Measures to help unemployed young people into work were announced in today's Autumn Statement. But is making them even cheaper for employers to hire really the right solution?
The Chancellor confirmed in his Autumn Statement today that employers will no longer have to pay National Insurance contributions (NICs) for young people aged under 21.
This was one of the many initiatives the Chancellor announced that are designed to support the economic recovery and to ensure that its benefits are widely spread. The government is feeling particularly vulnerable on the issue of youth unemployment because, although there has been strong growth in employment during the last year, and a fall in aggregate unemployment, youth unemployment has remained stubbornly high. According to the latest figures from the Office for National Statistics, there were 965,000 unemployed 16 to 24 year olds in the UK in the July to September quarter, an unemployment rate of 21 per cent.
The move to make it cheaper to employ young people, which the Treasury says will cost £465 million in foregone revenues in 2015/16, is, therefore, to be broadly welcomed. However, it might not be the best use of the money.
International experience – as reported in a recent IPPR paper, for example - suggests there can be a high deadweight cost with any form of job subsidy. Some employers take on extra people as a result of the government making it cheaper to do so, but a lot of employers benefit by taking on workers that they would have employed in any case. For this reason, international organisations like the OECD do not favour general job subsidies, though they do acknowledge that targeted subsidies, like this proposal, can have a beneficial effect on the employment rate of particular groups within the labour force.
However, the effectiveness of the cut in employers’ NI announced today will depend to a large extent on whether cost is the principal factor stopping firms from taking on young people. And there are reasons for thinking that it is not.
Young people are already cheaper to hire than older workers. The national minimum wage for those aged 18 to 20 years old is £5.03 an hour, compared to £6.31 for older workers. (For 16 and 17 year olds, it is just £3.72 and for apprentices £2.68 an hour.) Not only does this mean young people are paid less, it also means that employers are paying very little in the way of NICs when they hire someone aged under 20 on the minimum wage.
This is even truer for the small firms that will benefit most from the introduction of the Employment Allowance in April 2014. In the March Budget, HM Treasury said that introducing the Allowance, which exempts firms from the first £2,000 of their NICs bill, will mean 450,000 small businesses no longer pay the employer NICs. There is, therefore, no extra incentive for these businesses to hire a young person following today’s move.
Even for large firms, surveys suggest that the cost of hiring young people is not the main issue for them; the problem is more to do with skills. Many young people, they argue, are not suitably prepared for the labour market and making them a little cheaper to hire is not going to make much difference. This is confirmed by the ratio of youth unemployment to adult unemployment, which was increasing well before the recession in 2008, and remains close to an historical high.
A better way to spend £465 million on alleviating youth unemployment would be to make more funds available for training young people, including an increase in apprenticeships specifically for those aged under 21. In addition, a young people’s job guarantee would ensure those not learning or earning after six months without work could be offered paid work experience or a traineeship, with the threat of loss of benefits for those who refuse to take up the offer. In future, the government will require those who have been out of work for six months to start a traineeship, take work experience or do a community work placement. This is better for them than doing nothing, but the quality of the opportunities offered may be very variable and a poor substitute for paid work.
The Chancellor is right to target some of the limited resources at his disposal on reducing youth unemployment. If his move to cut employers’ NICs is shown to be successful in this regard, today’s move will be very welcome. But the suspicion is that there are better ways of making young people more attractive to employers by equipping them with more skills and greater work experience.
Tony Dolphin is chief economist at the Institute for Public Policy Research
