Minimum Wage or Living Income?
Robert Skidelsky
Project Syndicate | Thursday, July 16, 2015

LONDON – Most rich countries now have millions of ‘working poor’ – people in some sort of work, but work which does not pay enough to keep them above the poverty line, and whose wages therefore have to be subsidised by the state. These subsidies take the form of ‘tax credits.’
 
The idea is a very old one. England had its Speenhamland system during the Napoleonic wars, a form of outdoor relief intended to offset the rising price of bread. In 1795, the authorities of Speenhamland, a village in Berkshire, authorised a means-tested sliding scale of wage supplements. Families were paid extra to top up wages set at a certain level. The level varied with the number of children and price of bread.
 
After criticism that the scheme allowed employers to pay below the subsistence wage, because the taxpayer would make up the difference, the system was abolished in 1834 and replaced by the New Poor Law. This confined relief to workhouses, under conditions sufficiently odious to force people back into the labour market.
 
It is odd that the Speenhamland principle should have been revived by the free market liberal Milton Friedman in 1962, in the form of a ‘negative income tax,’ whereby people earning below a certain amount receive supplemental pay from the government instead of paying taxes to it. The idea was to get people off welfare into work. It was implemented as the Earned Income Tax Credit in the United States and the Working Families Tax Credit in the United Kingdom.
 
From the other end, attempts have been made to raise the wages of the lowest-paid through minimum wage legislation. But the minimum wage never reached the floor set for a ‘living wage’ and did not, therefore, appreciably reduce the bill for wage subsidies.
 
In 2008, about 5.5 million working families were receiving tax credits, including working and child credits, housing benefits, and local tax benefits, in the UK. Austerity policies have reduced this number to 4.3 million. The number of working households in the UK was 11.4 million in 2012. This means that an astonishing 38% of working households do not receive a ‘living wage.’ Or, to put it another way: the market-clearing wage was unable to provide a living income for 38% of working families. These are the ‘working poor’.
 
In his 8 July budget, Britain’s Chancellor of the Exchequer George Osborne proposed to cut £12 billion from the welfare bill over the next four years as part of his deficit-cutting plan. Of this £9 billion will come from cutting the tax subsidies for working families.
 
To offset this, Osborne proposed to raise the minimum wage from £6.50 per hour to £9 per hour over the same period. The increase in the minimum wage will fall on employers, not the public purse, and so the reduction in credits and benefits is a net gain for the Exchequer.
 
An analysis by the Institute for Fiscal Studies has concluded that while the Exchequer will save £12 billion, the gross increase in pay from the higher minimum wage amounts to only £4 billion[1]. As Paul Johnson, head of the IFS, puts it: “There is simply not enough money going into the new minimum wage to anywhere near compensate in cash terms people on tax credits’.[2]
 
But even if the minimum wage were raised sufficiently to offset the tax credit withdrawal, the strategy of transferring more of the cost of labor from the taxpayer to the employer would still be wrong. The reason is that for many, perhaps most, people work will be a declining source of income.
 
One prediction that we can rely on with some assurance is that automation is going to make increasingly large inroads into the world of human work. Up to 50% of existing jobs may be at risk from ‘machines’ in the next twenty years[3]. It is at least an open question whether enough replacement jobs can be found; or indeed, whether it is desirable to go on producing more and more products simply to provide human employment at ever shrinking wages.
 
As robots increasingly replace humans we need to give humans incomes to replace jobs. Tax credits point in the direction of replacement incomes; raising minimum wages point in the opposite direction by making income more dependent on jobs. In addition, they will surely speed up replacement of humans by robots. Previous evidence that minimum wage legislation doesn’t reduce the demand for labour might not stand up against the rapidly falling cost of automating plants and services.
 
In short, if Osborne is serious about his pledge to provide a ‘living income’ for all, he should be moving towards the idea of a ‘basic’ or ‘citizens’ income,’ one independent of the job market. A simple way forward would be to provide an unconditional ‘tax credit’ to all citizens. This could be built up gradually as the rewards from work fall.
 
Long advocated by both free market and socialist thinkers, the basic income idea has always fallen foul of two objections: that societies are too poor to afford it, and that it would be a disincentive to work. The first is surely no longer true of the rich economies; and the second falls to the ground if the object is not to improve the incentive to work, but to make it possible for people to live without work. An unconditional basic income would make part-time work a possibility for many who now have to work full-time at minimum wages; it would also start to give all workers the same choice as to how much to work, and under what conditions, as is now possessed by owners of substantial capital.
 
 
[1] http://www.ifs.org.uk/uploads/publications/budgets/Budgets%202015/Summer/opening_remarks.pdf
 
[2] https://www.politicshome.com/economy-and-work/articles/story/ifs-budget-leaves-low-income-workers-significantly-worse
 
[3] http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf