The Minimum Wage: Part III

Author

Date

21st July 201517th May 2016

[avatar]

This morning, MPs backed George Osborne plans for £12 billion pounds of cuts with a majority of 308 to 124. The Chancellor had previously reiterated his support for Harriet Harman, the interim Labour leader, who had called on her party’s MPs to support the recent welfare reforms put forward in the Conservatives’ latest budget. In an impassioned opinion piece written for The Guardian, Osborne was quick to highlight his plan to cut corporation tax but raise the minimum wage to £7.20 per hour with a view to eventually reaching over £9.00 per hour by 2020. While the Labour Party oppose other aspects of the welfare bill, such as changes to Employment and Support Allowance, Osborne hopes that progressive Labour MPs will support the Budget’s attempts to stimulate economic growth.

As mentioned previously, the effect of such a great hike on the minimum wage will have a huge effect on SMEs, particularly if there is no attendant increase in productivity. While productivity in the UK has begun to rise, this is probably by too little and too late. The new wage equates to a £1300 per year salary rise, and unexpectedly eclipses the £8 per hour figure offered by Labour during the election. However, he has pledged to cut corporation tax to 18% by 2020, the lowest of any G20 country. So if, hypothetically, the tax reduction offsets the higher wages, everyone is a winner. However, undoubtedly it will be smaller, less profitable businesses with tight margins, paying little corporation tax that will feel the pinch the most. Small companies who pay the majority of their employees the minimum wage will undoubtedly have to restructure their costs which will inevitably lead to redundancies. Meanwhile, the more progressive large companies, IKEA in the vanguard, have said they will be able to introduce the new minimum wage early. To compound the bad news for SMEs, the issue of late payments again was ignored, along with any discussion on business rates and rents.

The Conservatives who opposed Blair’s original introduction of the minimum wage in 1999 were proven wrong; it remains to be seen if Osborne’s decision will silence the criticism of some factions who claim he is a Chancellor who lets politics dictate his economic decision making. After all, there is a huge risk that the UK’s higher labour costs, particularly without an increase in productivity, would drive businesses to look to competitor economies, leading to further job losses and widespread business closures. It would certainly take a very brave Chancellor to renegade on a promise that affects an estimated 2.7 million people nationally.

The State of London’s Property Market

Author

Angus Dent

Date

8th May 201517th May 2016

[avatar]

Every morning as I walk in to work, I pass the old Port of London Authority building that dominates the eastern side of Seething Lane. Sat derelict and covered up for months, this colossal building’s classical façade has finally been re-exposed as its renovation nears completion. And when it is finished next year, 41 newly furnished luxury apartments will come to market with prices as grandiose as the building itself: £5 million for a one bedroom flat. Perhaps it is not surprising that such peerlessly positioned homes are given these lofty valuations. But the prices they command are proving more and more commonplace in modern London. Indeed, few topics have held as many column inches in recent years as London property prices, and the statistics illustrate why this is the case.

Since 2010, the average asking price for a London home has risen 49% to £594,585 according to the online real estate firm Rightmove. To put this in a global context, Savills now estimates the value of London property to be greater than the GDP of Brazil. As a result, it is estimated that first time buyers now need a salary of £77,000 before buying a London home even becomes a possibility. All this is made more galling by the fact that the future trajectory of house prices appears resiliently steep; despite stalling somewhat since August 2014, prices are still predicted to rise by 10.4% over the next five years. Getting a foot onto the capital’s property ladder has never looked so unattainable.

So how has such a highly valued market come to fruition? One of the more frequently cited factors in the media is the significant inflow of foreign investment that London has experienced, particularly as a result of instability in Russia and the Middle East. With 70% of central London property going to foreign buyers in recent years, this is undeniably an important demand-side factor. But over and above this, the supply of houses has simply not increased at the necessary rate to keep prices flat.

Predictably, policies intended to alleviate this housing crisis in London and further afield have featured heavily in the election campaigns of both the Labour party and the Conservatives. The former have pledged to build 200,000 houses a year by 2020, the latter to extend Margaret Thatcher’s ‘right-to-buy’ scheme and introduce discounts for first time buyers. Fears have circulated that Miliband would seek to neuter other Conservative schemes aimed at helping first time buyers in this difficult market, though it is the left-wing party’s proposed ‘Mansion Tax’ that has stirred up particular ire for its potential effects on the property market.

The website Zoopla has argued that if this proposed levy on homes worth over £2 million were enforced, it would stymy demand from high net worth foreign investors whilst simultaneously increasing competition further down the property ladder. And whilst it is not surprising that a property website would dislike interference in the housing market, their arguments are partially reinforced by analysis which suggests that the entire high-end property market could be at a tipping point. Drawing on historical property data of periods of both Labour and Conservative governments, the report in The Telegraph estimates that luxury home sales could fall by 27% under a Labour government or jump by 20% under a Conservative one. The possible impact of a ‘Mansion Tax’ on the appetite of high end buyers is clear.

As the last few votes are counted this morning, it appears that a Conservative victory is now a certainty. Whether this is a victory for first time buyers will not become evident for some time. But the developers of the old Port of London Authority apartments will likely be breathing a sigh of relief.

The Minimum Wage – Part II

Author

Angus Dent

Date

6th May 201517th May 2016

[avatar]

If searching for a segment of the UK labour market that would be disillusioned with a rise in the National Minimum Wage, the Small and Medium-Sized Enterprises (SMEs) sector is the obvious place to start. Defined as those businesses with no more than 250 employees and a turnover below €50 million, the members of this group are likely to offer lower wages and be less able to absorb an increase in wage costs than many of the nation’s larger firms. Surprisingly, a recent report has shown that a number of SME business leaders hold a remarkably sanguine outlook on the 20 pence rise in the minimum wage coming into force this October – the largest rise in real terms in 7 years.

The report found that the directors of these smaller firms believed the static wage environment since the financial crisis, the lower costs of fuel and the favourable exchange rate with the Euro had made dealing with increasing overheads easier. They also recognised that their competitors in the UK would be facing the same challenges and appreciated the more general virtues of a sensible minimum wage for society at large. These individuals’ magnanimity in the face of increasing business costs is well-founded, as a paper published this February by the National Institute of Economic and Social Research and Centre for Macroeconomics, which analysed historical company data, states that “labour cost increases amongst low-paying firms may have been met by increases in labour productivity.” A point borne out further by a Financial Times columnist, who argues that the gradual rise in the minimum wage might have brought in better workers with better morale, and that this phenomenon could explain why the job losses predicted by opponents of the minimum have largely failed to take place.

A rising minimum wage has not been positive for businesses in every case though; a fact accepted by the man who first established the benchmark in 1999, Professor Sir George Bain. Some unemployment has occured in a few sectors, such as social care, where many are paid very low wages, and Bain notes that if the minimum wage were raised now to meet the ‘living wage’ – around £7.65/hour – then “widespread job losses” would likely follow.

This brings us then to the timely matter of this year’s General Election, and more specifically to the question of how prudent the minimum wage pledges made by some of this year’s election hopefuls appear to be. The mainstream left-wing parties all seek to raise it considerably, but the Green Party can be marked out for its particularly aggressive plans for the measure, with suggested increases to 60% of net national average earnings, £8.10/hour, rising to £10/hour by 2020. The party’s plans to raise the minimum wage in such a manner would seem to be built on assumptions that due to the net positive effects seen so far, the level at which it is set does not matter. This is surely misguided. The benefits that the minimum wage has created so far derive from the cautious approach taken by the Low Pay Commission when advising the government on an appropriate level at which to set it. And looking back to Bain’s warning, it would seem clear that there is a level at which the minimum wage will become counterproductive. To abandon the principle of caution when setting it, as planned by a number of this year’s candidates, poses a real threat to the health of the British SME sector.