Today sees a raft of changes for the UK economy and should there be any problems the originators will have plenty of cause to wonder if it was none to bright to have introduced them on April Fools Day! A bit like Japan a couple of years ago with its Consumption Tax rise. The major change is the introduction of the National Living Wage as shown below.
From 1 April 2016 workers in the UK aged over 25 earning the minimum rate of £6.70 per hour will see a 50p increase……Many will see their pay packets rise by up to £900 a year. This will be the largest annual increase in a minimum wage rate across any G7 country since 2009 in cash and real terms.
The Resolution Foundation suggests that it will affect a large number of people directly as shown below and then even more indirectly.
Almost two million workers are expected to have their pay topped up to the National Living Wage this year……And the gains don’t end there, because minimum wage rises also create ripple effects further up the pay ladder as employers seek to keep gaps between their lowest-paid staff and those on the next rung up. We estimate that a further 2.6 million employees will benefit indirectly from the NLW, taking the total number of beneficiaries to 4.5 million in 2016.
So the hype of a pay rise for Britain does have some basis. Indeed as we move forwards into future years there will be an even larger impact from the future planned increases.
As a result by 2020 around six million workers will benefit from the NLW. It’s worth pausing here to note that by 2020 the government will be shaping the pay of almost a quarter of Britain’s workers.
There are always swings and roundabouts in such a move so let me discuss them and also explain why overall I am a fan of the changes.
UK Real Wages
These have had a very poor credit crunch. This mostly occurred when the Bank of England let inflation overshoot in 2010/11 in a disastrous effort to stimulate the economy from its models rather than looking at the real world. From the Office for National Statistics.
With Consumer Prices Index (CPI) inflation averaging 3.7% in the 12 months to April 2010, 2011 and 2012, there was a sharp fall in median earnings in real terms from their peak of £12.25 per hour (2012 prices) in 2009 to £11.21 per hour in 2012 – roughly the same as their real value in 2003.
According to the latest numbers real wages continued to fall in the UK until October 2014. In spite of the recent pick-up in real wages ( which is of course mostly due to lower inflation) we still have real wages which are just under 5% below the pre credit crunch peak. Also we know that under what the ONS calls “composition effects” not only has the credit crunch era been disproportionately bad for the low skilled and paid there are more of them.
Supported by evidence of a growing inflow into low-skilled positions,
A report by the Resolution Foundation put the wages issue thus.
This pattern was most discernible from the 75th percentile down among men and from the median down among women.
As I pointed out above there are benefits in terms of real wages for those at the lower end of the pay spectrum. If we stick to the positive moves then this will also reduce the amount of tax credits and other benefits paid by the UK taxpayer. For much too long the taxpayer has effectively given a subsidy to employers who pay low wages. There will also be more income tax and national insurance paid on the higher earnings so there are gains here. Whilst the last two positive changes make not make us feel like it overall the move will also help with the issue of the low paid facing a “poverty-trap” of very high rates of effective taxation as the imposition of taxes combines with the withdrawal of benefits. I have written before about this being a national scandal where the poorest can end up paying what are much higher effective tax rates that even the richest.
It is a diktat
It would obviously have been better if employers had chosen to raise wages rather than being forced to do it. But the lesson of the current UK boom phase is that there was very little sign of this happening of its own accord. A rather contrasting pattern to chief executive pay and benefits.
The downside of the plan is that it excludes two main groups and they are groups which have had a bad credit crunch on this front. The first is younger workers as those under 25 are excluded from the increase. Surveys into wage changes have shown that they have had a particularly bad credit crunch on the wages front.
The growing number of self-employed find themselves in something of a blackout zone. We know very little about their earnings as the official surveys and data sets ignore them leading us to fear the worst. Will there be growth in their lower paid numbers in response to this as they become the low wage sector? It is hard to say and it remains a national scandal that we know so little about pay in this sector.
Economic theory would predict that nominal and real wage rises will lead to more unemployment. Although of course conventional economic theory has been wrong so often in the credit crunch era. In a dynamic economic environment these things are very hard to measure but we do know that the introduction of the national minimum wage did not seem too.
The optimists say we will see an increase in productivity. This is a lovely idea but has two main problems. Firstly we have an increasingly patchy knowledge of what productivity is as the inexorable march of the services sector continues, and second we seem to be struggling to increase it.
There is a clear danger of price rises in response to the new higher wage levels and these are likely to come in the sectors most affected. From the UK ONS.
The industries with the highest proportions of employees paid below the NLW before April 1, 2016 were: accommodation and food services (33.2%), administrative and support services (16.9%) and wholesale and retail trade (13.4%). Therefore, businesses in these industries are more likely to feel the impact of the NLW than businesses in other industries.
The media have mostly skipped by this because they have bought the line that we need more inflation. This leaves them in something of a mess regarding real wages as they cannot logically call for a rise. Poor old HAL 9000 from the film 2001 A Space Odyssey would be feeling it had been lied to again.
To the extent that other wages rise in response to this change then inflation will rise too. Back in the 1970s when we had more overt wages and incomes policies which this is something of a return too we saw rises caused by what were called “relativities” as other workers wanted to maintain what they called parity. It will be interesting to see how much this happens as it will tell us a fair bit of relative worker bargaining power in the credit crunch era.
As I wrote earlier it would have been much better if employers had chosen to raise wages but sadly these days they mostly seem to prefer to raise their own. So the government has stepped in and we can look at the same move in two ways. One way is to look at what 50 pence buys you and it is not much but over a week hopefully the hours worked will make a meaningful difference. The other is to anticipate all sorts of bad consequences as some have done. The truth is like many reforms we do not actually know for sure but the evidence from past moves and indeed from existing efforts – Lidl for example already pays it- is hopeful.
The main danger in my opinion is that it leads to inflation and this is on my mind today as the UK establishment tries to sneak through some institutionalised inflation. After all April Fools Day is a good day to bury bad news.
Council tax bills in England are going up by an average of 3.1%, or £46 a year, while residents of Wales will pay an extra £41……Air Passenger Duty: Up by almost 3% on long-haul flights. APD on economy flights up from £71 to £73…. NHS dental charges: Cost of a check-up goes up by 5% to £19.70. Cost of a filling up by 5% to £53.90……. Stamp Duty: Landlords and buyers of second homes will pay a 3% surcharge on Stamp Duty, or LBBT in Scotland.
You may note how many of them apply to the owner occupied housing cost sector that the official inflation numbers ignore. Time for the Fab Four.
Roll up, roll up for the mystery tour
Roll up, roll up for the mystery tour
Roll up (And that’s an invitation), roll up for the mystery tour
Roll up (To make a reservation), roll up for the mystery tour
The magical mystery tour is waiting to take you away
Waiting to take you away