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Old or new, big or small, businesses should be rewarded for tackling youth unemployment – Mark Lloyd

October 14, 2011

It is almost 10 months since David Cameron announced he would follow the “most pro-business, pro-growth, pro-jobs agenda ever unleashed by a government”, yet as this week’s dismal unemployment figures show, there is little sign of a sustained UK recovery. Business confidence is back down to early 2009 levels and GDP growth has been revised downwards to a barely perceptible level. The ‘R’ word looms large.

Calls for a ‘Plan B’ on fiscal tightening are coming from all directions (even the flinty-hearted IMF has voiced concerns), and monetary expansion is again under way, with a new round of quantitative easing aimed at improving liquidity in credit markets. Despite this, the Coalition remains committed to its original deficit reduction plans, with the PM reminding the Opposition at PMQs that, owing to the government’s perceived commitment to fiscal tightening, the UK is currently able to borrow at ‘German-style’ interest rates despite running a ‘Greek-style’ deficit.

It is clear we need a plan for growth, and fast, yet many of the plans being floated at the moment run counter to the government’s commitment to fiscal retrenchment.

The usual ideas are surfacing. The Institute of Directors came up with a number of tax and regulation-cutting measures that it believes would help the UK grow. Amongst them are proposals to reduce corporation tax to 15 per cent (from 26 per cent) and scrap the 50p additional income tax rate. Ed Balls, for his part, has suggested a five point plan that includes the reversal of the recent VAT rise and bringing forwards planned infrastructure projects.

But cutting taxes or boosting spending too severely might mean revising forecasts on deficit reduction – a ‘Plan B’ in the eyes of the markets, and one that could shake confidence. A small VAT cut is anyway unlikely to make much of a difference to unemployment or growth, relative to its cost. So, with the government seemingly unable to go into reverse gear on spending, how can it hope to foster extra demand?

There is hope – but none of the answers offered so far have passed muster when it comes to affordability and impact. One of Ed Balls’ ‘five points’ was a proposed one-year national insurance holiday for all small firms that take on extra workers. Details were scant (and the measure is simply a re-hash of an idea touted by the FSB last year), but Ed Balls suggested the measure could be funded by money left over from the government’s “failed” NI rebate for new businesses. The idea is to make it easier for small firms to take on new workers, bringing down unemployment and boosting growth. The idea of more generous national insurance breaks has promise, but it is unlikely that Mr Balls’ plans, if they were implemented, would have much impact. Any tax breaks, however small, must be well targeted in the current climate.

The fact of the matter is that, for all the romanticism attached to small enterprises by some politicians, evidence suggests that small firms account for a relatively small amount of overall job creation. Figures from the US show that, despite making up only 0.3 per cent of firms, big business creates around 35 per cent of new jobs. The government’s current NI provisions, aimed at new business start-ups, are similarly misguided given that over half of new enterprises will fail within their first four years of trading.

These statistics, combined with the fact that most low-paying companies fit into the small business definition means it is reasonable to conclude that large companies are more likely to create both higher paying and more stable jobs. Singling out small businesses or new ventures for special treatment will therefore be a less than optimal approach.

Another crucial issue to consider is the make-up of the jobless population, which is skewed towards the young. The jobless rate amongst 16-24 year-olds is nearing the 1m mark, a rate of about 20 per cent. The young now make up about 40 per cent of the total number of unemployed. Focusing any job creation measures on the younger demographic would therefore also appear sensible.

With this in mind, rather than giving small or new businesses special treatment, why not target measures more effectively where they’re needed by giving a national insurance holiday to all firms who take on workers aged 16-24? This wouldn’t be a difficult measure to introduce, and could replace the government’s current focus on new businesses. I suggest that any firm taking on a jobseeker under the age of 25 be given NI breaks for one year after recruitment on the individual’s employer NI contributions. This would make it cheaper for firms to take on young staff.

In order to encourage companies to retain and train their employees , a one-year extension of the NIC holiday could be offered to firms who enrol new staff members on a recognised national qualification course such as a certificate or diploma within the first year of their employment. Britain needs a better skills base, and it is government’s responsibility to help make that happen.

Targeted national insurance breaks are less likely to impact the government’s deficit reduction plans than headline rate tax cuts or creating new spending. A young jobseeker costs more money on the dole than in work.

To illustrate, Jobseekers’ Allowance for under 25s amounts to £53.45 per week. According to HMRC’s employer NIC calculator this means any individual moving into a job would have to be earning at least £27,000 per year in order for the exchequer to lose more in NI revenues than it would gain from moving someone off Jobseeker’s Allowance and into employment. The exchequer may lose out on employer NIC’s from those young workers with the luck and skills to find work regardless of current conditions, but, as Richard Posner has argued, lower NI costs for employers should help to reduce ‘job destruction’ (lay-offs) amongst more vulnerable young workers if the current slow-down turns into a lengthy contraction.

Businesses have been calling for a new apprenticeship model in the UK, and these measures could be a valuable part of a new tax deal for companies who invest in training.

With better targeted incentives the UK government could encourage jobs growth, and help tackle unemployment and skills shortages in the younger population without damaging its hard-earned credibility on deficit reduction. Old or new, big or small, all businesses should be encouraged to take on and train young workers at a time when the young are suffering the effects of a recession they played no part in creating.

Mark Lloyd is the author of ‘Tier 4 Fears: why government student visa proposals are unfair’. His next publication for CentreForum will be a research note on taxing pension lump sums.

One Comment leave one →
  1. Mark Lloyd permalink
    October 14, 2011 3:35 pm

    It has come to my attention since writing this article that esteemed economist David Blanchflower, writing for this week’s New Statesman, has proposed a similar idea. Blanchflower suggests a 2-year NI holiday (both employer and employee contributions) for all under 25s.
    His proposals would no doubt be more expensive than the above, but would still be better than current measures (or Ed Balls’ proposals). Good to see someone reading from the same page.

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