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NHS wages: multiplier effect v opportunity costs

by | 19th, September 2017

If you pay the NHS’s legion of workers more money, they’ll spend it and everyone will be better off. Anyone with even a rudimentary understanding of economics will recognise that as only partly true. But in the Guardian, it’s just a magical fact. Faiza Shaheen tells readers about the “muliplier effect”. She does not mention opportunity cost, of which more later:

Putting the direct costs of the pay cap to public services aside, there is also the so-called multiplier effect to consider. This means when you give someone a pay rise, there are larger positive implications for the economy because it can stimulate further rounds of spending. For example, if there is a £2bn increase in wages for NHS workers and they spend just half of this in shops, then shopkeepers will also receive income.

True. But why not just cut taxes and rates for shopkeepers. Same result, no? Around 2.7 million people work in retail in the UK. It is the nation’s biggest employer. Around 1.2 million of us work for the NHS.

In turn, this increase in income will mean shopkeepers are more likely to employ more people and increase salaries themselves.

Shopkeepers are booming. Will others want to get in on the boom and open their own shops, perhaps undercutting the existing outfits? Indeed, in May 2017 Chris Hopson, NHS Providers’ chief executive, told the Guardian: “Years of pay restraint and stressful working conditions are taking their toll,” he said. “Pay is becoming uncompetitive. Significant numbers of trusts say lower paid staff are leaving to stack shelves in supermarkets rather than carry on with the NHS.”

Back to Shaheen:

The treasury would then not just receive more taxes from higher wages among NHS staff, but also the VAT on extra goods sold, and on higher income taxes from jobs created elsewhere.

Of course, some of the State’ investment in NHS staff will return to central Government. But that misses the point.

The multiplier effect is thought to be higher for those on low-middle incomes, as they are much more likely to spend it than save it or put it in a tax haven. According to a Unison study based on International Monetary Fund figures, every 1% increase in public sector pay would generate between £710m and £820m for the government in increased income tax.

Tim Worstall notes:

That money has come from someone. Might be tax, might be borrowing, but those who had it would have also spent some portion of it into the economy. Even if we say that borrowing means it is obviously only coming from savings if those savings weren’t put into gilts then it would have been invested elsewhere instead.

What we actually want to know is what is the effect after this? This is known as the marginal propensity to spend (or save, the inverse). If we take tax off low paid people and give it to low paid people then the net effect is nothing. Because whatever the marginal propensity to spend of the poor is, it’ll be the same or those who lose money as those who gain it. If we take money off the rich then there will be a change. But that change is not the amount of money itself. It’s the difference between what the rich would have spent and the poor do spend. A useful rule of thumb here is some 15%. Upper middle classes might save 15% of any marginal income, the poor 0%, that’s the amount that spending rises by.

Do also note that this only applies to tax funded increases in such wages. If it’s from what is already being saved well, those savings would have been used to invest in some other thing if not borrowed by government.

Spotter: The Guardian

 

 



Posted: 19th, September 2017 | In: Broadsheets, Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink