Monday, 19 March 2012

Unintended consequences

Caritas proposal for a sharp increase in the minimum wage in order to extract people out of poverty, or out of the risk of poverty,  suffers from the law of unintended consequences.    This law states that certain measures if taken could have unintended consequences so that the end result would be the opposite of that intended.

I very much think that if Caritas suggestion is adopted the people on minimum wage could well be dragged down further into poverty rather than extracted out of it.

Caritas proposal overlooks two basic realities:

  • Our workers today are competing with workers in countries where wages are much lower than ours.

  • Workers on minimum wage are most probably unskilled and a raise in minimum wage would probably out-price them out of the labour market with very limited prospects for finding a new job if they lose the one they currently have.
The objective to pull people out of poverty would be more effectively achieved if tackled from the fiscal and social security side.  The living wage concept is interesting in the sense that people not earning enough to live above the poverty line should receive social payments rather than pay taxes, through some sort of  positive taxation.

This would keep their current minimum wage competitive and reduce the risk of losing their job.  

For such innovation to remain fiscally sustainable the country would have to rethink its social policy and render social services mostly means tested rather than universal.    Therefore a reliable means testing mechanism would be required and this would necessitate a total rehash of our fiscal system to reduce direct tax rates and shift the burden to indirect taxation.

Furthermore those who would be entitled to a living wage supplement to their normal wage would have to be helped to improve their skills and employability  by attending evening training courses.   This to ensure that we do not create a culture of dependency rather than a culture of innovation.

Surely the living wage concept needs to be explored further.  Solutions with grave risks of  unintended consequences should be avoided.

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