So they were better off twice! Of course! Why should they be? Tax credits are a labour bribe and are sending the country down the plug hole

At the time I thought it was a great idea, it actually rewarded people for seeking out work, even if low-paid.
The unforeseen consequence (unforeseen by thicko me, at any rate) was the advantage that employers would take of it, keeping wages low and knowing that the employees' incomes would get topped-up by HMG.
The amount in tax credits is a cost saving to the business (who often syphon profits offshore), shareholders getting the benefit and the overall tax-take to HMG going down.

The response has to be to raise the minimum wage.,

I'll draft out a logical example (making it up as I go along, to see whether or not it bears out my thoughts).

Suppose we hve a company that runs a business in a mature market (ie a long established field of activity with many competitors both UK and foreign providing the same product / service). Differentiation is difficult and pricing transparent so the business cannot simply up is prices and consumers will buy from competitors (many of whom are based outside the UK). Not an uncommon scenario.

Suppose the business makes a net profit of 100 before wages and employs 2 people (the optimum it requires) and their wages are 45 each (which is below the designated living wage of 55). State benefits for the umemployed are set at half the living wage. Corporation tax is 20% and effective income tax on this level of modest wages is 10% (with no NI for simplicity).

So, pre-living wage we have:

Company makes 8 net profit after tax (100-45-45 - 2 tax). The state gets tax of 2 (from company) + 9 (from workers) = 11. Two people are employed, the state has a budgetary surplus (or at least contribution to its expenditure) and the company ticks over, making 8 to invest in its future survival.

Post - living wage we have:

Company cannot increase its prices (see above) otherwise it'd lose all business quickly. So, it either makes an unstainable loss of 100-55-55= (10) or (inevitably) it has to reluctantly shed one of its employees. So, we end up with the company making 100-55 = 45 before tax and contributing 9 to the state in tax. We also end up with one employee earning 55 and contributing tax of 5.5. So the state now receives tax of 9+5.5 = 14.5 but has to pay unemployment benefits of 27.5, so has a deficit of 13. So, we now have a state in budgetary deficit, an unemployed person but on the face of it a much more profitable company. But that company needed 2 employees to carry out its functions. So, quickly customers get poor product / service and drift away. If the company is lucky it reaches a new equilibriym where, say, it makes net profit before wages of 60 and net profit before tax of 5. It then contibutes 1 in tax and its employee 5.5. So revised equilibrium position is: tax take 6.5 - 27.5 benefits = deficit of a whopping 21 plus one person really unhappy as unemployed.

Therein lies the story of the UK's slow and remorseless decline over the last 100 years or so - too few innovative, high margin companies to support everything desirable. If you want to see the medium term future for large swathes of the UK look at the story of Detroit in the 'papers currently. Bottom line is we need an explosion of innovation to generate new wealth (very unlikely until things get alot worse - due to people taking the safe option in life) or we have to await becoming a low cost producer of basic goods or we accept large discrepancies in income between people / regions.

If the company sells to the home market, all its home competitors will be bound by the same law, hence none will suffer a competitive disadvantage from introduction of a minimum wage, as we have already seen, years ago.

Exporters are mostly in higher-tech industries, which tend to pay much higher rates than minimum wage anyway.

The only remaining scenario that I can think of at the moment is where the company is in competition with a foreign company (which probably means far East), it is not possible or desirable to compete with such countries on wage-cost. Higher-tech production is where the UK has retained/regained market share.

Why would an overseas competotor be bound by UK wage law?

UK productivity (production per unit labour cost) has nose-dived again in recent times. I have not looked up the stats. but would think that may not be unconnected to the NMW. Are you sure it is not? It would surprise me if it isn't correlated to some degree.

Maple Leaf wrote:Why should anyone get tax credits? It is costing billions. Better to introduce a living wage which EMPLOYERS have to pay. The tax take would be greater. You do realise the living wage is calculated on the assumption that people will claim all the benefits they are entitled to including tax credits? It is based on something called the Minimum Income Standard (MIS) which is a level of income deemed necessary to participate in society. It's around 77% of the median wage in the UK (the poverty line is 60%). The MIS is calculated for various different family types e.g. lone parent with 2 kids, couple with two kids etc. They then come up an hourly wage figure that a particular family group requires to meet the MIS. The MIS (outside London) for a couple with two kids was (in 2012) £37371 which is £9.56 an hour with both parents working a 37 1/2 hour week based in full employment i.e. paid for 52 weeks in the year. This figure of £9.56 is higher than the current living wage of £7.45 an hour because they average it out, weight it based on the number of different types of families there are. That gives a figure of £8.80 an hour but they also limit it further by applying a wages cap which is basically an employer affordability measure and also a limit on disposable income. That is how you get £7.45. So the conclusion is even the living wage isn't enough in itself to allow families to meet the MIS. What is also interesting is this taken from the paper that describes this "....The first is that there have been recent cuts in tax credit support, particularly support for childcare. The second is that in order to make up for these cuts, and to cover rising living costs, families receiving means-tested tax credits require particularly large increases in earnings. In order to increase take-home income by £1, a family on tax credits typically needs to earn an additional £3.70, with the rest lost in additional taxation and a reduction in tax credits support associated with having a higher income." So you see removing tax credits requires a large increase in income to make up for the loss. To summarise: The living wage is based on people still receiving tax credits. The living wage is capped so still doesn't meet the MIS. If you stopped paying tax credits the living wage will have to be much higher. Conclusion: The cost of living in the UK is too high. High rents and things like no cheap public transport any more all contribute to the high cost of living and ultimately increase the benefits bill. Tax credits remain an essential part of the benefits package available to low income families as without them we'd have to have some other way to keep them above the poverty line. Most of these costs can be attributed as a direct result of various Tory policies (not reversed by Labour) such as the sale of council houses and the mess public transport ended up in.

Maple Leaf wrote:Why should anyone get tax credits? It is costing billions. Better to introduce a living wage which EMPLOYERS have to pay. The tax take would be greater. You do realise the living wage is calculated on the assumption that people will claim all the benefits they are entitled to including tax credits? It is based on something called the Minimum Income Standard (MIS) which is a level of income deemed necessary to participate in society. It's around 77% of the median wage in the UK (the poverty line is 60%). The MIS is calculated for various different family types e.g. lone parent with 2 kids, couple with two kids etc. They then come up an hourly wage figure that a particular family group requires to meet the MIS. The MIS (outside London) for a couple with two kids was (in 2012) £37371 which is £9.56 an hour with both parents working a 37 1/2 hour week based in full employment i.e. paid for 52 weeks in the year. This figure of £9.56 is higher than the current living wage of £7.45 an hour because they average it out, weight it based on the number of different types of families there are. That gives a figure of £8.80 an hour but they also limit it further by applying a wages cap which is basically an employer affordability measure and also a limit on disposable income. That is how you get £7.45. So the conclusion is even the living wage isn't enough in itself to allow families to meet the MIS. What is also interesting is this taken from the paper that describes this "....The first is that there have been recent cuts in tax credit support, particularly support for childcare. The second is that in order to make up for these cuts, and to cover rising living costs, families receiving means-tested tax credits require particularly large increases in earnings. In order to increase take-home income by £1, a family on tax credits typically needs to earn an additional £3.70, with the rest lost in additional taxation and a reduction in tax credits support associated with having a higher income." So you see removing tax credits requires a large increase in income to make up for the loss. To summarise: The living wage is based on people still receiving tax credits. The living wage is capped so still doesn't meet the MIS. If you stopped paying tax credits the living wage will have to be much higher. Conclusion: The cost of living in the UK is too high. High rents and things like no cheap public transport any more all contribute to the high cost of living and ultimately increase the benefits bill. Tax credits remain an essential part of the benefits package available to low income families as without them we'd have to have some other way to keep them above the poverty line. Most of these costs can be attributed as a direct result of various Tory policies (not reversed by Labour) such as the sale of council houses and the mess public transport ended up in.

He didn't say they should be.

They wouldn't be, I didn't say they would.


Just to be sure we're on the same page here, are we agreed that the only areas we are now talking about are UK manufacture for the export market and UK manufacture competing with imports?

If so, UK manufacture for export tends to be in higher-tech, higher-skill areas where labour cost is higher than NMW anyway.
UK low-tech manufacture competing with imports is an area where we haven't tended to bother to compete on wage-cost for quite some time.

Regarding productivity, the NMW was introduced in 1999 and productivity actually went up, from then it remained in a minor zigzag within a 1-to-2 percent range of annual growth until the 2008 recession, then it it took a dip as wages were restrained, lending was down and confidence was low, with more people getting jobs in a shrinking economy, so the balance tilted slightly towards labour-intensiveness rather than investing in higher-tech productivity improvements.
It did rise again 2010-2011 but has dropped again as wages have remained restrained and confidence is still low.
Basically, it flummoxes economists how employment can go up in an economy that remains depressed ... easily explained by we humans but it doesn't fit their beloved models which were made to fit their own pet theories in the first place.

Absolutely!

Or the job is underpaid. But that's not a fashionable thing to mention nowadays, is it? Because it's all about scrounger soundbites rather than facts.