Sunday, 1 September 2013

Follow Up: Rents, Housing, The Minimum Wage, & Too Much Employment

After a friend from America commented on the last Blog regarding how she agreed that rises for low earners are dwarfed by other prohibitive factors, I thought I'd do a quick follow up about the specific case she mentioned - rent prices rising with rises in the minimum wage, producing a nullifying effect. Here's how things are in the capital of England  In London there is a great need for low-skilled work, but rent prices make it hard for low-skilled workers to live in London, so the Government subsidises them with housing benefit.

Suppose we have John the cleaner; John works in Canary Wharf cleaning for a big city firm, and is subsidised by the Government (which means the taxpayer).  John's housing benefit is stopped, meaning he can no longer afford to live in London, which means his firm has to hire another cleaner.  But when John represents all low-skilled earners, things change, as city business that need cleaners will have to increase wages of cleaners to enable them to live in London, lest they have cleaner-less offices.

So assuming we stop the minimum wage, as my last Blog post suggests, we are left with a choice, with neither option perfect. We ether:

A) Stop topping up the incomes of low earners with tax credits as that is only really a further subsidy to the employers of low-skilled workers, letting the market care for itself, which would reduce the probability of inflated housing cost and under payment for low-skilled workers, but would create a vortex.

B) Continue to top up the incomes of low earners with tax credits, whilst having the corollary effect of increasing the inflated housing cost problem (among other things).

Most people in the UK prefer B, which is fair enough, as it's the pearl of great price of the welfare state.

Incidentally, here's where the situation started to intensify. Until the eighties Conservative government sold off their council houses, local councils used to build council properties and rent them out for modest sums (modest sums subsided by the taxpayer, of course).  Naturally, the selling off of council houses was ideological in the sense that the Tories expected to secure votes from these house-owners, but also it was seen as efficient, because it transferred the cost of maintaining properties from the council to the individual property owners.

But this had a knock-on effect; low-earners were then expected to rent property from private landlords, which causes problems when they are numerous.  One of the ineluctable laws of economics is that if demand increases and supply decreases or remains unchanged there will be a higher equilibrium price to account for the scarcity of supply. That is to say, to apply it here, when claimants of housing benefits constitute a greater part of the market, rents are hiked up. As a corollary, higher rents engender a surge in buy-to-let investments, which forces up house prices, which comes full circle in justifying high rent.  This 'locking in; effect means that taxpayers are expected to subsidise low earnings to guard against a low-earner exodus from London, or a compelled increase in the minimum wage.

Too much employment?
Another rule of economics is that taxing something produces less of it, and subsidising something produces more of it. The minimum wage (which is basically a stealth tax on employers of low-skilled work) reduces employment by a little, and income tax credits (which are basically subsidies) increase employment.  But by how much?  That's the key question few people ever ask, which is irresponsible, because although subsidising something produces more of it, it is a great mistake to assume that the more the better, because that assumes it is automatically preferable to have too much of something rather than too little of something else.  If someone is going to pour some sugar and some salt on your roast dinner, you'll certainly hope they pour very little sugar and the right amount of salt.  But only a fool would argue that because they under-did the sugar then any amount of salt won't ruin the dinner. Clearly, while the right amount of salt is good for bringing out the flavour, too much will ruin the dinner altogether. 

In the above situation, the minimum wage is like sugar and income tax subsidy is like salt - too much salt and you'll have too much employment, which engenders inefficiency.  In other words, one mustn't assume that just because employment is good that there can't be too much of it - too much unemployment is bad, but so is over-employment.  If increases in income tax credit push employment past the optimum level of efficiency, then we'd either look for a reduction, or an alternative policy.  To put it another way, it is injudicious to focus only on who enjoys the benefits of a policy without examining who picks up the costs. As we've seen in the last Blog, the cost of the minimum wage falls on the employers of low-skilled labour, which, in the long run, is borne by the customers of the businesses in price hikes. The cost of income tax credit subsidies falls on the government, which means it falls on taxpayers as a whole. While I think income tax credit is preferable to the minimum wage - even the minimum wage becomes preferable to a situation whereby too much employment is created by tax credits that are too high.

 * Photo courtesy of