National Insurance: are the Tories this useless?

[matgb]

OK, for those under a brick, headline news most of the last week has been the argument between the two Labservative parties over the planned National Insurance increase. It's dull and longwinded; palpably obviously, no one commenting on it in the media seems to actually understand it at all. Boy George Gideon Osborne doesn't.

I suspect Darling does, but is keeping schtum for political reasons, and I'm pretty sure Vince is doing the same. Why would they both do this? Y'see, unless my understanding of economics generally is completely off base (and I've been trying to do a lot of understanding of economics over the last 5 years), increasing National Insurance does cost jobs. Channel 4 FactCheck certainly think so. Here's why:

It's all about Tax Incidence and Marginal Costs. Putting it simply, employers pay people to do stuff if the value of the work they do for the company is more than what the cost of employing someone is.

It's not about the overall tax bill, it's about whether hiring, say, an extra bartender is worth it for the pub. If there's a rush on, and you're short staffed, you lose custom. If there isn't a rush on, and you're over staffed, you lose money. Make a judgement as to how many staff you could do with, and factor in how much it'll cost.

less jobs are cost effective

Two staff doubles the staffing cost, but if you only get 50% extra customers, is it worth it? That's marginal cost. Put the marginal cost up (which NI definitely does), less jobs are cost effective, so employers cut back. They have to; you simply don't pay people to do work that doesn't benefit the business if you want to stay in business.

It's not the employer that pays extra

The other effect is tax incidence, or who pays. Every study I've seen shows that if you put payroll taxes up, it's not the employer that ends up paying extra, but the employee, as the wages go down.

Goes back to the cost/benefit thing; if the cost overall is too high, then the benefit isn't good enough, the value to the employer of the work you do is fairly set, what they can pay you in terms of total cost is therefore set, if someone puts a tax on that cost, they'll reduce the cost over times in other ways.

If the cost is too high, the benefit isn't good enough

Masses of literature on it, but, y'know, Gideon actually knowing what he's on about would be a first, so that's what the fuss is about.

Note that when Vince has attacked the Tories on this, he's not argued with them too much over the NI stuff; he's argued with them over how they're going to pay for it; he's right to say that the money they're using is pretty much fictional, from what I can tell.

The "a price worth paying" argument

What the Govt could, and perhaps should, be doing is actually admitting that there will be a small decrease in the rate of fall of unemployment (which is basically what the above means), but that the greater economic stability makes us all better off medium term, etc etc etc. Y'know, the "a price worth paying" argument. Except that doesn't tend to go down well with the Trades Unions, who, well, are bankrolling their election campaign.

And I'm not sure, myself, that it is a price worth paying, there are better ways of raising money; capital gains tax taper relief anyone?

Isn't politics fun?

Oh, wait, no, this is several billions pounds of national debt and about 100,000 jobs we're talking about here. Not really fun at all.

Comments

[missedith01]

Did I see somewhere that for a worker earning the male median it was about £200pa? It would have to be a pretty close call on cost-benefit if £200pa could reverse an employer's decision to hire.

What annoys me about his debate is that anyone takes these business leaders seriously at all. They say that the money is best off left with them so they can be entrepreneureal with it; in fact what the public sees is excess profit used to fund excessive executive pay and bonuses.

[0ct0pus.livejournal.com]

Yeah, the actual cost of the rise to employers and employees is not something that has really been talked about. I think for the UK average earnings (£24,000) it's about £85/y for the employee and the same again for the employer. It's a marginal cost but it is very marginal, and anyone sacked for the sake of £85/y was probably going to be sacked anyway.

For me the telling thing about this story is the 100 employers that agree with ditching the tax rise. Out of all the employers in the country, they can only find 100 who are willing to stand up and say "actually, yes, we'd rather not pay a tiny bit of extra tax, thanks. Screw the UK deficit, it's our profits that matter."? Interesting...

[matgb]

I doubt many if any will get fired (unless businesses fold, but that's unlikely), but it will decrease hiring rates slightly (possibly slightly more than is justified based on actual costs; see supposed numbers put off by tuition fees/loans &c).

That the Tories have a fairly easy case to make but are failing to make i t at all well (combined with Tesco &c coming out against them) is telling.

[matgb]

Well, yes, but what the public see is as wrong as what the business types are saying.

The job losses are a marginal effect, 100,000 or so over a 5 year period; if we haven't created at least a million jobs over the next 5 years we're in trouble.

And yes, it would have to be a close call, but a lot of hiring decisions in a small business are close calls; I had to argue hard every year to justify my seasonal assistant, this despite the record of my 60-80 hour weeks, the business was in trouble and trying to turn itself around (it did this), and every hire had to be triple justified.

Anything that increases the cost to hire, even marginally, will slighlty decrease the number of hires made.

But the Tories are failing to make this point well enough, and Darling's dug himself into a hole by not being straight in the first place.

[fearmeforiampink]

The marginal cost thing seems reasonable, and besides which if you utterly over-simplify the situation, increase in NI = price of labour goes up = (generally) quantity of labour demanded goes down.

[matgb]

Or net wages go down, depending on need of the work. But yeah, it's a simple argument to make, which is why I'm surprised that even Osbourne can't seem to make it stick.

[innerbrat]

1) Livejournal Add-ons has finally paid attention to the lj-cut closing tab. I like this, it makes my fpage viewing neater.

2) FEWER jobs.

3) the left always seem to forget that our econmic viewpoint is usually a price worth paying - leftist economics is about having less personal wealth in return for greater societal. Either side is just plain wrong every time they act like wealth can be generated; it's like energy.

[matgb]

1) Guh? I know not of which you speak (addons not work with DW yet, can't be arsed to hack it, 'fey's working on making it a site feature)

2) pendant

3) Wealth can be generated, it's kinda what we've been doing for the last 30 or so years, hence even incredibly skint minimum wage people have laptops and Wiis &c.

But the problem with any economic discussion is that most people either don't understand the terminology (because it's not taught at all, even on politics degree courses let alone GCSE level) and some that do have weird dogmatic views.

Also? No right answers. Just many many not-quite-as-wrong ones. The case study I read on China as an example of a competetive market in ownership systems was weird...

[innerbrat]

'pendant' just made me choke with laughter at my desk.

[matgb]

Can't claim credit for it unfortunately (other than knowingly doing it).

Polly Toynbee used it to describe Tim Worstall. In the comments of a blog post in which she was excoriating all bloggers for their low standards and lack of editors...

[lostinthewires.blogspot.com]

After seeing about a year of politicians making the facile comparison between national debt and household debt to explain why we can't go on borrowing, I'm not surprised by this. (Basic economics hint: they're not the same, regardless of what William Cobbett might say.)

Anyway, yes, in terms of simple economics NI will increase costs to employers/reduce wages to employees/decrease employment based on the demand elasticity of labour supply and demand. The supply of labour is fairly inelastic, it seems, which means that the reduction in jobs is fairly small, and employees take a hit on their wages instead.

I could probably manage to graph it; I think I just about remember that much from my Principle of Economics.