Tuesday, 29 November 2011

Subsidizing youth hiring is wasteful and will yield no positive long-term effects

This post was also published on the Adam Smith Institute blog

The UK Chancellor George Osborne announced his Autumn Statement today, and here are some immediate UK think tank reactions. In summary, the Autumn Statement wasn't surprising; it seems that the taxpayers were bearing the burden of the crisis in order for the government to spend that money on wasteful infrastructural projects, mortgage guarantees (see here), loans to businesses (see credit easing) and essentially is trying to guide (dare I say centrally plan) investment incentives in the economy. 

Within the Autumn statement one proposal in particular caught attention, and it was a policy earlier announced by the LibDem Deputy PM Nick Clegg. The UK government wants to subsidize businesses in hiring young unemployed workers, precisely from the ages of 16 to 24, by offering £1bn to the private sector to take young workers into apprentice schemes. 

Under a typically political decision and explanation, youth unemployment is supposed to be tackled by offering money to private sector firms to take on temporary workers so that the young might get more experience. How this is supposed to create value for the private sector and how is such a policy sustainable in the long run, no one in the government knows or cares about.

The coalition is obviously desperate to cut youth unemployment as it fails to see the paradox in its claim that a subsidy to employ a young person is a way to create “lasting” jobs in the private sector. A temporary subsidy will be of just that effect – it will be temporary. Even if it does produce some youth jobs this won’t be due to an increase in real demand for workers, but due to an artificial increase in demand for workers. 

A private sector business will be able to assess by itself the best whom to hire and how long to keep them. By creating a distorted incentive the government is directing the firms’ employment policies. In a crisis of confidence with many lay-offs it is natural that the young suffer the most. They lack the experience older laid-off workers possess and cannot compete with them. By creating a subsidy to employ only the youth, the government discourages hiring of older workers and distorts the labour market against them (discriminates against them). These are not just too old workers, but all those older than 24, meaning that younger workers, university graduates, still may get discriminated against. A subsidy, wherever it is enforced, will always yield similar effects – it will distort the market in favour of the subsidized and against every other market participant. In addition, the effect is always temporary and works only if the subsidies carry on indefinitely, which is of course extremely costly.

A private business owner will have better knowledge of what kind of worker to employ, whether a young or more experienced one, the choice is always his to begin with. A government subsidy can only help him make the wrong decision and chose a young worker, not necessary a worse decision but also not necessarily a better one either.

Subsidies create a political market for the companies to compete on. The difference is they don’t compete for customers, they compete for bureaucrats, or more precisely the favourability to bureaucrats in extorting funds. 

A far better idea would be to create incentives for hiring temporary workers, not via subsidies but via decreased taxes (removing the NIC for employers) and cutting employment regulations to encourage businesses to start hiring again. An NIC holiday for small businesses (actually proposed by the Chancellor) or removing it altogether, lower income taxes for the young, removing any regulatory confinements for hiring temporary workers and those on zero based contracts, reducing the rigidity of dismissal rules, removing financial repercussions for employers and further reform of the employment law. These are just some of the policies that would work much better than a subsidy. First of all, it will cost less to implement. There will be no need to increase public spending and waste resources. Second, a tax cut creates a completely different incentive to the private sector business. Instead of competing for public money, it will decrease its costs by hiring another worker. It will lead to lowering of the entire unemployment rate and create more scope for businesses to make higher revenue. This will eventually decrease youth employment as well, as it will go down once the economy starts recovering with a higher pace.

In addition, if they really want to help the young get more working experience there is a particular policy decision preventing the young to do so – minimum wage. By removing the minimum wage for young workers the government will make it much more affordable for the private sector to offer them temporary jobs and work placements. The young are willing to work for a lower rate than the market rate to get some work experience. This is why they engage into internships and volunteering, hoping to get more experience and be more competitive on the market. Removing the minimum wage would yield exactly the effect Nick Clegg is hoping for – it will offer more jobs to more young people and help them get more experience. The subsidy, on the other hand, will fail to result in the same effect and is a prime example of wastefulness of the taxpayers’ money. 

Besides I again fail to see how is spending £1bn going to cut the deficit and lower the national debt. The more serious the threat of recession in Europe, the further away the UK government is from obtaining its long term stabilization of the debt and deficit policy. If you already design a credible plan, I expect you stick to it. Every policy proposal the government made after its plan A seems to undermine it.

Furthermore, a similar policy was in power during the Labour government, worth about £1,3bn only to be removed by the Conservatives once they came to power. Regarding such a U-turn, I would like to remind them of a certain Conservative leader and her opinion on the subject: 

3 comments:

  1. I just love good ol' Maggie :)

    and I agree with your conclusion - scraping the minimum wage would create more jobs for young people since they are willing to temporary work for less to get some experience. I mean, the whole policy from the autumn statement concerning jobs is about creating more experience for the young, but they are unable or unwilling to realize their proposals are much more costly and ineffective than a minimum wage scraping would be.

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  2. Don't forget the fact that the youth contract is aimed only at those who are seeking work for 9 months or more - so, if I, as an employer, want to hire someone who I think is good enough but has only been unemployed for 6 months, I am discouraged to do so..Am I supposed to wait for three months in order to hire him/her? I can see situations like these arising..and there you have another discrimination..the policy is just plain ridiculous

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  3. I agree, the 9 month constraint will simply add to the reshuffling of unemployment instead of decreasing it

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