Much as I applaud the sentiment behind David Cameron’s plan to help employment by cutting taxes, did he have to claim he’d “create 350,000 jobs” that way? He may answer: yes, the media want such a figure, and just you see they’ll put it high up the story tomorrow. Plus we’re not in power, so we’ll never have to prove it. But to my nerdy eye, this figure spoils it. I mean, there are 940,000 on Jobseekers’ Allowance – is Cameron really proposing to reduce that that by a third? In a downturn?
But my more serious objection is that cutting payroll tax at the margin has a heavy deadweight cost: would these employers take on staff anyway? The document the Tories produced to back up their proposal today is packed full of excellent research, figures and references. But a fellow statistics nerd pointed out to me that one of the studies cited in that document, Dar & Tzannatos 1999, is actually quite scathing about what it calls “wage subsidy programmes” – a definition that includes the tax cuts the Tories are proposing. From p29 of that study:
“Wage subsidy programs are unlikely to have a positive impact. They have substantial deadweight and substitution effects, and the wage and employment outcomes of participants are also generally negative as compared to a control group.”
It looks at a 1998 payroll-tax reduction programme in Sweden (where else?) and concludes there was “no positive impact” on unemployment. It could well be that the Canadian experiments subsequent to the Tzannatos paper are more optimistic, but a third of a million jobs? All this may sound nit-picking, but we do it with Brown’s stuff – and we at CoffeeHouse are equal opportunity nit-pickers. But it’s a welcome move in the right direction: cut taxes on companies, and you will get more jobs. But 350,000 of them during a deep recession? Dream on.
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