Thursday, 1 April 2010

Payroll taxes destroy jobs?

The UK government has announced a National Insurance contribution increase – effectively a payroll tax. The increase is 1% of each employee’s pay.

This has produced howls of anguish from employers’ organisations, the Tory Party, and others looking for something to do. Supposedly this will destroy jobs. Well obviously this tax (indeed any tax) taken in isolation reduces aggregate demand and destroys jobs. But if government spends the money collected, the number of jobs so created ought to be very similar to the number destroyed by the payroll tax increase.

There is no obvious reason why the number of jobs created would be much different to the number destroyed, but if the number created WERE less than the number destroyed, no problem. Government can just give the economy a bit more stimulus. Also it is primarily labour shortages which spark off inflation. If additional unemployment results from this 1% increase, labour shortages will be alleviated, thus there will be room for more stimulus.

Having said that, there is just one channel via which jobs might arguably be destroyed, as follows. This 1% increase in the cost of employing people could be significant for those on minimum wages. If minimum wages destroy jobs, then on the face of it an increase in minimum wages will destroy even more. But not even this argument stands inspection. Reasons are thus.

If the value of the output of someone on minimum wages is marginally more than the costs of employing them, and costs of employment rise by 1%, obviously that person is out of work – ASSUMING PRICES REMAIN CONSTANT. But prices won’t remain constant. If the cost of employing everyone rises by 1%, then prices will ultimately rise by 1% (other things being equal). And that includes the price of stuff produced by those on minimum wages.

Stuff produced by those on minimum wages competes with stuff produced by others. If stuff produced by “others” rises by 1%, there is a good chance stuff produced by those on minimum wages can rise by 1% with impunity. Indeed, untill someone measures the cross elasticity of demand for min wage "stuff" versus other "stuff" it is just as likely that this 1% NI increase will EXPAND opportunities for minimum wage people as CONTRACT such opportunities.

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