Zoe Williams can't do thinking

Zoe's contentious thesis in the Grauniad today is that we (the taxpayers) pay the £6mm salary of Tesco's CEO by funding in-work benefits (housing benefit, working tax credits etc.) out of State coffers; this allows Tesco to pay its workers less.

Ahem.

While I realise that Oxford historians don't have to be strong on maths, I thought their tutors would at least encourage them to do some research and challenge unfounded assertions. It appears that Zoe has forgotten, or at least repressed the memory of, those tutorials.

So let's take a Tesco worker who works 35 hours at £5.50/hour (say), and let's say that Zoe's idea of a living wage where this worker lives is £8.50/hour. During one week the worker is short £105 which the Government makes up in working tax credits, or in the region of £5000 a year (the worker's gross pay is £10k, made up to £15 by subsidy). Tesco certainly employs way over 1200 workers at this payscale, so that's certainly £6mm and more that the Government is "subsidising" Tesco. So far so good.

But how do we fix this situation?

No more subsidies; remove the tax credits. Great! Now Tesco has to spend the extra £3 / hour itself to pay the worker a living wage. Except that it won't. The salary for the worker is determined by productivity. If the worker can't do more than £5.50/hour of work, it's not worth Tesco hiring him or her; that work will go un-done, or Tesco might spend £7/hour equivalent of capital and running costs of machinery to replace the worker. If the worker's work was worth £8.50/hour, Tesco would pay it; it already does so for its more skilled employees who are harder to find and worth more. Oops. Plenty of people willing to work at £5.50/hour even without those tax credits.

Removing the subsidy also makes work less attractive for the worker; now instead of £8.50/hour he or she only gets £5.50/hour. Combined with the high marginal losses of tax, NI and loss of benefits they will be no better off than not working, except now they have no free time and are tired. Nice job!

Let's raise the minimum wage to £8.50 instead, so we make work more attractive; sure enough, it's more attractive than not working now even allowing for the high marginal tax rates. Erm, except that a large number of jobs are going to vanish; as noted above, if workers can't produce £8.50 / hour of work, they're not going to be employed. Tesco and the other private sector employees are not charities. If you make it uneconomic to employ people they're not going to build stores.

Here's an idea instead: let's allow the worker to keep his money in the first place. Let's ensure that he keeps all that £5.50 / hour, with none of it going in tax and NI. For NI for 2011-2012:

if you earn more than £139 a week, you pay 12 per cent of the amount you earn between £139 and £817

so the employee is paying £6/week, and his employer similarly: that's £12 of his gross. Weekly tax allowance is £143.75 so he pays 20% of the £50 or another £10. So he and his employer are paying £22/week for the privilege of him working at minimum wage, with a 44% marginal tax on every additional £1 he earns. How is this sane?

Let's taper off benefits more gradually. Raise the bloody income tax threshold over £12000 and NI threshold similarly, and cut at least one of employer or employee NI before about £15k of income. That means less income tax collected, which means that the Government has to spend less, but at this point I view this as a feature, not a bug (Chris "Windmills" Huhne, I'm looking at you).

If you actually want people to earn a "living wage", you have to make their labour more efficient and therefore worth more to the employer. But this involves better education and practical training, and that seems to be out of fashion at the moment. Alternatively you could introduce full employment (so employers have to compete to attract workers); I think we all remember how well this worked in the former Soviet bloc countries. Zoe's old enough to have travelled to East Germany before the fall of the Berlin Wall so she has no excuse for peddling tripe like this article.