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Unintended Consequences - Closeup of nurse fanning out a small wad of banknotes
Last updated September 2015

The Invisible Hand

Dominic Fox explains the good and bad news about workers' pay rising to meet the living wage, as politicians fight it out to prove who thought of it first.

It is a situation no doubt familiar to many readers: frustrated kids go from curious to furious in just 15 minutes during long summer holiday car trips, according to a new survey by Highways England. Parents say that, on average, kids start asking "are we nearly there yet?" around 2 hours and 23 minutes into a journey. And by 2 hours and 37 minutes, angry rows have started to break out. With the return of the party conference season the kids on the backbenches of all parties are certain to experience volatile mood changes as the political heat rises and frustrations build.

Let's start with employment and the world of work. Part of the mood music at the last election suggested Britain's employment levels were a reason for good cheer. Putting a dampener on this, the Office for National Statistics says that almost three-quarters of the employment growth in the past year was accounted for by non-UK citizens. The number of non-UK nationals working in Britain increased by 257,000 to 3.1 million, while the number of working UK nationals rose by 84,000 to 27.7 million.

Since 1997, the proportion of employment accounted for by non-UK nationals has climbed from 3.7% to 10.3%, it said. Almost the entire increase since the global financial crisis of 2007-08 has been accounted for by EU citizens. The figures show employment among EU citizens born outside the UK has risen above 2 million for the first time. Of the total, 839,000 were born in the 14 countries that were part of the EU before its enlargement, while 973,000 came from the eight countries that became members in 2004.

This looks like bad news for a government desperate to avoid a split as it embarks on a referendum on Britain's EU membership, and a Labour party desperately trying to think up ways to prevent its working class base voting for other parties.

Another aspect of the successful election campaign was the idea that Britain is recovering from the financial crash as evidenced by its booming economy. However, despite modest levels of growth, welcome though they are, there still a record level of indebtedness and little evidence of much growth in pay or productivity. 

George Osborne achieved something of a political coup with his audacious appropriation of the living wage in his post-election budget, silencing (momentarily perhaps) his bitter rivals in Labour and Boris Johnson. The Chancellor announced that the national minimum wage, which is currently £6.50 an hour for those aged 21 and over, would be replaced by a national living wage from April 2016. He said this would be set at £7.20 an hour for those aged over 25 from next year, before rising to at least £9 an hour by 2020.

Speaking in June David Cameron said that Britain needs to move from a "low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society" and must tackle "complacency in how we approach the issue of low pay. This is what I would call a merry-go-round," he said. "People working on the minimum wage having that money taxed by the government and then the government giving them the money back, and more, in welfare. Again, it's dealing with the symptoms of the problem, topping up low pay rather than extending the drivers of opportunity."

There is some concern that employers might cut back on investment as they wait and see what effect these changes make in their costs and profit margins. It has been estimated that in our small corner of the economy the introduction of a national living wage could cost the charity sector an additional £500m by 2020, according to a study published by the Third Sector Research Centre. Researcher Stephen McKay says that the cost of increasing pay to a minimum of £7.20 an hour would cost the sector about £100m, and a further rise to £9 an hour would lead to an additional earnings bill of £400m. McKay says an analysis by the Office for Budget Responsibility suggested that the introduction of the national living wage would increase the wage bill of the country by 0.3 per cent, but argues that this underestimates the costs because it does not include employers' national insurance and workplace pension contributions. He says that an additional 13.8 per cent of earnings is likely to be paid in employer NI for increases in earnings alone.

It is clear that as the country begins its second fixed term Parliament that the ravages of austerity are with us still. The government's appropriation of "one nation" politics, another borrowing, makes for a snappy slogan that does not quite describe a political philosophy. It does at least fill the gap left by the "big society", which did such sterling service in the last Parliament.

Whilst ideologically appropriate for a conservative government and in line with the majority of the electorate's wishes, the shift of responsibility away from the state to employers shouldering greater responsibility for employee wellbeing and welfare will perhaps prove hopelessly optimistic given the uncertainty still present in the world economy.

Uncertainty for employers may delay investment in productivity and could cause people to lose their jobs, thus shifting more responsibility away from government and employers towards charities helping those in need.

The invisible hand of enlightened self-interest for the common good is at work in a complex and increasingly unequal world and as Adam Smith predicted can have unintended consequences.


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