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You want the poor to have more money? Well, doh! Splash the cash

It's really not that taxing

More people, same jobs, unemployment

There really are people saying that new and higher minimum wages will convince some people who currently don't work for money (say, housewives etc) that going out to do so would be a really good idea. But more people chasing the same number of jobs does have a name: unemployment.

And we could try to set the price at that market clearing price: at which point why the hell are we bothering, quite apart from Hayek's point that we can only use the market itself to work out what the market clearing price is.

Note also that once you start fixing prices then you get dragged ever further into intervention. So, there's no youngsters getting jobs because they're entirely untrained and not worth that adult minimum wage?

So, have a lower youth one. Or training schemes, or guaranteed jobs ... and one does, just inevitably, get sucked further and further into actions trying to undo the effects of your previous actions.

So, just on general principle, let's not try to manage the economy by fixing prices. But this still leaves us with the problem of how do we make sure that everyone gets what we regard as a decent income? Here we get to a bit of what we talked about last week, about valuations and expressed and revealed preferences.

What people say everyone should get is one thing; what people are prepared to pay for everyone to get seems to be another. For example, the calculation of the Living Wage (not Osborne's one, the charity campaigners' one): they go and ask groups, well, what should people be able to do in order not to be in poverty? Perfectly acceptable method there. Answers come back, be able to have a cheapo meal out once a month, couple of pints with the missus once a week. Tot all that up and that's not being in poverty.

However, that then leads to the idea that it should be business paying for that in that Living Wage. And it's entirely possible (and, obviously is) that that is higher than the market clearing wage in this country. So, to insist upon it is to create, inevitably, unemployment (no, do not go off and start talking about increasing aggregate demand. Not a large enough effect there).

That is, what we've got here is an expressed preference. Which is rather different from what people are actually prepared to do with their own money. And economists rather prefer to think that revealed preferences are a better guide as to what people really want than expressed.

So, if people had to pay for those higher incomes for the poor, in a manner that they clearly understood was paying for it, we don't think that their willingness to cough up would be all that great. Or rather, the amount that should be guaranteed might be rather lower.

So, if we're not going to produce this minimum income via price fixing, and we're going to try and do it by what people are willing to pay for, not some airy fairy “gosh wouldn't it be nice if...” then the obvious method is simple tax and redistribution.

Yup, tax everyone (sure, progressively, even Smith said the rich should pay more than in proportion to their income) and hand out the cash to the poor.

One huge advantage of this is that we can actually give money only to the poor. Instead of paying higher wages to people who aren't actually part of poor households (from a goodly portion to the majority of increased incomes from a rising minimum wage don't actually go to poor households, depends on the country) we can identify those who are poor and give them the money we think they require.

This then rubs up against a significant objection: aren't we now subsidising the profits of low-wage employers? The answer to which is weeeell, yes, but really, no, we're not.

There's an important distinction between benefits that are paid because someone is in work and benefits that are paid because someone is poor irrespective of employment status. The former acts, in part, as a subsidy to the employer, the latter works as an anti-subsidy, for it raises the reservation wage.

The reservation wage is the amount I need to be paid for me to get off my arse and go do something. If there's no welfare and without work I'm going to starve, tomorrow, my reservation wage is pretty low. I'll go to work, as people in the 18th Century did, for a gallon loaf of bread a day.

If, whether I work or not, I know that I'll have a roof over my head (housing benefit), a modicum of cash (enough to eat certainly, even if not enough for steak) then it's going to take rather more than that 2lbs of bread to get me out the door of a winter's morning.

The existence of the welfare state raises my reservation wage. That obviously raises the amount the company must pay me: two loaves of bread, not just one.

The standard welfare state is thus an anti-subsidy to the employers of low-wage labour. For it raises what they must pay to attract workers.

This is not true of subsidies which are only paid if you are in work. So, wage top ups, like working tax credits or the US EITC (which working credits are based upon) are, potentially at least, subsidies to employers. As it happens, empirical work shows that some 25 per cent or so does flow through to the employer as a subsidy. Well, OK, so we've found a subsidy to employers then.

But note the effect of the whole system: the non-work related parts of the welfare state are vastly larger than those employment subsidies (of which only 25 per cent are truly subsidies to the employer) meaning that the overall effect of the total system is an anti-subsidy, not a subsidy.

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