Uncharted Territory

September 16, 2015

Will Osborne’s UK National Living Wage Really Cost 60,000 Jobs?

Filed under: Economics, Inequality, Minimum wage, Unemployment — Tim Joslin @ 7:25 pm

It’s pretty dismal if you’re left-leaning in the UK right now.  Not only did Labour lose the election catastrophically and – adding to the shock – much more badly than implied by the polls, they’ve now gone nuts and elected a leader who can’t win, and even if he did advocates policies that belong in the 1970s.  Meanwhile Osborne is implementing a policy Labour should have been pushing during the election campaign, namely what is in effect a higher minimum wage, his so-called National Living Wage (NLW) for over 25s.  Of course, Osborne’s overall package is disastrous for many of the poorest households who will be worse off even with the NLW because of simultaneous cuts to tax credits.

If you’re following the debate around the NLW – for example as expertly hosted by the Resolution Foundation – it’s clear that the Big Question is how much effect the NLW (and increased minimum wages in general) is likely to have on (un)employment.  Now, based on logical argument (that being my favoured modus operandi), and, of course, because my philosophy is to question everything, I am highly sceptical of the mainstream line of reasoning that labour behaves like paper-clips.  Put up the price of paper-clips and you’ll sell fewer; put up the price of labour and unemployment will rise is the gist of it.  But this ignores the fact that increasing wages itself creates demand.  More on this later.

Much as I believe in the power of reasoned argument, I nevertheless recognise that it’s a good idea to first look at the strengths and weaknesses of the opposing position.  In this post I therefore want to focus on the meme that Osborne’s NLW will cost 60,000 jobs.  How well-founded is this estimate?  You’ll see it quoted frequently, for example, by the Resolution Foundation and on the Institute for Fiscal Studies’ (IFS) website and no doubt in mainstream media reports.  The original source is the Office for Budget Responsibility.  As far as I can tell the 60,000 figure first appeared in a report, Summer budget 2015 policy measures (pdf) which was issued around the time of Osborne’s “emergency” budget in July (the “emergency” being that the Tories had won a majority), when he bombshelled the NLW announcement.

So, I asked myself, being keen to get right to the bottom of things, where did the OBR boffs get their 60,000 estimate from?  Well, what they did was make a couple of assumptions (Annex B, para 17 on p.204), the key one being:

“…an elasticity of demand for labour of -0.4… This means total hours worked fall by 0.4 per cent for every 1.0 per cent increase in wages;”

They stuck this into their computer, together with the assumption that “half the effect on total hours will come through employment and half through average hours” and out popped the 60,000 figure.

But where does this figure of -0.4 come from?  They explain in Annex B.20:

“The elasticity of demand we have assumed lies within a relatively wide spectrum of empirical estimates, including the low-to-high range of -0.15 to -0.75 in Hamermesh (1991). This is a key assumption, with the overall effects moving linearly with it.”

The Hamermesh reference is given in footnote 3 on p.205, together with another paper:

“Hamermesh (1991), “Labour demand: What do we know? What don’t we know?”. Loeffler, Peichl, Siegloch (2014), “The own-wage elasticity of labor demand: A meta-regression analysis””, present a median estimate of -0.39, within a range of -0.072 to -0.446.” (my emphasis)

Evidently Hamermesh is the go to guy for the elasticity of demand for “labor”.  So I thought I’d have a look at how Hamermesh’s figure was arrived at.

I hope you’ve read this far, because this is where matters start to become a little curious.

Both papers referred to in footnote 3 are available online.  Here’s what Hamermesh actually wrote (it’s a screen print since the document was evidently scanned in to produce the pdf Google found for me):

150916 National Living WageSo what our guru is actually saying is that although the demand elasticity figure is between -0.15 and -0.75, as assumed by the OBR, his best guess – underlined, when that was not a trivial matter, necessitating sophisticated typewriter operation – was actually -0.3.

So why didn’t the OBR use the figure of -0.3?

Perhaps the answer is to do with the -0.39 they quote from the Loeffler, Peichl and Siegloch paper (pdf).  But this is what those guys actually wrote:

“Overall, our results suggest that there is not one unique value for the own-wage elasticity of labor demand; rather, heterogeneity matters with respect to several dimensions. Our preferred estimate in terms of specification – the long-run, constant-output elasticity obtained from a structural-form model using administrative panel data at the firm level for the latest mean year of observation, with mean characteristics on all other variables and corrected for publication selection bias – is -0.246, bracketed by the interval [-0.072;-0.446]. Compared to this interval, we note that (i) many estimates of the own-wage elasticity of labor demand given in the literature are upwardly inflated (with a mean value larger than -0.5 in absolute terms) and (ii) our preferred estimate is close to the best guess provided by Hamermesh (1993), albeit with our confidence interval for values of the elasticity being smaller.” (my emphasis)

Yep, the Germanically named guys from Germany came up with a figure of -0.246, not the -0.39 in the OBR’s footnote 3.  The OBR’s -0.39 is a rogue figure.  It must be some kind of typographical error, since they correctly quote the possible range ( -0.072 to -0.446) for the demand elasticity.  Bizarre, frankly.

It’s even more mysterious when you consider that the OBR would surely have used the elasticity of demand for labour previously.

Based on the sources they refer to it seems the OBR should have plugged -0.3 at most into their model, not -0.4.  This would have given a significantly lower estimate of the increase in unemployment attributable to the introduction of the NLW, that is, roughly 45,000 rather than 60,000.

Why does this matter?  It matters because the idea that a higher minimum wage will increase unemployment is one of the main arguments against it, frequently cited by those opposed to fair wages and giving pause to those in favour.  Here, for example, is what Allister Heath wrote recently in a piece entitled How the new national living wage will kill jobs in the Telegraph:

“…it is clear that George Osborne’s massive hike in the minimum wage will exclude a significant number of people from the world of work. There is a view that this might be a worthwhile trade-off: if millions are paid more, does it really matter if a few can’t find gainful employment any longer? Again, I disagree: there is nothing more cruel than freezing out the young, the unskilled, the inexperienced or the aspiring migrant from the chance of employment.

Being permanently jobless is a terrible, heart-wrenching state; the Government should never do anything that encourages such a catastrophe.”

Clearly, Heath’s argument (which I don’t in any case agree with) carries more weight the greater the effect of a higher minimum wage on unemployment.  But getting the numbers wrong isn’t the only problem with the OBR’s use of the demand elasticity of labour, as I’ll try to explain in my next post.

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September 16, 2011

Off the Buses in Ealing

I reported yesterday that TfL is planning to increase fares on average by RPI+2 each year until 2018, and Travelcard prices by RPI+3 over the same period, the supposed justification being that rail fares are to rise by RPI+3. I briefly discussed the implications of this discrepancy, but had a subsequent conversation which led me to consider a different case.

I don’t know about you, but I always feel short-changed if I buy a season pass for a transport network and then find I’d have been better off paying for each journey individually. How likely is this to happen for someone living in Ealing, but working in central London a) now and b) in 2018?

Case 1: A morning and evening peak commuter
This individual uses the tube during the morning and evening peak and sometimes catches a bus back from the station.

In the following table I’ve ignored inflation and just increased costs by 2 or 3% p.a. So in today’s prices a zone 1-3 Travelcard will cost £41.55 in 2018, compared to £34.80 in 2012.

Year   Travelcard cost       Less 10 peak tube fares      Bus fare cost         No. bus fares to break even
2012         34.80                     34.80 – 10*3.10 = 3.80         1.40                             3.80/1.40 = 2.71
2018         41.55                     41.55 – 10*3.49 = 6.64         1.58                             6.64/1.58 = 4.21

So whereas in 2012 our peak commuter would only have to catch the bus 3 times in 2012 to avoid feeling cheated on a weekly Travelcard, he’ll have to catch it 5 times in 2018. If, like me, he walks to and from the station most of the time, he’ll be in a bit of a dilemma by 2018 as to whether or not to buy a weekly Travelcard.

Case 2: A morning peak and evening peak/off-peak commuter
It gets even worse in the case I actually discussed yesterday. The evening peak is from 16:00 to 19:00, so many people working in London may not actually travel home until off-peak fares apply. If this happens 3 times in a week, then the calculation changes somewhat:

Year  Travelcard cost     Less 7 peak, 3 off-peak tube fares     Bus fare cost   No. bus fares to break even
2012        34.80               34.80 – (7*3.10 + 3*2.60) = 5.30              1.40                     5.30/1.40 = 3.79
2018        41.55               41.55 – (7*3.49 + 3*2.93) = 8.33              1.58                     8.33/1.58 = 5.28

By 2018 this commuter will need to use the Travelcard on more than one bus each work-day (or for leisure journeys) to justify the expenditure.

Personally I feel the Travelcard should be a better deal. In London, it seems, regular tube users are likely to pay as much per journey as occasional travellers. And it seems unfair for commuters to have a dilemma as to whether to by a season ticket or not – I haven’t even discussed the effect of Bank Holidays, leave, sick-days and occasional home-working. This is the opposite of the case for main-line rail commuters who get a tremendous deal compared to the occasional traveller.

From TfL’s point of view inflating the cost of Travelcards relative to pay as you go (PAYG) fares may also not make sense in the long-run. The result may be that more of us in suburban London stop buying Travelcards and instead cut out as many bus and tube journeys as possible. As I said yesterday, “maybe it hasn’t occurred to TfL that people might consume less of their product when they put the prices up”.

September 15, 2011

Off the Buses

Boris has announced the 2012 London Transport fare increases already. Do we always get an announcement at this time of year? Or is our leader trying to get the bad news out of the way as long as possible before the mayoral election in May 2012? I note that the last time I visited this topic was in January this year when the last fare rises actually came into effect. With a bit of luck there’ll be a double whammy with negative stories now and in January 2012.

Let’s get the ball rolling with a negative story, then.

The BBC provides a link to the documents issued by the mayor. I only looked at the first one (pdf), which seems to tell me everything I need to know.

It turns out that TfL has a Business Plan based on fare rises of RPI+2%. News to me, most likely totally unjustifiable, but certainly worthy of discussion.

First, are we to believe that TfL’s costs rise faster than general inflation? This seems unlikely, though we do know that many of their employees are extraordinarily privileged to the extent that they apparently deserve a bonus just for doing their job during the Olympics. A lot of people will be working then, and the vast majority will be paid their normal salary, and would expect nothing more. I don’t support the present government, but I was rather hoping they might look at strike law with a view to stopping Londoners being continually held to ransom.

Second, on the customer side, how is it possible to bear continual above inflation rises in transport costs? I’m thinking of low-paid workers travelling into central London. The cost of a weekly Travelcard (tube and bus) season in 2012 will be £34.80 to zone 3, £42.60 to zone 4, after rises of 8.1% in each case. That’s about £1 per hour of work! Surely the minimum wage for central London needs to be higher than elsewhere to compensate? Assuming your pay rises roughly in line with inflation (which is doing well these days), then, if you have to spend more on transport, you have to spend less on something else. That is unsustainable. TfL is not like national rail, which, as the Transport Secretary pointed out this week, is now a service for the wealthy. It is simply not realistic for TfL to increase its prices by more than RPI for a long period of time, unless the lowest wages are increasing by at least the same rate.

So why has TfL adopted the RPI+2% formula? Maybe the document I downloaded doesn’t tell me everything I need to know after all. There seem to be a lot of TfL Business Plans, but the 2009 one for 2009/10 to 2017/18 tells us what we need to know:

“…fares in January 2011 and in subsequent years are now assumed to rise at RPI plus two per cent.”

So it is indefinite. And the purpose is clearly to increase the proportion of operating costs covered by fares and therefore reduce what TfL term “Net operating expenditure”:

Excerpt from TfL Business Plan 2009/10 - 2017/18

Let’s just note in passing that the congestion charge is going to raise less in 2017/18 than 2009/10!

Bizarrely, TfL don’t state what the figures in the table refer to. Presumably they’re 2009 £s (i.e. adjusted for inflation). Assuming that is the case, TfL assumes a steady growth (several % p.a. varying erratically) in passenger numbers as well as a 2% annual increase in the fares. They say:

“As the economy recovers from recession, it is projected that demand will return to current levels by 2012 and then continue to grow strongly as London’s employment and population increase, with demand reaching record levels by the end of the Plan.”

This is a fairly heroic assumption, as it seems to assume a very low elasticity of demand – maybe it hasn’t occurred to TfL that people might consume less of their product when they put the prices up. I’ll return to this point in due course.

TfL’s Business Plan suggests they expect costs to also rise by several % p.a. more than inflation, and also erratically, with a bigger increase in 2012/13 presumably to reflect the need to bribe the staff not to disrupt the Olympics, and in 2017/18, perhaps because Crossrail comes onstream (though there is no concomitant increase in fare revenue).

So in answer to my earlier questions, it seems that unlike every other field of economic activity, running London Transport becomes less and less efficient with time. And low-paid London commuters are expected to pay an ever-increasing proportion of their income on transport.

It seems to make sense that the fare-payer should cover the cost of the service, but let’s make a few observations:

1. Unlike many others, the London transport market is not segmented, so that those who can pay more do (compare walk-on national rail or air fares with advance tickets). I’m not saying I’m a fan of dramatic market segmentation. It creates its own problems, such as making urgent travel punitively expensive for everyone. But in an unequal society, it does allow some access to services for the less well off. Obviously it’d be better to have greater income equality in London, but until that happy day, subsidising fares helps alleviate the problem.

2. The fare-payer is not the only beneficiary of the London transport network. Just as, in the ’80s and ’90s, out of town superstores and malls benefited from the motorway network, such as London’s M25, (and generally improved roads), so the new millennium has seen similar developments – notably London’s twin east and west Westfields (or perhaps the new one should be an Eastfield?) – piggybacking on the city’s public transport network. Maybe these businesses should chip in and subsidise fares from the taxes they and their customers pay.

3. Just as for customers, businesses benefit from the availability of employees. They don’t pay a higher minimum wage even for staff having to travel into the centre of London. Maybe they should, but in the meantime it doesn’t seem entirely unfair for businesses and higher paid employees to subsidise the fares of the low-paid through the tax system. £1 travel cost for each hour of work is a lot for those earning little more than the minimum wage of £6/hour.

4. Today’s fares shouldn’t subsidise investment. That should be paid for by future fares, i.e. the beneficiaries of the investment. And in fact, the goal in TfL’s Business Plan is not apparently to increase fares to pay for more investment. So when Boris mentions investment in the same bluster as higher fares he’s actually being misleading and trying to deflect criticism.

And on top of this, there’s an anomaly in the pricing scheme – this is what really got my goat and prompted me to delve into the mire of transport fares once again:

“Travelcard season prices increase by 8% overall because of the link with National Rail fares which, as approved by the Secretary of State for Transport, are to rise by 8% (RPI+3%).”

What tosh.

Fares other than Travelcards are going to increase by RPI+2% (7% this year), but Travelcards are going to increase by RPI+3%, because you might get the train.

Do they think we’re stupid?

The price for a mainline train within London is the same as the price for the same journey by tube. I can go to Ealing Broadway and get a train to Paddington or I could get the tube there. I’d touch in and touch out with my Oyster card the same either way.

The daily limit applies just the same whether I use tubes and buses or tubes, trains and buses.

No, increasing the weekly limit faster than other fares (and remember this won’t happen just this year, but indefinitely until the policy changes) affects certain people disproportionately. The sort of people most affected are those who use the system most, that is, those dependent on it most likely to get to work, that is, those with least choice.

I’m in zone 3. If you need to get a bus and tube to and from work – and tube stations are thin on the ground out here, so often a long walk – then you’re going to need a weekly Travelcard (£32.20 in 2011; £34.80 in 2012), given that 10 peak pay as you go (PAYG) zone 1-3 tube journeys alone cost £29 in 2011 and £31 in 2012.

Of course, the tragic thing about all this is that many Londoners get the bus all the way into the centre to save a few pounds at the expense of perhaps an hour a day. But even they’re being screwed. The cost of a 7 day bus and tram pass is rising by 7.3% from £17.80 in 2011 to £19.10 in 2012. I can understand why the individual bus fare is increasing by 7.7% – that’s to keep a round number (£1.40 in 2012 after £1.30 in 2011). But £19.00 for the weekly pass would have been a 6.7% increase. Why not stop there? Gratuitous.

As far as I can see, the main beneficiaries of the fare changes for 2012 are off-peak occasional tube travellers for whom the zone 1-2 fare rises by only 5.3% (£1.90 to £2 – OK a nice round figure) and the zone 1-4 fares by a mere 4% (£2.50 to £2.60). For the last, £2.70 would only have represented an 8% increase. It seems fairer somehow to impact what is most likely discretionary travel a little more and that for people trying to make ends meet a little less.

What else could be done to help the low-paid? Besides fair pay, that is.

Well, here’s another curious anomaly. “Peak” in regard to the daily limit means 4:30-9:30am. That is, if you travel between those hours the daily cap will be the peak rate (£10.80 in 2012, rather than the off-peak £7.80). But if you don’t reach the daily limit and just pay as you go, the peak is 6:30-9:30am and 4-7pm (16:00-19:00). Odd. Why not give people more of an incentive to travel before 6:30am, when presumably there is spare capacity? Why not make the peak daily limit apply only if you travel between 6:30 and 9:30am? Wouldn’t this be sensible demand-management? It would help at least some of those who currently spend more than the off-peak daily limit because they take a bus and tube to work (e.g. in zone 3 in 2012 a pre 6:30am tube fare, a peak return fare and two bus fares would come to £2.60 + £3.10 + 2x£1.40 = £8.50, above the off-peak cap of £7.80 but below the £10.80 peak cap).

The case I’m most interested in is my own, of course. It’s the borderline case, where I may as well walk to and from the tube station rather than catch the 297 (or infrequent E10). If the service were more frequent I might take the 297 to Ealing Broadway. As it is, I never do, because I don’t know how long I’ll have to wait, at least until I get to the stop, when there may be a few clues. When I come out of the station, though, I can sometimes see the bus waiting, or at least a queue of people. I’d take it more often if they actually bothered to display a departure time. But sometimes it comes down to a cost consideration. Basically, I’ll rarely pay the full fare. I might take the bus, though, if I reckon I’ll hit the daily limit.

I note that for 2012 the daily limits for zones 1-3 are increasing by more than the relevant tube fares. The peak daily limit is going up from £10.00 to £10.80 (8%) whereas the peak tube fare is increasing only from £2.90 to £3.10 (6.9%). And off-peak, the daily limit is going up from £7.30 to £7.80 (6.8%) whereas the tube fare is increasing only from £2.50 to £2.60 (4%).

So, in 2011, an off-peak return tube journey to the centre, and a journey within zone 1 (£1.90) came to £6.90, leaving 40p of the daily limit to be taken up by a bus fare, but the same itinerary in 2012 would come to £7.20 before the bus, which effectively costs me 60p. OK, it’s a 50% price increase but I expect I’ll still hop on a 297 at Ealing Broadway station if passengers are boarding!

Nevertheless, if TfL persists in increasing weekly Travelcard prices by more than other fares, there will be people who switch to pay as you go, and walk to tube stations rather than take the bus. Maybe this is all very healthy, but it seems a strange policy. It would make more sense to me to raise all TfL prices by exactly the same percentage and charge – now that it’s all electronic with Oyster – to the nearest penny if necessary.

October 27, 2010

The Benefits of Being Ugly

Filed under: Economics, Housing market, Markets, Minimum wage, Public spending, Regulation — Tim Joslin @ 8:19 pm

I’ve just watched today’s Prime Minister’s Questions (PMQs) on iPlayer (warning: programme will probably not remain permanently available), because it’s simply not clear what aspects of the Coalition government’s benefits cuts programme Labour opposes.  It was ugly: the problem is Ed Miliband didn’t stick to the point.  There is a chink in Cameron’s armour, but Miliband missed it.  If he’d thought through his position rather better you feel he could have skewered the bastard.

The point is, if you watch the Guardian’s PMQ clip, Miliband appears to be latching onto the vindictive proposal to reduce Housing Benefit (HB) by 10% after someone has been on Jobseeker’s Allowance (JSA) for a year.

I’d thought Chris Bryant had been off-message when he took on Clegg over the £400/week limit on HB, which could force people out of central London.  Clegg did that old trick of ignoring what was asked and taking offence at the manner, suggesting Bryant had dissed those “ethnically cleansed” around the world.  Bryant said “sociologically cleansed” so Clegg was just being a prick.  I don’t like to use bad language on this blog, but I’m making an exception for the Deputy PM.  Anyway, back to the story.  Unfortunately, in PMQs, Miliband let Cameron talk about the £400/pw limit rather than the 10% reduction.

Labour is defending the indefensible in opposing the £400 limit and should be supporting it.  The 10% cut is a different matter altogether.

It’s depressing to see Labour in complete disarray in the face of the Tory onslaught.  All we’re seeing is uncoordinated rearguard action.  Ed won’t last long if they carry on like this.

The point is there are different motivations for different aspects of the welfare reforms.  Some measures are to restore fairness and others to reduce the overall cost.  There is an element of financial sleight of hand.  But there is also an attempt to punish the unemployed, and that is simply out of order.  Ugly, Cameron, ugly.  With around 1.5m on JSA already and with 500,000 civil service job losses to come, as well as transfers from disability and incapacity benefit, there are bound to be some people who don’t find work within a year.  Sure, some of these will be people who tried less hard than those who found work, but the point is not everyone will find work, even if all applied the highest standard of diligence in looking for a job.

So what are the main changes and their rationale?  Which should Labour oppose?

1. Reassessing disability and incapacity benefit claims

Labour was doing this anyway.  The Tories are not outflanking Labour though are giving the impression of doing so.  To be honest, both parties are cynically preserving votes, since there’s actually no reason why you need more money if you’re disabled.  The benefit should be the same as JSA, unless extra funds are needed to overcome specific disabilities. I caught a Radio 5 phone-in this morning and none of the callers fell into such a category.  RSI (“carpal tunnel syndrome”), chronic migraines and depression are unpleasant conditions, but do not in themselves result in expense.  The point is that paying more money gives people an incentive to label themselves as ill, which is in neither the public nor, arguably, their own interest.

2. Limits on the maximum HB that can be claimed

This depends on the number of bedrooms you’re assessed as needing.  The maximum (for 4 bedrooms) is £400/pw (the other limits are “£340 for a three-bedroom property, £290 for two bedrooms and £250 for a one-bedroom property”).  This is more than many working people can afford, so there is overwhelming public support for the limit for the unemployed.  And the Tories are milking it.

But employed people can also claim HB.  The answer to the case of the caretaker cited by Polly Toynbee is to demand a higher minimum wage in London (see my previous post), not to oppose the HB limits.  As I said, Labour is in disarray.

There are serious questions to be asked, too. And Labour isn’t asking them.  People on high rents are going to run out of money very quickly.  Is the government saying, for example, that if someone is made unemployed and they happen to be renting somewhere for more than the limit they’re entitled to – not difficult in London – or have two bedrooms when they’re only entitled to one, that they have to move immediately, or at least before any savings or redundancy payment run out?  The additional disruption is hardly conducive to rapidly finding new employment, is it?

3. An increase in rents for new social housing tenancies to 80% of the market rate.

Judging by Toynbee’s comments, Labour seems to have missed the point of this.  The idea is to raise money for new-build social housing.  The idea is that providers will be able to borrow against the increased revenue stream.  (Most of the rent at present goes on repairs).  HB will have to be higher to fund the higher rents, so all that’s really happening is the cost of new social housing is being amortised – rather like the much-derided Public Finance Initiative (PFI) Labour used to get hospitals built.

4. Paying HB only for rents up to the 30th percentile for the area rather than the median.

It’s crazy that it was the median in the first place.  Over time, this must simply push up rents in general, since with HB-funded demand, any properties offered up to the median price will be let quickly (so no incentive to mark them down), whereas those marketed at an above-median price might find a tenant before they have to be marked down.  The median will steadily increase even if supply and demand are balanced.  It’s possible even the 30th percentile might not be enough to prevent this effect (since properties private tenants would pay less than the 30th percentile rate for will let to HB tenants at the 30th percentile rate).

5. And then there’s the 10% HB punishment if you don’t find a job in a year.

This makes absolutely no sense to me.  HB is supposed to be a payment in kind.  It’s to pay the rent.  If it’s reduced, then something’s got to give.  And apparently there’s more: I start to appreciate Polly Toynbee’s indignation:

“But that’s not all. The sum paid towards the rent will fall every year, in perpetuity: it will no longer rise as average local rents rise but will be pegged to the consumer price index. If that had happened in the last decade most people would have been priced out: rents rose by 70%, but the CPI only rose 20%.

Now add in something more sinister. Council tax benefit, worth an average £16 a week, is to be cut by 10% and then handed over to each local authority to decide how much benefit to offer: if some councils want to push poor people out, they can pay virtually nothing to their residents.”

This makes no sense.  I can understand the idea that you’ve got no job, the state covers your main outgoings (rent, Council Tax) and gives you £65/wk to manage the rest on.  But £65 seems pretty much a bare minimum for food, heating, clothing and so on.  Playing games beyond this point is simply vindictive.  To see someone of Cameron’s privileged background doing so is, frankly, a rather disgusting sight.

So, Ed, you need to inject some clarity into Labour’s position.   You’re going to have to give up some ground.  Most of what the Coalition is doing makes sense.  But punishing the unemployed doesn’t.

And come up with some alternatives.  A higher minimum wage to increase the incentive to work.  And a higher minimum wage in expensive areas, such as central London than elsewhere.

Most of all, please, please read the blogs and stop defending Housing Benefit of more than £400/wk!

Housing Horror

Over the last few decades, here in the UK, we’ve become very good at pointing to apparent failure.  Often despite considerable objective evidence to the contrary.  Apparently we’re no longer any good at making things (compared to Germany and China, maybe, but not to most other countries), our armed forces are puny (compared to the US, maybe…), our energy supply is insecure, our public services are falling apart, the English Premier League is in a mess…  Such angst is spreading elsewhere in the West, but somehow you rarely hear fundamental criticism of our political and economic system.  You’d think the political process was merely flawed, a little unfair in places, perhaps, a little too tolerant of peccadilloes by the powerful, but basically sound, and very difficult to improve.  Despite considerable objective evidence to the contrary.

We’re just now quite rightly much vexed over the issue of housing (warning, link is to page of all 865 comments, and counting).

The issue, in a nutshell, is the extent to which the state should pay to provide some people with a standard of housing higher than they can afford on the open market.  The 1997-2010 Labour government (supported by at least the non-Tory controlled local councils, who have executive powers in area of housing), was quite enthusiastic about doing so, though in the main merely continued existing policies.  As time has gone on, though, the provision of housing to some by the state has been a factor in driving those not eligible for, or simply not claiming, state support, into less desirable – smaller, and often, crucially, less conveniently located – accommodation.  It should be noted that Labour’s attempts to increase the supply of housing over recent years has been effectively stymied by nimby campaigns, if not supported, then at least not effectively challenged by foot-dragging Liberal and Conservative local councils.  Despite guilt all round, the new Coalition government has decided to address the problem, in part, I suggest, as part of their strategy of blaming everything on Labour.   And in that regard, housing is pretty much an open goal.

As the debate continues, we see not one but two failings of our political system in stark relief.

The first failing is a confusion: are we making policy on the basis of reason or emotion?  Let’s take people who aren’t working for whatever reason (unemployed, incapacitated or retired).  Now, I’m not even going to argue this on the basis of rights.  It simply makes no sense, as hundreds of bloggers have pointed out (to massive approval, judging by “Recommendation” statistics), for workers to commute in every day from the outskirts of conurbations such as London, whilst people who don’t actually need to live there are paid to do so by the state.  Why, oh, why does Labour defend the indefensible? (Link to where Polly Toynbee explains the Coalition’s inhuman proposals – remember we’re essentially taking about a zero-sum game, here: what we give to one household, we deny to another).

But – there’s always a “but” – there are “priority cases” as a Councillor Timothy Coleridge (Tory, Kensington and Chelsea) explained on Radio 4 this morning trying to “soften” the policy.  There’ll be a “transition fund”, we were told.  He seemed to be particularly sympathetic to the elderly.  So it seems we’re going to make value judgements.

It might be worth digressing at this point to note that gerrymandering is a factor, because of first-past-the-post local elections.  Politicians want to keep their voters in their constituency and move the opposition’s out!  I suspect the Tories see the elderly vote as key to their next few terms in office, so I was immediately suspicious of Councillor Coleridge.  Any “prioritisation” must surely be done according to an objective, nationally applicable set of criteria.  Trouble is, value judgements are why we’re here in the first place.

If the policy is to minimise the fiscal cost of housing benefit, and optimise the use of housing, then that’s what we must do.

Here’s a case of the same sort of thinking, from a letter to the Guardian, by an Ann Tobin:

“The house was lovely, built to Labour’s postwar housing standards (later abandoned by the Tories). Us kids grew up and moved on and my parents stayed there until my mother died in 1998, 50 years after they had moved in. My father died three years before her. Yes, the house was too big for her, but she liked to invite her children, grandchildren and great-grandchildren to stay.” [my stress]

This partly explains how we’ve reached the present situation.  This identifiable individual (Ann Tobin’s mum) “liked” her big house, provided by the state.  Meanwhile, there is a waiting list of millions of families for such houses.  Maybe, because Ann Tobin’s mum was allowed to keep a house she liked, a family with a couple of school-age kids spent years moving about between emergency B&B accommodation to temporary lodgings.  Maybe that family would have “liked” a house of their own.  Because Ann Tobin’s mother has been allowed to stay in a family house, another family that can’t be precisely identified is living in poor or insecure accommodation.  This is crazy.  Housing supply is limited (though could be improved).  Why is it so difficult for people to understand that because of that limitation one decision impacts on others?  In areas with a limited supply of housing, its allocation is a zero-sum game.  You can’t give some people a place they’d “like” without denying others the same thing.

To my mind what we’re witnessing is the complete failure of post-war housing policy in the UK.  Council housing, for example, makes no sense.  It locks in housing allocation at one moment in time, making no allowance for the changing world we live in. Or the changing size of individual families for that matter.

This brings me on to the second failing of the political system.  Politicians see direct action by the state as the only way to achieve anything.  So we’re told we have to build more social housing.  Wrong.  We simply have to build more housing, period.  100,000 private homes will house 100,000 households just as well as 100,000 social homes will.  100,000 fewer households will be waiting for housing in either case.

And in actual fact, over the last decade or so, demands for social housing have actually reduced the total provision of housing.  Why?  Because the main way social housing has been provided has been through Section 106 agreements with housing developers.  In this daft system, housing developers have been given planning permission in return for including schools, hospitals or social housing in their schemes.  And you thought schools, hospitals and social housing all came out of the health, education and housing budgets?  This tax on developers, or first-time buyers, however you want to look at it, has the effect of reducing housing provision.  At a given house-price level, building houses is less profitable than otherwise would be the case, so fewer invest in that activity than in other opportunities.  Fewer houses get built, house prices rise, and more prospective purchasers find themselves on social-housing waiting lists.  Section 106 agreements to provide more social housing because it’ll be needed are, in aggregate, self-fulfilling!

I can’t even bring myself to discuss how shared equity schemes and other devices to subsidise house purchases simply push up the general price in the market.

The solution seems to me blindingly obvious, so I’m going to cut to the chase (a phrase, incidentally, that grated when used by Bob Hoskins in Made in Dagenham, since it wasn’t in general usage in 1968 when the film was set – I remember first hearing it in 1994).

We’ve simply got to manage the relationship between wages, at the low end, and house prices so that working people can afford to house themselves and their families.  The implication is that there needs to be a higher minimum wage in areas where housing is expensive.  It is simple exploitation to be paying the national minimum wage in central London, because there are only a limited number of possible outcomes.  Either workers commute in which case they spend more time and money than if they were working near their home; or living-standards drop and people end up sleeping in shifts; or benefits are necessary to top-up earnings, subsidising employers and consumers in expensive areas.  Ideally, employers would have to pay more in expensive areas, but the labour market is, has been for some time, and will be for some time, a buyers’ market.  Indeed it is government policy to force people to take any job they can get.

What a mess! State provision of housing has led to a situation where the minimum wage is nowhere near a “living” wage.  Perhaps that’s a bit strong: rather, state provision of housing and other benefits has provided a safety-valve so that pay has been allowed to become gradually lower and lower relative to socially accepted minimum living standards.

Maybe some blame should be apportioned, in order to unravel some of the mystery how we arrived in this absurd situation.

First, there are those, almost all in the Labour Party, but not all of the Labour Party, who believe it is right that the state provides housing and benefits on the basis of need.  “Capitalism” is so “unfair” that the state must step in.  As I’ve mentioned this policy has failed.

Second, there are those in all three parties who take a position I would characterise as “hand-wringing liberals” who make no attempt to analyse the problem and produce a complete policy.  They just want to address the problems of those with whom they empathise.  The trouble is, as I’ve also already said, with limited supply, allocating a house to Mr Jones simply moves Mr Smith onto the waiting list.  As a rationalist this is the position I detest most of all.  Government has a duty to find as solution for everyone, not self-righteously apply sticking-plaster where they most easily can.

Third, there are those in all three parties – since many of the individuals concerned have a vested interest in the form of their own properties – who explicitly or tacitly believe the natural order of things is for people like themselves to own their own homes, ever-rising in value, and that there must necessarily be “the poor” who don’t deserve or are incapable of having the same thing.  Explicitly in the case of some Conservatives… heeeere’s Boris!:

“Better a stagnant housing market, [those arguing for an end to housing speculation] will say, than another great boom and another great bust. Which is all very well, in theory.

In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Stark-staring bonkers, of course.

Houses simply can’t appreciate in value indefinitely compared to other goods and services.  The world doesn’t work like that.  Eventually house price rises will become self-defeating: even if they don’t stimulate more new-build supply (because of self-interested nimbyism); or inflation, causing interest-rate and hence mortgage increases; they’ll eventually act as such a drag on the economy that activity moves elsewhere – abroad, most likely – and housing demand and prices fall.

Those who buy into the view that the increasing value of their home represents a permanent increase in wealth support the ongoing British class division implicitly.  What they refuse to countenance is entirely feasible: it is possible for everyone in work to own their own home, or rent at a market rate, if they prefer the flexibility they gain that way.

So the three stooges are “Old Labour” socialists, who don’t believe markets can ever be fair; bleeding heart, sawdust-headed “Liberals”; and divided nation, blue-blood-is-just-better “Conservatives”.

It doesn’t have to be this way.  Instead of accepting capitalism as it is (“Conservative”), or rejecting it (“Old Labour”), or ooh, poor little kitten! (“Liberal”), we can make capitalism fairer.  A much higher minimum wage, relative to local house prices, would solve many of the problems that are causing such angst.

 

October 18, 2010

Boris the Builder

Filed under: Economics, Housing market, Minimum wage — Tim Joslin @ 1:15 pm

When our civilisation finally collapses, and becomes of interest only to historians, explanations will be sought.  How did we throw it all away?  Many will argue that one of the main causes was a collective failure to regulate individual greed in one way in particular.  In the housing market.

This is what the Mayor of London has to say in this morning’s Telegraph:

“Recent pronouncements from the Coalition Government have suggested a new doctrine: that house prices should be flat, or flattish, while earnings rise to meet them.”

Makes sense.

“In other words, the British middle classes are being asked to wean themselves off house price inflation, and become more continental, with a higher proportion of rentals.”

An increase in renting compared to owner occupation is rather a non sequitur, but I’m still with you so far, Boris.

“And a lot of people will say amen to that. Why do we pump all this money into unresponsive bricks and mortar, when we could be investing our capital in stocks and shares and thereby in the flesh-and-blood businesses that add to the GNP of Britain? They will point out – entirely correctly, that this national addiction to house price inflation has bred a kind of financial illiteracy, an apathy about any other investment except the roof over our heads.

And they will point out that it was the house price bubble – the demented practice of giving vast mortgages to people with no incomes and no assets – that led to the crash. Better a stagnant housing market, they will say, than another great boom and another great bust.”

Still with you.  Though not sure about this use of the word “stagnant”.  The reason house sales are sluggish at the moment is that prices are too high.  Mortgages are more difficult to get and higher deposits are demanded, so obviously the same amount of activity will require a lower price level.

“Which is all very well, in theory.”

Uh, oh!  Where’s Boris going with this?

“In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Unbelievable!

Even the most elementary reasoning shows house prices can’t rise faster than everything else indefinitely.  If they did, other things – food, energy, manufactures and so on – would eventually cost virtually nothing in comparison to house prices.

And more to the point, house prices can’t rise faster than labour indefinitely, otherwise everyone who doesn’t own a house would have to emigrate.

Unless…

Ah, Boris has a solution: build more “affordable houses”: Here’s his argument:

“…the best way to help those millions in search of an affordable home is not to try vainly to ensure that the present stock of housing becomes more affordable – ie falls in value – but to increase the supply of affordable homes.”

All very Alice in Wonderland.  Readers unfamiliar with the UK housing market may need some translation assistance.  “Affordable homes”, as used at the end, is a euphemism, spin for “social housing”.  The first use of “affordable home” is in standard English.  From now on, I’ll write “affordable home”, “affordable housing” in quotes when it means social housing and affordable, home and housing without quotes when the words mean what they say.

Let’s dispose of the argument against all this based on principle.  Boris clearly believes in a two-tier society.  A class of which I guess he is a member, who own their own property – appreciating in value forever – and another class who are housed at the whim of the state.  Hint: make sure you’re a “key-worker” or have lots of kids.  Kind of a socialised Upstairs, Downstairs, with a bit of hand-wringing charity thrown in.  I simply don’t agree with this worldview.

But let’s move on to the sheer incoherence of Boris’s proposition, though perhaps I should note at this point that Boris is guilty only of voicing the consensus view shared by virtually all UK politicians, even if a few pay lip-service to the rational and correct argument that the relation between house prices and wages needs to be restored.  Some even realise that it’s best to do this with a bit of general inflation rather than by house-price falls.

First, just because homes are rented for less than the market rate doesn’t mean they’re worth less than others.  They could be rented out for more privately.*  More to the point, the money to have them built must come somewhere.  The land has to be bought.  OK, the state can give planning permission on land it owns, but this is just chucking money away, since they could simply have sold the land off to a private developer.

Second, providing social housing will reduce demand for private housing.  The increased provision of houses would lower prices anyway.  So Boris’s plan won’t even succeed in holding up house prices.  So as far as the Upstairs are concerned, building “affordable homes” is just as bad as building private housing! Of course, social housing is less efficient for several reasons, not least because people won’t move for work, because they’ll lose their home and may not get another or at least have a long wait.  The state should just get out of the way and make it cheaper to build private housing by stopping demanding all kinds of goodies (including “affordable homes”) in return for planning permission (usually under Section 106 agreements).

Third, where do ever-rising house-prices lead us?  Well, unless the salary structure of the economy changes, there will eventually be no buyers.  Possible the wealthy will buy to let as they did up to the crunch in 2007, but that makes no sense, since the tenants won’t be able to afford the rent plus a profit for the landlord and letting agent, since if they could they’d be able to get a mortgage!   So eventually we’ll simply run out of buyers.  Prices will simply have to drop to an affordable level, since otherwise properties will simply sit in estate agents windows.

No, Boris.  You’re not a dumb blond even if you do mumble and bumble in a ditzy manner.  Thatcher was right on housing.  The answer is to make just about everyone part of the property owning class (or at least renting by choice rather than necessity).  And for that to happen house prices must be kept down to a reasonable multiple of the lowest salaries.  Say three times.

————

* Notwithstanding the revelations in a DWP report, also featured in today’s Torygraph.  As there is insufficient “affordable housing” the state often simply has to pay private-sector rents.  Except that apparently the system is so inefficient that landlords can get more rent for social tenants that for private ones!  Though working people on low incomes end up in poorer accommodation than the state would provide:

” ‘[Low income working] Households with children aged under 16 do appear to be worse off in terms of the property size that they occupy and the rates they would be entitled to if they were eligible for housing benefit,’ the study said.”

You couldn’t make it up.

Politicians of all stripes have created this mess.  Sorting it out requires a step back.  The basic principles need to be laid down.  Starting with fairness.

October 21, 2009

The Great Crunch: It’ll happen again because we’ve gone soft on bankruptcy (Part 1)

Filed under: Credit crisis, Economics, Housing market, Minimum wage, Northern Rock, Regulation — Tim Joslin @ 10:55 am

The debate as to what to do to try to prevent a repeat of what I like to term the Great Crunch absolutely amazes me. There is virtually no analysis of what actually happened; instead the debate is dominated, it seems, by pre-existing prejudices. The whole financial crisis was caused by a cascade of bankruptcies, starting with so-called sub-prime lenders in the US and ending with Lehman’s failure, after which the authorities finally took decisive action.

Let’s start first with the least of the culprits. I worked myself into a bit of a lather late yesterday after reading a column by Vince Cable in the Times – see my comment there at 10:23pm on 20/10/09.

Why oh why do we persist in trying to devise policies to save people from themselves? Drugs? Ban them! Totally ineffective, in fact counterproductive, in fact worse than counterproductive in that the policy creates worse problems than those it doesn’t solve.

What we should be doing, in general, is equipping people to save themselves from themselves.

Tightening regulation of lending, it seems to me, is part of a paternalistic infantilising trend in our doomed Western societies that has been repeatedly shown to fail. It’s the wrong design principle, as was pointed out – to make a leftfield connection – in a thoughtful letter from Merrelyn Emery in last week’s New Scientist. Merrelyn notes “[t]he unstable nature of DP1 [hierarchical] systems” in comparison to “DP2” type systems “in which adaptation depends on regulatory systems built into the operational parts of the system itself”. Quite so.

Back to Vince in the Times. Vince, it seems, very much approves of the regulatory proposals announced yesterday by the FSA’s Hector Sants. If there is a shred of understanding in my grasp of recent history, the FSA, of course, has shown itself to be entirely incompetent in enforcing the regulations it already imposes, so one has to imagine that tighter checks on mortgage borrowers will also be ineffectual.

The whole proposition makes absolutely no sense. It rests on no sound analysis. Here’s a more subtle way in which it will fail. Mortgage defaults in the UK are an inevitable result of this or any other recession. They arise because mortgages are a 25 year commitment, a long-term loan, whereas income is paid on a short-term basis. Mortgagees are no different to banks which lend long-term and borrow short-term. Proving your income at the time you take out a mortgage has minimal bearing on your ability to pay the mortgage over the long-term. As the economy now comes out of recession the housing market will pick up. Happy days will be here again, and the buyers will be once more out in force. Inevitably a proportion of them will lose their jobs in the next recession.

In actual fact, banks diversify their risk when they offer mortgages to those with sources of income other than regular employment. We know that employees will be made redundant in the next recession. Many some of those with other forms of income may well continue to be able to pay their debts.

If we’re to put the onus on banks the problem never ends: next we’ll be asking banks to evaluate the security of mortgagees’ employment. Then we’ll be requiring them to ensure mortgagees have access to funds to pay the mortgage if they lose their job and so on…

Hey why not take the same approach in other areas of life? Why not, for example, mandate bar staff to ensure customers can actually afford to buy the booze they want? Oh, sorry, our paternalistic policy for drink is to put the price up. That’s odd, because in earlier eras the problem with heavy drinkers was not so much that they destroyed their health or caused a nuisance in the town centre. Rather it was that they destroyed the family finances.

No, no no! What’s needed is tough love. People need to take responsibility for their own finances. What sort of policies would this imply?

Well, first, it might be an idea to tell people that the economy experiences ups and downs. Companies fail. Even in the public sector people can be laid off. So those planning to take on a mortgage need to judge what would happen if their personal circumstances changed. Do they have sufficient savings to tide themselves over? Could a couple pay a mortgage on one salary?

Second, we need to look at the balance between greed and fear in the housing market. When the market is rising people pile in. And I don’t blame them. This time round we’ve sent the message that there’s not much to be afraid of. The dominant narrative consumed and constructed by those who drove house prices to unsustainable levels is characterised by indignation against the banks rather than by remorse, by scapegoating rather than by learning. And there’s more: many have been saved by low Standard Variable Rates (SVRs). There’ve been few stories of borrowers being pursued for their debts. Compared to the 1990s we now have Individual Voluntary Agreements (IVAs) and one year rather than 3 year bankruptcy arrangements. As I pointed out a couple of weeks ago, we’re even allowing people to take banks to court over perfectly clear mortgage terms.

In actual fact, as the ultimate inditement of complete regulatory incompetence, I can’t help observing that right now I’m sure I’m not alone in having just taken on board the lesson that I should have run with the herd and taken on a mortgage when I had the chance! Regardless of house prices.

My recommendations are completely opposed to current mainstream thinking. But perhaps that’s because I’m looking at what actually happened. The whole financial crisis was caused by a cascade of bankruptcies, starting with so-called sub-prime lenders in the US. Why Northern Rock was left floundering when it was, and ultimately nationalised is still completely beyond me, but A&L, B&B and HBoS failed to a greater or lesser extent because of fears about defaults in the UK housing market. NR would presumably have been in trouble later on had the odious Mervyn King not decided to “make an example” of its reliance on money-market funding. The cascade continued as even the soundest banks were stressed by a secondary source of losses: the recession arising from the original financial crisis.

So to snuff out the next one, why don’t we start at the beginning of the cascade by increasing the value of these dodgy mortgage debts?

Here’s my recommendation: treat debts from bankruptcy in a similar way to the UK’s student loans. That is, attempt to collect them directly through a levy on income (above a subsistence threshold) until they are repaid or for life and beyond. In effect, a bankrupt would pay higher levels of tax in the future. (I should add, that the level of interest would be low on bankruptcy debts, because the might of the state is to be employed to collect them). On death, any estate would first be used to pay off bankruptcy debts. The whole concept of bankruptcy needs to be rethought. We need to consider the general interest. At the moment, every time someone goes bankrupt, others must pay, increasing the risk that they too will get into financial difficulty. Why on Earth do we retain the archaic notion that bankruptcy can be “discharged”?

The effect on the bankruptcy cascade would be to increase the value of debts. Those sub-prime mortgage-backed securities (MBSs) would have been worth more than they were when the housing bubble burst.

That’s the stick. But we don’t want to be using it all the time. We also need policies so that the risk of bankruptcy is minimised:
– we need stable house prices;
– we need to hold house prices at the low end at an affordable level for those on the lowest incomes: in short, we need to raise the minimum wage and keep it in line with house prices.

October 16, 2009

Bus Fares, the Minimum Wage, Pensioners, and the Nonsense of RPI and CPI

Filed under: Bus, Economics, Inflation, Local government, Minimum wage, Politics, Transport, Tube — Tim Joslin @ 7:40 am

BBC Radio 4 is more than usually surreal this morning. Unless my ears deceived me, they just broadcast a nursery school teacher asking her young charges: “What rhymes with ‘bucket’?”. Recipe for disaster, I’d say. Earlier they’d announced that “Google, the world’s biggest search engine” has an opinion. No, the company may have an opinion, or, better, the CEO, but, unless the internet has become self-aware overnight, search engines do not have opinions.

So I decided that, rather than slob about, I’d make a point I’ve been dwelling on overnight.

On the BBC London News, after News at 10, the reporting of the London Transport fare rises brought home to me the scale of the price rises. Bus fares are going to rise by 20p. At the moment my Oyster is charged £1, now it will be £1.20. That’s 20%. Previously I’d only skimmed a BBC report that noted that:

“Bus fares are to go up by 12.7% and Tube fares will rise by 3.9%.”

I hadn’t really taken in the rest:

“Oyster card pay-as-you-go bus journeys are to rise from £1 to £1.20. … and the price of a seven-day bus pass will also jump from £13.80 to £16.60 but London Travelcard prices will be frozen in the vast majority of cases.”

This makes me suspicious. I’ve just downloaded the PDF from the BBC’s report. Yeap. The 12.7% and the 3.9% are spin – well, they’ve been constructed somehow, but without any information as to how, they are virtually worthless.

Like RPI and CPI, these % increases mean little. They do not reflect the effect on specific individuals.

In fact, the fare rises are ludicrously unfair. Is this the start of a Tory assault on the poor?

The key point is that fare rises on buses are much greater than those on the tube. The result is that the cost of living increases fastest for the poorest. Boris may not realise this (Ken did, apparently), but he shares London with people who catch the bus because they can’t afford the tube.

Let’s consider first how the fare changes affect those struggling on the minimum wage. Let’s assume Mr Minimum catches a bus to and from work 5 days a week. That’s 10 fares now at £1.20 rather than £1 – £10/wk now but £12/wk after 2nd January – a 20% increase as already mentioned. Now, the minimum wage recently increased from £5.73 an hour to £5.80, that is by 7p an hour. If Mr Minimum works 40 hours a week, he’s better off by £2.80/wk (before tax) because of the pay rise, but worse off by £2/wk because of the bus fare rise. That’s right – the fare increase has wiped out all but 80p, or (200/280)*100 = 71% of the rise in the minimum wage.

Maybe that’s not incredibly realistic. Mr Minimum might have to take 2 buses to work and 2 back. In that case he’d reach the daily fare cap on the buses. But this has risen from £3.30 to £3.90 or by 18% (exactly where did this 12.7% come from?). More to the point Mr Minimum will have to pay 5*60p = £3 extra per week to get to work. Wiping out his entire annual pay rise plus an additional 20p.

But, of course, if he used the bus to travel to work 5 days a week, Mr Minimum will most likely have taken advantage of the weekly Bus and Tram pass. How has this increased? From £13.80 to £16.60, that is by £2.80 or just over 20%, that’s how. Unbelievable.

If Mr Minimum works a 40 hour week, the bus fare increase wipes out his entire annual pay rise.

On the other hand, fares for most tube commuters will not increase at all – some peak fares and more to the point 7 day Travelcard prices are (mostly) frozen.

Bizarrely, off-peak tube fares have risen more than peak fares. The way to use the system more efficiently is to spread the load more. I would have thought a greater differential was called for. Train fares are punitive at peak times. Maybe both could converge on a happy medium.

I was going to mention pensioners, who have just been awarded a £2.40 weekly rise. Then I realised that pensioners can travel free on the buses anyway. In fact, pensioners are now rather more than £2.40 a week better off, since they would have been entitled to no rise at all based on RPI, which is negative. In general the increase in the state pension is based on an inflation index that includes transport costs, even though they pay less for transport than the general population.

What’s actually needed are indices that reflect the cost of living rises for different segments of the population, to be used for different purposes.

But there’s a bigger issue. When are we going to start treating the low-paid fairly?

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