Minimum wages

 1. For what it's worth, my model of the effects of minimum wages is this.

2.  The labour market consists of a covered and uncovered sector. In the old literature, the uncovered was illegal working, here I think of it as being self-employment.

3. A job consists of wage and non-wage payments eg. a wage per hour and "working conditions".  The latter might be: holidays, paid tea breaks, number of breaks, effort at work, how horrible or nice the boss it etc. etc. 

4. When a minimum wage comes along, adjustment is along many margins.  Wages might rise, but employment contracting status might change and non-wage attributes might change.  Once the min wage gets to a certain level, there is no more adjustment avaiable though non-wage attributes and employment might then fall.

5. Here is an example of adjustment of attributes.  From the March 2016 NBER digest.  

In Delivering Higher Pay? The Impacts of a Task-Level Pay Standard in the Gig Economy (NBER Working Paper 34545), Yuan An, Andrew Garin, and Brian K. Kovak examine Seattle's App-Based Worker Minimum Payment Ordinance, which took effect in January 2024. The ordinance, which applies to tasks starting or ending within the city limits, establishes a minimum base compensation for delivery tasks as the greater of $0.44 per minute plus $0.74 per mile, or $5 per task. 

The researchers analyze unique data from Gridwise, a third-party app that tracks detailed gig work activity across multiple platforms. Their dataset covers over 2.8 million tasks completed by nearly 6,000 workers in Washington state from August 2023 through July 2024. It includes task-level information on base pay, tips, bonuses, locations, and timing. The researchers compare workers whose pre-reform delivery activity was concentrated in Seattle with workers active elsewhere in Washington state.

The minimum pay standard immediately doubled average base pay per task in Seattle from $5.37 to $12.52 while pay rates remained constant in the rest of the state. However, average tips per delivery declined substantially following the policy, offsetting over one-third of the base pay increase.

For highly attached incumbent drivers, who completed an above-median number of tasks pre-reform (approximately 20 per month), increased base earnings per task were offset both by decreased tips and by a reduction in the number of tasks completed per month. By February 2024, the number of monthly tasks fell by at least 20 percent. Taken together, drivers’ monthly earnings remained virtually unchanged after the reform. 

6. So the non-wage attributes, here tips, entirely offset the wage rise.  There were other effects for non-incumbents, but overall nothing got better.

7. Of course, we want workers to be compensated well.  But this question for min wage setters, I think, is a different one: do they have the information to set better the balance between wage and non-wage attributes than that prevailing in the market?

 

 

Error and fraud in R&D tax credits

 To look at this, this HMRC report, from 2023, looked at claims in 2020-21.  They say that there has been reforms since then.  Here are the findings from " based on 97% of cases in the MREP with a finalised compliance audit" : 

As the final row shows, 16.7% of claims, representing over £1b are error and fraud.  

An updated table, published in October 2024,  gives more current data, based on estimates

And some examples of this in action are by Dan Neidle, here for example on claiming R&D tax credits from footballer wages.

Returning to the 2023, report, some comments from the report

Analysis of the MREP shows that around half of all claims, by volume, contained at least some element of non-compliance. HMRC found fraud indicators in fewer than 10% of claims examined in the random enquiry programme and these claims accounted for less than 5% of the total value claimed. To be classified as fraud, a caseworker needs to have found evidence that the claimant deliberately set out to misrepresent their circumstances to get money to which they were not entitled.

This indicates that the majority of non-compliance is down to other behaviours. As with other regimes, the term ‘non-compliance’ or ‘error and fraud’ encapsulates this full range of behaviours, from mistakes and failure to take reasonable care through to deliberate non-compliance.

In claims where expenditure was over £1 million, around 75% of claims were fully compliant. In smaller claims the percentage of claims being fully compliant was lower, at between 35% and 64%.

As the size of expenditure decreases, the value of non-compliance expressed as a percentage of the value of the claim increases. In the smallest claims where expenditure was less than £10,000, over 75% of the value of the claim was non-compliant. 

The end of rent sharing in the UK

 Bell, Brian, Bukowski, Pawel & Machin, Stephen (2024) The decline in rent sharing. Labor Economics, 42(3), 683 - 716. https://doi.org/10.1086/724570, links here and working paper here study the extent to which wages are correlated with UK company profits/rents.  Using industry and company data and controlling for exogeneity etc. they find a consistent picture, summarised in their Figure 3, working paper version, below

Before 1999, the central estiamte was that wages were marked up by around 25% of firm value added and 7% of  profits.  After 1999 that figure is below 10% and 1% respectively and insignificantly different from zero.  Similar results are obtained for EU industries using industry level data.  

CPI, RPI and CPIH, summary of differences

 

The final table in Consumer Price Indices, Technical Manual, 2019

https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpricesindicestechnicalmanual2019

Bank of England December Rate decision: 5-4 for a cut from 4% to 3.75%

 Some points. 

1. Self on the Today programme, Radio 4 

The interview starts at 1:20:11 :

https://www.bbc.co.uk/sounds/play/m002nhxx

2. A feature of the BoE minutes that caught my eye:

In 5th November, they said "The MPC sets monetary policy to meet the 2% inflation target,"

Today they said 

"19.

The Monetary Policy Committee’s job is to ensure that CPI inflation falls all the way back to the 2% target and stays there."

This is an interesting addition I think, trying to signal to the market that drifting along at above 2% is not what they want to do.

Labour markets updated and the UV curve

 The Resolution Foundation has a good update to the labour market situation today. 

Some fasctinating trends.

1.  Unemployment is rising.  

Inactivity is up due to more long-term sickness.  But it is more or less equally down as more come into the labour market.  Unemployment is up.

2. Whether future unemployment rises or falls depends if the natural rate has changed.  They say little evidence based on the Beveridge and Wage Phillips curve: 

3. I note the RF have reservations about the minimum wage, especially for young workers, calling for them to keep the youth rate.  As they say (March 25) increases in NICs are absorbed by wages except if there is a minimum wage floor

"The combined impact of NICs and the minimum wage is significant: the overall increase in labour costs for employing a part-time adult minimum wage earner in April will be 14.2 per cent, the largest since the minimum wage began, in 1999.

Most workers will end up absorbing much of the higher NICs in the form of lower pay. But pay cannot fall for workers at or near the minimum wage, so labour cost increases and job losses will be concentrated at the bottom of the labour market"

My comments.  

1. Their point, which has some force is that the current situation on the UV curve doesnt show a shift out of hte curve i.e. the dot on the left is about in line with the past.  We shall see: the labour market data today showed vacancies about flat and unemployment rising, so the dot might be moving out horizontally to the right which would be a rise in U* (the natural unemployment rate).

2. the curve on the left seems to show that wage growth is higher than what unemployment can explain, altough the RF point out is has been moving closer to the historic line.  I was certainly worried about this upward wage inflation when I was on the MPC and this movement closer to the line is welcome. But it is not there yet and with headline inflation rising in recent months, there might be some additional element of catch up wage pressure coming in the pipeline.  

3. I note too the rises in the youth minimum wage in the Budget that will be a source of upward U* pressure, as part of the stronger rise in the minimum wage in the UK than in other countries.

Big numbers and thinking about GDP

 UK GDP is about £2.2 trillion. A basis point is defined as: 1bp is 0.0001 = 1/100th of 1%.  

1. So a basis point of GDP, 0.01% of GDP, is 2,200*10^9 * 1*10^-4=£220m.  That's about half the cost of a medium size hospital.

2. Ten basis points, 0.1% of GDP is therefore £2.2billion. 

3. with around 30m households GDP is around £70,000 per household, so 0.1% of GDP is around £70 per household. 

My time on the MPC and monetary policy at Covid and after

I was asked by the IIMR to talk about my time on the MPC and how I reacted to the pandemic and subsequent inflation.  The video (18 mins) is here.  

The blurb says: 

Gain an insight into the thinking behind the Monetary Policy Committee decisions during the Covid crisis from the personal reflections of Jonathan Haskel, who was an external member at the time. From the second session of the 2025 IIMR Monetary Conference 'Why were so many economists wrong about inflation in the early 2020s?' that was held at the University of Buckingham on November 12th, 2025.

The UK social security system: who "puts in" and who "gets out"?

 https://ifs.org.uk/news/more-nine-ten-individuals-pay-more-taxes-they-receive-social-security-over-their-lifetime?utm_source=chatgpt.com

I am late to this IFS report "Redistribution from a Lifetime Perspective,

"

In a single year, 64% of individuals in the UK pay more in taxes than they receive in social security. New analysis, ...shows that extending the period of analysis from a single year to an entire lifetime increases the percentage who pay more in taxes than they receive in social security to 93%."

and they say

The Labour government’s expansion of in- and out-of-work benefits between 1999 and 2002 was less well targeted towards the lifetime poor than the snapshot poor. The reason is that many of the poorest individuals over the lifetime are not poor in all periods of life.

 

UK minimum wages over time, comparison with other countries

 

1. This is an important chart from the resolution foundation, labour market outlook, Q2 2024.