buyer and to “save jobs”. If Tata Steel closes we could see some 15,000 people lose their jobs, with up to 25,000 possibly lost in the supply chain, so 40,000 jobs lost in total. This has been the political story of the week and it has dominated the headlines and will probably do so for many weeks to come.

And yet on the 1^st April we saw the introduction of the new national living wage (NLW) for over 25’s, or the new national minimum wage for over 25’s as some prefer to call it. The government’s own estimate is that the introduction of this measure will cost some 60,000 jobs by 2020 when it is fully implemented and set at 60% of the median wage. 

So why aren’t politicians and commentators protesting this loss of jobs?  Well, firstly because the job losses will be spread out over five years and the government hopes no one will notice; and they will affect part time, poorly educated and low skilled workers most. According to research by the Social Market Foundation nearly 50% of those who will lose their jobs will be part-time workers; 40% of those affected are educated only to GCSE standard; and those working in social care, hospitality and pubs are particularly at risk. 

By the time the NLW is implemented in 2020 some 20% of workers will have their pay determined by government. What is wrong with that? Well, several things. The national minimum wage was originally introduced to put a floor under wages and prevent exploitative pay. Its regular reviews were carefully calibrated by the Low Pay Commission to minimise the impact that raising it would have on jobs. But by setting the NLW at 60% of the median wage government has locked in NLW increases regardless of the state of the jobs market. And don’t imagine for a moment that government will reduce the NLW if the median wage were to fall – that would fall into the “politically too difficult” category.

The NLW also introduces the idea that wages should be set to cover a workers cost of living, rather than the market rate for a day’s work. This is utterly iniquitous not least because employers have absolutely no control over the cost of living. But government does. If government wants to relieve the plight of low paid workers then there are a number of structural things they could do that wouldn’t involve meddling in the labour market at a cost of tens of thousands of jobs; but they’re looking at the problem from the wrong end of the telescope. Reducing the cost of living is a much more effective way of helping low paid workers than government wage intervention.

Let’s take as an example the average consumption of an adult in the bottom income quintile who smokes, drives a car and drinks alcohol. According to the Office for National Statistics this average low income consumer spends £1,746 a year on tobacco taxes - 15.4% of disposable income (DI); £933 a year on motoring taxes (8.3% of DI); £278 a year on alcohol taxes (2.5% of DI); £1,165 on VAT (10.3% of DI). In all, 36.5% of the disposable income of low income workers is spent on VAT and sin taxes. Halve sin taxes and reduce VAT to 15% and you could transform the living standards of the working poor without losing jobs. Of course, public health meddlers would have a fit if government were to reduce sin taxes – particularly on tobacco or alcohol; and government would have to wean itself off vanity projects and get its finances in order, so don’t expect any change in this direction soon. 

It is much easier for government to put this burden on employers than to put its own house in order.

It is also easier for government to take a moralistic view of the consumption patterns of the poor than to admit that its own taxes impoverishes them. The figures I’ve just quoted illustrate how indirect taxes are regressive and how they impact most on the living standards of those in the lowest quintile. By contrast, sin taxes and VAT gobble up only 15% of those in the highest quintile. The cost of sin is only going to rise with the introduction of the sugar levy – another measure that will disproportionately affect the poor. Someone needs to turn the telescope round.

Paul Chase