Sometimes, it's just a cigar

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Thoughts on the autumn statement

Before we get back to the primary object article I’ve promised, a few thoughts on economics.

I’ll make an admission. I may have said some of this before. Let’s start with a few principles.

If you have created a system in which generations of minor adjustments, improvements, workrounds and dongles have created a system which is complex, unreliable, and not delivering the results you want, more workrounds and tinkering may not be the answer you want.

The autumn statement delivered by George Osborne was predicated upon an economy which is growing, but not delivering additional tax revenues. More people are working, but paying no more tax than previously. Because many of the newly employed are underemployed, and underpaid, they still require in work benefits to sustain them, resulting in a reduced benefit to the state from their move into work from worklessness.

Is this accidental, or are there structural reason why this is happening?

National Insurance is one. What effect do you think a tax only payable over a certain amount of wages would have on employers? Let’s do a worked example. Let’s imagine I pay my member of staff £7.65 an hour for 20 hours work (s)he will receive £153 per week, and I pay nothing in tax. So (s)he costs me £7.65 per hour. For the 21st hour, however, I become liable for National Insurance Employers contributions, of 13% or thereabouts. That means that hour costs me (7.65×1.13) or £8.64.

Imagine I grow my business. Do I want one member of staff doing 40hours, half at £7.65 per hour, half at £8.64 per hour, or two members of staff each doing 20hours at £7.65 per hour?

Of course, there is always the question of who will work when they are underemployed, and underpaid in comparison to their needs, but a huge unwieldy mechanism of in work benefits has been constructed to free me, as an employer, from having to worry about that.

I’ve deliberately set out the problem as being about small numbers and small choices for one employer. Now think about doing the numbers as if you’re Asda or Tesco. It only becomes worthwhile employing full time staff if the marginal cost of training extra employees is greater than the saving from under-employing the majority of your employees. Helpfully, the government’s response to this is to force the unemployed to do compulsory work training in the retail industry (at places like Poundland) further driving down the marginal cost of employing extra part-time workers.

Removing the lower earning limit on employers NI would transform our economy for the better. It’s time someone considered it.

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2 comments on “Thoughts on the autumn statement

  1. georgefinnegan
    December 6, 2014

    Well put. It seems like a few people are waking up to the idea that workers need to be paid well in order for the economy to do well. Of course, that means those at the top may have to make sacrifices, so we’ll have to see how that goes over.

    Like

  2. Pingback: Things Labour isn’t debating – the labour market | Sometimes, it's just a cigar

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This entry was posted on December 6, 2014 by in Uncategorized.

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