However in addition to having a negative effect on economic performance they often lead to secondary effects

“However, in addition to having a negative effect on economic performance, they often lead to secondary effects which actually thwart the social objectives sought in the first place.”So it is a potential win-win situation. Get rid of the barriers, push through reform and then tackle the social problems which these regulations were supposed to solve (but failed to) with alternative and more targeted measures. “Removing such barriers across the board, or at least revising them with an eye toward their economic implications, will have a tremendous positive impact on the economies of France and Germany,” the report concludes.It is a view which will have some impact on European policy-makers, as McKinsey is almost certainly right in the judgement that there is now real appetite for structural reform in France and Germany. But in a way, assuming you do have the political will to carry reform through, sweeping away restrictive regulations is the easy part Britain has done a lot of that. The harder part is constructing effective ways of coping with the social consequences of deregulation.In some areas there is a blue-print Take telecommunications. Privatisation has been coupled with regulation in every country that has privatised its telecoms industry, resulting in better service.

But that is relatively easy because it is a rapidly expanding industry and most of the regulator’s role is to balance natural monopoly by encouraging competition. It is much harder to counter the adverse effects on, say, the motor industry from an increase in imports, if the industry has been relying on home demand for its main market.This last point applies particularly in France, where Japanese imports are tiny. France is at last restructuring its industry, but cutting the workforce at Renault does not create new jobs in, say, software. Even if it did, the jobs would go to different people.Looking ahead at the prospects for structural reform in Europe, there are three roadblocks. One is political will – although even if it is missing, eventually the economic pressures become so great that reform is inevitable.The second is the difficulty of creating a culture of regulation which is appropriate to each – very different – industry It is easy to set a goal of light but effective regulation. But it is difficult to acknowledge that the regulators are bound, from time to time, to fail.And the third is that lifting barriers to enterprise may not be enough.

From a US perspective, McKinsey may be right in emphasising the opportunities, but these probably require French and German people to behave more like Americans And maybe they won’t want to do that.. According to the Financial Times last week, new research shows that a minimum wage won’t help the poor much at all. Thanks to benefit clawbacks and taxes, the paper said, much of the extra cash paid out by employers, if a minimum wage is introduced, will go to the government and not the low paid. That, said the FT’s headline writer, was an unpalatable truth for supporters of the minimum wage to swallow. Is it surprising then, asked the correspondent, that some people think there is no need for a minimum wage at all?
But the FT completely missed the point And it clearly didn’t look at the new research very closely. Yes, the study does indeed show that for many low-paid people, increases in wages are clawed back through the tax and benefit system. And yes, it is true that tackling this benefit trap is critical if we are to get people both into work and out of low-wage poverty.

But no, the research does not show that a minimum wage is pointless. Quite the reverse; without a minimum wage, any attempt to solve that benefit trap will fail.Consider the new study on which the FT based its claims. Academic Holly Sutherland of the Applied Economics Unit at Cambridge University has analysed the links between a minimum wage and in-work benefits for a new report by the Employment Policy Institute, due to be published next month.In the report Ms Sutherland says: “A national minimum wage would have a significant impact on the incomes of low-paid workers and affect work incentives. But for many families the gains from a national minimum wage would be offset by tax increases and reductions in in-work social security benefits.”Take the case of a security guard on pounds 2.80 an hour, whose wife stays at home to look after their two children aged under five.

He works 38 hours a week, and pulls in pounds 106.40 for his pains. It isn’t much – but it is enough to incur tax on every extra pound at 20 per cent and National Insurance contributions of 10 per cent.The family is entitled to Family Credit, Housing Benefit and Council Tax Benefit because its income is so low But these are withdrawn at a steep rate. Suppose, then, that our security guard gets an extra hour’s overtime, which pays him an extra pounds 2.80 that week. The taxman takes the first bite: 56p vanishes in tax, and 28p in National Insurance. Then the Benefits Agency steps in to withdraw a further pounds 1.38 of Family Credit, 38p of Housing Benefit and 12p of Council Tax Benefit. So he is left with only 8p extra to take home (just 3 per cent of his extra gross pay). Shocking, isn’t it?It is easy to see why people get trapped in poverty, either on low pay or out of work altogether.