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Work and Pay: Taxing the Poor and Reducing their Pensions


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Work and Pay: Taxing the Poor and Reducing their Pensions

Pay   (Pay, Wage, Salary, Remuneration, Emoluments)

Pay is wage or salary plus any share of profits. It includes payments and fringe benefits such as assistance with house purchase, life insurance, private pension and social insurance contributions by the employer, car and travelling expenses, paid holidays and benefits provided by government.

Pay is pay, no matter what it is called. There is no difference between 'pay', 'remuneration' or 'emoluments' as long as we include all direct and indirect pre-tax payments and services received from the employer.

Pay Increments   (Merit, Cost of Living, Betterment)

Merit Increase   People gain experience and absorb it, applying the lessons learnt one day to work done the next. Their experience continues to increase and as a result so can the responsibility they carry. As responsibility increases, income increases accordingly. Experience, responsibility and remuneration increase as people grow older. So income increases with age and the corresponding change for a particular individual is his 'merit increase'.
Cost of Living Increase   What matters to the individual is his take-home purchasing power which is what his take-home pay will buy after allowing for the increasing cost of living. The amount needed to cover the increasing cost of living is the 'cost of living' increase.
Betterment Increase  

The 'Betterment' is the amount which is one's share of the change in the national standard of living. The Betterment increase provides direct participation in the country's increasing prosperity, is the extent to which one is sharing in the changing national standard of living.

Changes in the cost of living are measured by the cost-of-living index (RPI). The Betterment is the extent to which increases in average earnings exceed increases in the cost of living.

Work and Pay

The 'Work and Pay' reports illustrate how National Remuneration Scales are used (see figure 2) to show clearly, reliably and precisely

1.   The amount of the 'merit' increase which is given at each age and level of working.
2.   The amount needed to cover the increasing cost of living, that is the 'cost of living' increase.
3.   The amount which is one's share of the change in the national standard of living, that is the 'Betterment' increase.

While profits, dividends and 'capital gains' increase automatically, a bitter struggle develops as owners and employers attempt to use 'inflation' as an excuse for reducing labour costs, that is wage rates, wages and salaries of the working population, so as to increase profits still further.

Employees are then not compensated for increased skill, experience and responsibility (increased merit), do not receive their share of the increasing national income and wealth (the betterment), do not receive merit increases and betterment increases. {4 clm4.html}

So owners and employers will, when they can, pressurise the working population into accepting even lower rates of pay by increasing the working population's needs. Doing so by advocating greater unemployment, reducing social security, reducing national health service provisions, weakening the quality of education (knowledge, clear thinking, understanding, objective evaluation).

Here is an example. Since 1980 the UKs Tory government has withheld from old-age pensioners their share of the increasing national income and wealth (their 'Betterment'), for no apparent good reason, amounting to something like 2 percent of their pension every year. Pensions had been linked to the index of average earnings but in 1980 they were linked to the cost-of-living index. As a result, their 1998 pensions were a fraction of what they ought to have been, would have had to be increased by 34 percent just to reach the level at which they should have been. And pensioners would still have had to be compensated for the moneys withheld from them without good reason by the government since 1980.

This attack on the standard of living of old-age pensioners has continued since then and still continues. Such attacks on the living standards of the working population are misleadingly called a 'fight (or battle) against inflation' to persuade the working population to tighten its belts, to reduce its standard of living, so as to increase profits.

Index Linking

Index-linking is an accepted way of taking the heat out of employer and employee pay bargaining. After index linking, pay bargaining can concentrate on the main issue, namely on how to share out the increased value created by the joint effort of both sides, and on how to adjust national differentials to ensure that no one section gains unfairly at the expense of others and to balance out inequalities.

Consider how index linking operates in relation to the increasing cost of living.

Owners' profits (dividends plus capital gain) increase automatically whenever costs increase. So profits are in effect linked to costs, to inflation.

Linking of pay to a cost of living index takes the heat out of employer and employee pay bargaining, reduces confrontation and strife, eliminates having to struggle just to maintain one's place. It is at times applied to essential public services such as medical, fire, police, teaching and government.

Pay is reviewed at intervals and is increased according to changes in the index. If the index has increased by 2 per cent say, then pay is increased by 2 per cent. Another way of linking is to increase pay by a given percentage whenever the index has increased by that percentage.

But the cost of living index should reliably reflect the cost of living of the working population, by its composition and weighting, and be protected against politically motivated change which favours one side or the other.

For example the index needs to be protected against misleading changes of the kind which try to replace a validly compiled, appropriate and easily understood 'cost-of-living' index with something else.

Now consider this:

The UK's RPI (Retail Price Index) measures changes in the cost of living of a typical household. Its component items and their weighting are based on population consumption surveys and representative sampling. This is the cost of living index which measures changes in the cost of living and it does its job well.

If the RPI were called the 'cost of living' index, it would tell ordinary citizens that this was an easily understood measure of how changes in prices and government policies were affecting them. It would point to its use for negotiating cost-of-living pay increases.

But another index (RPIX) was then introduced by a conservative (Tory) government which excluded mortgage interest payments. In the UK the purchase of one's own home by taking out a mortgage is widespread. Mortgage interest costs depend on the level of the centrally determined base interest rate and so this index does not reflect the corresponding increases in the cost of living when the base interest rate is increased.

Still another index (RPIY) was then introduced which excluded not only mortgage interest payments but also excluded indirect taxes which had to be paid by all regardless of how small their income. It excludes VAT (Value Added tax), Council tax (local government tax), excise duty, car purchase tax, insurance and airport tax. In other words, this index does not show the effects on a typical household's cost of living when such taxes are introduced or increased.

The RPI index is a good cost of living index but instead of being called 'cost of living index' it is called 'Headline rate of inflation'. The RPIX index is called 'Underlying rate of inflation'. To me these are misleading terms which confuse instead of illuminate, and which seem intended to confuse.

Such misleading developments are particularly harmful because we have, and have had for many years, the knowledge, understanding and means for automatically increasing pay and pensions in line with the cost of living, allowing at the same time for increased merit (knowledge and experience) and the betterment (share of increased national income). Index linking is one aspect of this process.

Inequality and Change

We need to become aware of processes which redistribute income to benefit a few at the expense of the many. We need to see what is actually happening, the extent to which it is taking place, and what the effects are. And we need to counter such trends and manipulations.

Inequalities increase during a time of unemployment, during economic crisis and stagnation.

But differentials and poverty increase even when there is full employment in an affluent society as long as attention remains focused on percentage increases instead of on amounts. The same percentage increase means a far greater amount at the top compared with the bottom of the income scale. In this way inflation redistributes take-home purchasing power from the bottom to the top.

The great and increasing inequality between the well-off and the rest of the population is revealed when one looks at the amounts each receive as their share of the increasing national wealth.

Merely to prevent inequality increasing, that is to prevent it from getting worse, we need to give automatic increases which fully compensate for an individual's increased skill, knowledge, experience and responsibility (increased merit), for inflation (increasing cost of living), and which provide him with his share of the increasing national income and wealth (the betterment increase).

But we have, and have had for many years, the knowledge, understanding and means for automatically increasing pay and pensions in line with the cost of living, while allowing at the same time for increased merit and the betterment, by means of index linking.

Inequality has been defined and measured and the unequal sharing out of additional purchasing power has been going on for many years. The increasing differential between poverty at the bottom and luxury at the top is undermining the internal strength of our society as those who see themselves in real and in relative poverty, do complain, demonstrate, organise and disrupt.

Short Descriptions

The material quoted here was first published in the following reports by Manfred Davidmann:

Title   Description

Corrupted Economics and Misleading Experts

  Shows how 'Economics' is used to misinform and mislead the general public. Clearly states underlying considerations of specific important economic relationships and comments on misleading political interpretations and on role of independent experts.
Work and Pay     Major review and analysis of work and pay in relation to employer, employee and community. Provides the underlying knowledge and understanding for scientific determination and prediction of rates of pay, remuneration and differentials, of National Remuneration Scales and of the National Remuneration Pattern of pay and differentials.
Work and Pay: Summary   Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
The Right to Strike   Discusses and defines the right to strike, the extent to which people can strike and what this implies. Also discussed are aspects of current problems such as part-time work and home working, Works Councils, uses and misuses of linking pay to a cost-of-living index, participation in decision-taking, upward redistribution of income and wealth.

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Manfred Davidmann

Manfred Davidmann is an internationally well-known and respected scientist and author of a number of books and reports which have had and are having considerable impact. His work usually breaks new ground and opens up new understanding and is written in meaningful and easily understood language. Outstanding is that his work is generally accepted as factual, objective and unbiased.

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