Tag Archives: minimum wage

Reducing inequality and poverty

I stated in my last blog post that we need to tackle inequality in the UK. I suggested that we could start by increasing income tax for higher earners. There is a lot of disagreement as to whether this is the best way to raise funds without it backfiring in other ways, and there are other suggestions that could be worth considering such as a tax on land value along with a decrease in income tax and other taxes. Empirical research and comparisons between different countries is always required, rather than mere guesswork of course. There are two distinct problems: what we want to achieve, and how best to achieve it. What we need to achieve remains the same: reduce poverty and inequality. How best to achieve it is an open question, but my proposal last time was fairly conservative in that respect: a gradual increase in income tax for higher earners, starting with a 50% top rate on earnings over £150,000 a year, which we had until 2013 anyway. If this doesn’t have the desired effect, then of course we would have to look elsewhere. This isn’t about ideological policies; we need policies to achieve what they have been put in place for.

In any case, there is much more to reducing inequality than higher taxes for those on high income. We can start with an increase in the minimum wage. It has long been said that the minimum wage is not enough to live on. The minimum wage is currently £6.31 an hour for those aged 21 and over, £5.03 for those aged 18 to 20, £3.72 for those under 18 and £2.68 for an apprentice under 19 in the first year of level 2 or 3 apprenticeships. According to the Living Wage Foundation, the living wage is £8.80 an hour in London and £7.65 an hour for the rest of the UK. The minimum wage seems not to have kept up with increases in the cost of living. It should also be the same for everyone, regardless of age. Ageism is no more a valid prejudice than any other.

Obviously those on the minimum wage need enough to live on. If those on it can’t afford to live properly, they still have to claim benefits from the government. But rather than seeing these people as a burden on the state, arguably a more appropriate interpretation is that tight-fisted employers are effectively claiming off the state to subsidise the wages they have to pay. An increase in the minimum wage will go some way to prevent this. Those out of work also need enough to live on. I would argue that anyone out of work should automatically have the opportunity to work for at least the minimum wage by doing work in the community, which could include litter picking or visiting and helping elderly people who live on their own.

I would also look at a maximum ratio between the top and bottom earners in a company. Switzerland had a vote on a 12 to 1 ratio last year, and while it was rejected, I think it is a good idea in principle. It would root CEOs’ salaries in something meaningful. Instead of awarding themselves whatever they like, they would only be able to award themselves a certain percentage rise if the company could afford that percentage rise overall. This is something that could be written into legislation, although the exact ratio would need to be carefully considered. The wage ratio between those at the top of companies and typical workers has increased dramatically over the last few decades. According to a report by Bloomberg, the average ratio has gone from 20 to 1 in 1950 to 204 to 1 today. Wagemark is a not-for-profit organisation that certifies companies that have an 8:1 ratio or lower between the highest earners and the average earnings of the lowest 10%. This and the suggested Swiss 12 to 1 ratio are fairly close together and would probably be around the right ballpark to be looking at.

Increasing the wages at the lower end of the scale would reduce the need for the state to provide benefits. But there are also other ways. By providing housing benefits, the state is effectively paying money directly into the pockets of private landlords. This is why we need more state-owned accommodation, and/or proper enforceable pricing brackets for landlords based on considerations such as size of property and the facilities it has. This would save money in the long term. Furthermore, landlords can and do currently discriminate against those on benefits, whereas it could be made unlawful to do this.

We need proper government targets on poverty and inequality – targets that will be met.  And this means that politicians and the media would have a responsibility to report statistics relevant to these. Since the economic crisis started in about 2008, two of the main economic statistics we have about from politicians and the media ever since are the government spending deficit and economic growth. I’m going to briefly talk about these statistics.

The term “deficit” was not in everyday use by ordinary people in 2008, and most people probably didn’t know what it meant. It was never introduced to us properly, and politicians and the media bandied it about like we should know what they were talking about. The deficit is the annual shortfall between income and spending. This is distinct from the national debt, which is the overall amount that the government owes. So when the government says that it has halved the deficit, this doesn’t mean that things have improved. It just means that they are getting worse at a lower rate. It’s indicative of the obsession with rate of change of a thing rather than the thing itself.

This brings us nicely to the size of the economy. It rarely gets talked about in absolute terms; it’s all about whether it’s growing or shrinking. If it’s shrinking (specifically if it has shrunk for two consecutive three-month periods), then we’re in recession and apparently that’s a really bad thing. Intuitively, the absolute size would be more important. The economy could grow for ten consecutive years, and we’d be hearing about how great everything is. Then it might shrink to the level that it was after nine years (so one year previously) and we’d be in recession. But we’d be in the same position (by the seemingly relevant measure) as we were at a time when everything was considered to be really good. Of course, I am simplifying matters, but merely stating that these are the important statistics without any explanation is, to my mind, irresponsible and lazy.

In any case, I’m not saying that we should never hear about these statistics, but more important to us is surely wealth of individual citizens and households. Statistics such as median and mean wealth and how these have changed over the years (both the thing and rate of change of the thing) would be a good start. But I’m here to talk about poverty and inequality. So we need statistics relevant to these, and these statistics need to be as well publicised as the deficit and economic growth. It doesn’t help if the economy is growing if the extra wealth is just going to those who are already rich, further fuelling inequality.

We could use the average wealth of the poorest 5% as a figure for poverty. For inequality, I think it’s slightly more complex. There is the distribution of wealth by Gini coefficient, but we could also look at simple ratios such as average wealth of the richest 5% compared against average wealth of the bottom 5%. But whatever statistics are used, they need to be official government statistics with official targets, and they need as much coverage in the media and by politicians as economic growth and the deficit.

Meeting these targets would not simply be a case of handing out massive benefits to the poorest and leaving it at that. Doing this could encourage others to give up work on the basis that they too will get these massive benefits. And the less work that gets done, the less wealth there will be, which could ultimately lead to a reduction in the wealth of the bottom 5%. It would need to be a sustainable system. There would be long-term targets to stop self-defeating policies. We can’t know exactly what will work without experimentation, but the suggestions I have made here seem a reasonable start. We also need to be scientific and see what actually works. We can start by looking at inequality in other countries and what policies seem to reduce it. This is not just about wealth; people’s health is at stake.