National Minimum Wage v’s Living Wage

The National Minimum Wage (NMW) is back in the news with Millipede Sr and UNISON boss Dave Prentis calling in yesterday’s Observer for it be raised to match the ‘Living Wage’ (LW) rate of £7.20 (or £8.30 in London) an hour.

As Tim Worstall pointed out once again yesterday, this could be achieved just as easily as not taxing anyone doing a full-time job at NMW rate for those over 21 (currently £6.19/hour).

The figures (courtesy of Listen to Taxman) for someone doing a 37.5 hour week in the 2012/13 tax year are as follows:

NMW LW
Gross Pay (£) 12,070.50 14,040.00
Income Tax (£) 793.10 1,187.00
National Insurance (£) 537.42 773.76
Nett Pay (£) 10,739.98 12,079.24

As can be seen the difference between gross income at NMW and nett income at LW is all of £8.74 (less then a half a penny an hour) and this figure will no doubt be even lower in the 2013/14 tax year once the 0% Income Tax (IT) band rises to £9,205.

Raising this threshold, as well as those for National Insurance (NI), to £12,070.50 would hand every employee on the NMW an automatic pay rise of £1,330.52 without costing their employers a penny. Sure, it would cost the treasury the same amount (more once employer’s NI is taken into account) but I suspect that that can be offset against the reduction in tax-credits.

Upping the NMW to match the LW however would mean that the treasury steals an extra £901.23 (£393.10 in Income Tax, £236.34 in employee’s National Insurance and £271.79 in employer’s National Insurance) per employee.

As someone who would rather the government had less revenue to waste, the former strikes me as the more sensible approach.

It also means that private sector employment in those areas of the country where the median wage is less than the UK median (generally everywhere outside of the big cities and their suburbs) should not continue to suffer at the expense of public sector employment.

It would, of course, make more sense if (whilst we have them) the NMW and LW wage as well as public sector salaries were set on a more local basis given that the cost of living varies across the country. We already have this working in London in the form of the ‘London Weighting’* so why not for those outside of the suburbs?

UPDATE: Millipede Jr has said he’d like to see the LW set at £7.45. Using the same methodology as above the figures come out as:

  • Gross – £14,527.50
  • IT – £1,284.50
  • NI – £832.26
  • Nett – £12,410.74

The difference between the nett figure here and the gross at NMW is £340.24 – or approximately 17.5p per hour.

* Somewhat of a misnomer I feel as it was (when my mum was based there) being paid to those working for local government in Basildon. Basildon, for those fortunate enough to have never heard of it, is a 1960s new town outside of the M25 and about 30 miles from the eastern edge of the City.

6 Comments

  1. Bucko says:

    Or. They could scrap the minimum wage altogether and give up all this silly talk of a ‘living wage’.

    Wages will drop, costs to employers will decrease and this will reflect in a lower cost of goods and services to the consumer. Cost of living will decrease in line with wages and nobody would be worse off.
    Apart from the government who will be stealing a lower percentage of income taxes.

    • Misanthrope Girl says:

      I’m not fan of the NMW myself as I believe it is responsible for a lot of unemployment at the bottom end of the scale (i.e. those who are either uneducated, unskilled, inexperienced or any combination of the three). The argument is that if we have to have it, we shouldn’t tax those who are earning it.

      It unlikely that any politician worth their salt will scrap it – in the same way that none of them will ditch the Winter Fuel Allowance or the ‘free’ TV licences for the over-75s. The best we can hope for, I suspect, is that this Chancellor or a future one implements a policy of only raising it by less than the rate of inflation.

      • Bucko says:

        You’re right of course. Scrapping the NMW would be the best option in the long run, but TPTB don’t think long term.
        Neither do the people. They would see the short term effects of lower wage being people earning less, not the long term effects of reduced cost of living and better employment prospects for the people you describe.

        Not taxing the lower earners would be the best alternative. Trouble is, that would mean the government having to cut back on spending or come up with new taxes.

        They won’t cut back on spending as it’s totally against their nature. They would probably go for some kind of ‘tax the rich’ option. It would be easy enough to justify by saying that the rich made their money on the backs of the lower earners who they are trying to help (Not that the rich created the jobs in the first place).

  2. sadbutmadlad says:

    If going by this article (http://www.ippr.org/?p=920&option=com_wordpress&Itemid=17) at the IPPR, it seem that the progressives would rather keep the poor poor rather than allow those middle income earners to benefit from a raising of the tax threshold.

  3. jameshigham says:

    National Minimum Wage v’s Living Wage v’s jobs available in the community and getting off our backsides and having one.