Monday, October 3, 2011

Minimum Wage levels are Symptom not Cause

Institute of Economic Affairs quote about National Minimum Wage:
This is basically pricing people out of the labour market and onto welfare
Source: Panorama article on BBC

I was never a fan of the minimum wage 'idea', however it is now in place in the UK.

As it happens I think that statement from Mark Littlewood, sidesteps the wider issue of Housing.

The minimum wage being 'too high' is purely a reflection of rising living costs.

Think of it as nothing more than a number/statistic helps.

The true problem, in my opinion, is the daft idea of turning 'housing' (an essential item) into a 'free market' driven by folks looking for 20% or 10% annual return.

Whilst that situation exists, living costs will continue to be driven by, that underlying market force, and that living cost reflection (minimum wage) will also continue to rise.

There have been many headlines in the past 5 years from Company Directors*, complaining about the minimum wage.

Directors and recruiters bleating about a minimum wage being too high, seems to me to be a lazy sidestepping of the wider issue.

Do these same Directors* and recruiters own second homes?

Because if they did, you could understand why they may be reluctant, to give up on a market system (housing) in which, they have major capital invested.

*Directors here means Company Directors in general, and does not refer to any one individual.

Better off on welfare - how the 'Housing market' creates this situation:

As a Mathematician and follower of logic, this seems all too easy to describe, and illustrate with numbers.

You are a blue collar worker named Bob and you work full time at a biscuit factory.

Your weekly earnings have increased steadily from £200 in 1990, to £300 in 2000, and £400 in 2010.

1994 was a good year, you got Married to Janet and bought a semi-detached for £30,000 with a Mortgage arrangement. You are 24 years old and things are rosy.

2002 was not a good year, you got divorced, agreed to sell the house and split the proceeds.

The 'Housing Market' now in full effect had increased the value of your property to £80,000.

You pay the divorce lawyer, and sale fees and You and Janet end up with roughly £30,000 each.

You choose to rent a flat at £100 per week.

The 'buy to let' effect on the Housing Market has increased average rents, now between 2003 and 2009, your rent has increased on the flat from £100 to £180 per week.

Luckily for you your wages in 2010 are now £400, but of the £220 remaining after your rent is paid, you must contribute to the living costs of the children from your marriage.

You struggle financially, but have got past the divorce,  and enjoy spending a couple of days with the kids midweek and weekends.

The £30,000 you had from the sale of the house has been pretty much spent on treating the kids - organised school holidays skiing for little Pete, and a pony for Lucy. You now have £5,000 in a saver account.

In 2011 the Biscuit Factory closes and you lose your job.

Now let's pretend for a second that there is no minimum wage.

Bob has a flat for £180 per week. He has to contribute to the upkeep of his children with Janet also.

He liked the job at the Biscuit Factory, and it gave him stability for many years, however he has few transferable skills.

Bob's cost of living has very little to do with whether he lives in a country that has a minimum wage.

If there was a minimum wage and it was scrapped overnight, it does not alter Bob's situation.

Adding some detail - Bob lives in the UK and there is (currently) a National Minimum Wage of £6.08

( For International Readers - I give some context ... £6.08 will buy between 4 and 6 loaves of sliced bread depending on where you shop )

Bob goes down to the job centre. Most of the jobs for which he would have any hope of showing 'previous experience' are priced at the Minimum Wage rate of £6.08 per hour.

£212.80 per week is what you will get on Minimum Wage for working a 35 hour week.

Assuming Bob takes the job at Roundhouse Cake Factory at £212.80 per week, and does not claim any housing assistance, he cannot stay in the flat and support his kids.

Instead Bob takes the job at Roundhouse Cake Factory at £212.80 per week, and does claim housing assistance - he can stay in the flat and support his kids.
Welfare won. Bob works hard but finds life is worth living and adores his children.

Should Welfare win? - the different opinions:

The welfare staff are chatting over lunch. The discussion is about Bob. He should really have moved out of the flat, and into a shared house with cheaper rent says Charlie. Jenny points out that a 40 plus single man with children staying over Wednesdays and Saturdays, might not work with a house of young students.

Have your own discussion folks. Is Bob right? Is Charlie talking sense? Does Jenny have a valid opinion?

What did not matter at all in that scenario was Minimum Wage.

What did matter looking back at the history was ...
  • 1994 -> 2002 the cost of a semi-detached rose from £30,000 to £80,000
  • 2003 -> 2009 the rental for a flat rose from £100 to £180

Now let's consider a clone of Bob (Bob2), who has let himself go a bit. He makes an effort with the children, but feels a little downtrodden and is not very happy except on Dad days.

Bob2 fails to get the job at Roundhouse Cake Factory - the employer had a more enthusiastic applicant and gave the job to Ted.


Bob2 fails to get the job at Roundhouse Cake Factory - the employer had 50 applicants for 2 jobs. Ted and Sally got the jobs.

Bob2 claims job seekers allowance, and claims help with his living costs.
Welfare won.

Charlie and Jenny and the rest of the lunchtime crowd from welfare are commenting on Bob2's situation. Somebody suggests that it is not right that Bob2 should have his Flat paid for. Another person disagrees. What do you think?

Idle Chatter, the Housing Market, the Housing Market:

My Opinion: All that talk is just idle chatter - the bigger problem - affordable housing is the real issue.

Until the government take measures regarding second ownership (tax it out of existence?), the housing costs of Bob and Bob2 will be driven by those seeking 10% to 20% annual returns on residential housing.

This generation (and the previous generation) have been raised to maximise the income to their family unit. Whilst a situation exists where 10% to 20% annual profit can be obtained through owning a second home, the welfare system is taking up the slack.

Everyone meets the cost of welfare, but only the second home owners get to keep the 10% to 20% profit.

Schooled in profit - would I ever own a second home:

The easy answer here would be to say NO NEVER, however I think it is naïve of me to reach right away for that answer.

Let me put it to you another way...

If I had £100,000 today and could earn 4% in a bank, or 20% in a second home, would you consider me an idiot for taking the 4%? Probably.

If I take the 4% I am considered a fool for giving up 16% earnings.

Regulation is required to prevent bank and building society investments, being the poor choice for most 'well off' couples and their investment.

Residential Housing is not a 'free market' and should not be treated like one.
Yes have a market, but have it regulated to moderate profits, through capital gains tax and other taxation measures.

If it is 'too profitable' then speculation and greed take over, and affordable housing becomes a myth.

Until this happens, those 20% annual returns are going to be too tempting for anyone to resist.

But nobody makes 10% or 20% per annum on a second house now?

If this is the case, then regulation is still required, just not as urgently.

It does not alter the situation that all those 10% and 20% yearly increases, between 1994 and 2009 have been taken out of the system.

Only when house prices fall so that those 10% or 20% rises are undone will the affordable housing problem go away.

But that is impossible? Only if housing is really not a free market or there is a fundamental change in our social makeup.

With the lack of regulation, a lack of buyers could well undo those past rises.

However second home owners would not allow that to happen. Lobbying for removal of rent caps on social housing, and other roundabout methods of propping up the residential property market, would likely come into effect.

The 'well off' do not like to lose money, and expect MPs, and other representatives to take action if that looks likely. Cynical? Maybe.

I mentioned a 'fundamental change in our social makeup' - see next.

Alternative housing - a threat to second home owners:

Bob loses the Flat and decides to take off and become a 'traveller'. The £5,000 buys him a motor home.

Wherever Bob goes around the UK, he is pestered by councils to 'move on'

Bob2 loses the Flat. He meets Victoria and in order to save up a deposit, they move into a large shed in the back garden of Victoria's folks house.

However an Anonymous complaint is received at the council, and the shed living arrangement cannot continue.

The couple will have to scrimp and save for a decade, before having any hope of affording to buy a house.

Note: I have misrepresented Victoria and Bob2 as a couple here. Victoria is a real person (see link), however I felt it a useful addition to this article. Bob2 bears no relation to the boyfriend of Victoria in the linked article. My words are fictional. 

So it seems that there are perhaps too many vested interests in the 'free market' of residential property, to allow any change.

Alternative housing will be vilified, as if it is not, then those 10% or 20% annual profits might never return!

Notes and Further Reading:

It is not my intention to suggest that welfare staff discuss individual cases over lunch. I just found it a useful way of introducing ideas and opinions, which the reader can mull over.

If this article comes across as being negative towards second home owners, it is not so deliberate. I only point out the negatives to get to the root cause - Having residential housing as a truly 'free market' is in my opinion a big mistake. This article is my attempt to illustrate that, rather than targeting those individuals outright.

An extract from a report by Shelter about Affordable Housing in UK:
Shelter's research found rents had risen at one-and-a-half times the rate of incomes in the 10 years up to 2007.

Shelter defines 'Affordable' as 35% of median average local take-home pay.

Do you think 35% of take home pay is a reasonable level?

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