Macro policy matters more than micro. This is one message we should take from Howard Reed's claim (pdf) that a living wage could be a net creator of jobs.

This claim rests on three assumptions, which I find questionable.

First, that "the short-run impact of reduced profits on consumer demand is zero." If this is the case, then the transfer of income from employers to employees (who are likely to spend their incomes) would boost GDP. But I'm not so sure it is. For one thing, many low-wage employers aren't giant corporations but smaller firms whose owners rely upon their profits. Secondly, expectations matter. If employers expect further rises in the living wage, and further cuts in profits, they might cut their consumer and investment spending in anticipation.

Secondly, he assumes that the £3.3bn improvement in government finances from higher tax receipts and lower benefit spending will be used to increase public spending and investment. This is an important point. Some supporters of a living wage say it will improve the public finances. Howard is entirely correct to see that this isn't a virtue of the plan, but a defect. On its own, a living wage is a fiscal tightening, which is a net destroyer of jobs.

Thirdly, Howard assumes this spending will have big multipler effects. He says: "multiplier effects are larger - and perhaps much larger - when national economies are operating well below full employment."

I agree this is the case when we're at the zero bound. However, a living wage won't be introduced until after 2015. By then, we might be moving away from the zero bound; markets expect three month rates to be 1.4 percentage points higher in September 2016 than they are now. This poses the danger that fiscal looseness could be offset by monetary tightening, implying lower multipliers and less job creation.

I don't say all this to rubbish Howard's paper. It's an excellent piece of work. I do so instead to point out that a living wage makes sense only within the context of an expansionary macroeconomic policy. Without this framework it is a threat to jobs, not (just) because higher wages might destroy jobs - Howard questions this, but I'm not so sure - but also because of that fiscal tightening implied by higher wages. And given that well-being is more sensitive to job losses than to income gains, this is a big drawback.

In fact, there's another reason why macro policy matters. As Howard points out, the biggest winners from a living wage are households in the middle of the income distribution, not those at the bottom. A living wage is not much of an anti-poverty policy. One of the best things governments could do to reduce poverty is to get more people into work. And that's a task for macro policy.