Reducing long-term unemployment with negative NI


moneyLong-term unemployment is an intractable problem. Reducing disincentives to take jobs is only half the battle. Given several applicants for a job, most employers will be reluctant to hire someone whose working skills are rusty or non-existent, and the supply of jobs at or above the minimum wage is constrained.

But suppose that if you hire Alan, who has been claiming unemployment benefits for the last 18 months. Instead of paying employer's National Insurance, you receive 80% of the first month’s wages as negative NI. Each month this reduces 5%. If you are paying £8/hr, Alan’s wages are only costing you £1.60/hour in month 1. In month 2 this goes up to £2.40 etc. but Alan will be progressively more valuable.

This should actually save the taxpayer money. Even after reforms, benefits are withdrawn at 65% and Alan’s extra income should generate VAT and other tax revenues of at least 40p/hr. So even in month 1 the “subsidy” of £6.40/hr is offset by benefits savings and tax revenues of £5.60/hr. By month 2 the net cost is zero and after month 3 it is saving the taxpayer money in cash terms, let alone the benefits in terms of health, skills, social integration and economic output .

If Alan has been claiming JSA for (say) 12 of the last 18 months then the negative NI would start at 50%, and the taxpayer starts saving money immediately.

Some safeguards would be needed. Special dispensation should be required for any employer whose total employer's NI bill became negative, and the hourly rate at which negative NI is paid should be capped. But the scheme should be kept very simple so that even small employers could easily understand and use it. Creating jobs, saving money, helping people rebuild their lives: over to you George.