A Subtle Transfer of Value…
..The Impact of Benefit Reform on Labour Rates for Unskilled Workers An attempt to reduce the benefits bill by £15 billion pounds represents a significant transfer of wealth from the poor to the well off. At first glance this transfer will be from the un-working poor to the working well off. I think there may also be a transfer from the working poor to the working well off. Benefits reform may drive claimants into the jobs market and therefore reduce wages for people already working in low skilled jobs.
£15 billion saved from the welfare bill is £15 billion that does not need to be raised in taxes or removed from service provision. Those working and paying taxes are better off than if that £15 billion were cut from services or found from their wallets. So far, so good for the middle classes and the working poor.
In order to reduce the welfare bill by £15 billion people will have to be removed from the welfare roll and moved into work. This is not the only way of reducing the welfare bill but it is the one I want to focus on in this essay. The impact of people who could otherwise participate in the labour market being moved off benefits will be to reduce their reservation wage, the wage at which they will start to choose paid employment over unemployment. People previously living on welfare will be forced back into the labour market at the best price they can get. I am going to make an assumption that most of these people are unskilled and will be looking for jobs on minimum wage, or close to minimum wage. I make this assumption because if they were skilled workers the market rate for their labour would be comfortably above both benefit rates and their reservation wage when compared to a life of idleness. They would already be working.
So, more, low skilled, low paid workers will enter the labour market. The supply curve for unskilled labour shifts to the right and the clearing price either falls or the demand curve also shifts to the right. This sounds like a good thing for the economy. After all, an increased working population is one of the three drivers of economic growth along side more capital (investment) and better capital (technology).
It may very well be a good thing if the economy were already operating at full employment; additional labour would increase economic activity and act as a dampener on inflation. However, I do not think we will be operating at full employment soon.
A second potential impact of increased “indigenous” labour entering the labour market is that it displaces migrant workers by slightly bidding down labour rates and reducing the hassle factor of bussing in labour from beyond the Rhine. Benefit reform may well have this effect. Eastern Europeans migrant workers may look at increased competition in the UK labour market, poor exchange rates, their own economic value in their home economies and the relative situation of their economies against ours or Germany’s and decide that the game is not worth the candle and take their labour elsewhere. In which case the impact that I am about to describe will be exported to their home countries and arguably becomes someone else’s problem.
The third impact of increased amounts of low skilled labour is that it increases the competition for jobs at the low end of the labour market. Whilst the minimum wage prevents labour rates falling beyond a certain level increased competition does mean that more jobs become minimum wage jobs. What is the impact of this on the UK economy? I do not think it dramatically increases our international competitiveness. These people do not have the type of skills that highly competitive British businesses are crying out for (but just a little bit cheaper than current market rates) so we can win orders from America, Europe, India, China and Brazil. If they did they would be working already on sitting on long-term benefits. We are unable to compete with India and China on low skilled labour rates. These people will mainly be working in the domestic service sector. They are check-out operators, nannies, labourers, barmen, pickers and packers, shelf stackers and cleaners.
An influx of new labour into these parts of economy will reduce costs for employers as more jobs priced near the minimum wage become minimum wage jobs. These are not just the jobs taken up by people moving off benefit. These are the jobs held by people who are already working. Everyone close to the unskilled-labour minimum-wage pool will see their labour rates fall. These reduced costs will be taken as profit (and directed to middle class pension fund holders) or passed onto (middle class) customers, or used by employers to fund wage increases for scarcer more highly skilled (middle class) labour.
The transfer to the middle classes is, therefore twofold, a transfer from not paying the benefits bill for those not working and a reduction in wages for those working in low skilled jobs.
This begs questions about how we help people gain skills that will take them out of the unskilled-labour minimum-wage pool.
It also begs questions about what government policy on increasing the minimum wage in line with inflation will be. With downward pressure on low skilled labour rates, below inflation increases to the minimum wage will see more and more lower skilled working people taking a pay cut.
Those are questions for another day. My thought for today is to watch out for the subtle transfer from have-nots to have along side the more obvious transfer from benefits claimants to taxpayers.