If we put up National Insurance contributions on every job, employers will have to pay more for them. That’s bound to be a tax on jobs…Putting up the cost of employment will lead to fewer jobs being created and it will probably lead to jobs being lost.But do NI contributions really affect jobs? This is where Finland comes in.
In 2003, the Finnish government wanted to boost employment in the northern part of the country. So it abolished some equivalents of our NI for firms in northern regions. This saved the average firm there around 4% of its wage bill.
Did this create jobs? The beauty of this plan was that it gave us a natural experiment. Because the tax cut only applied to firms in part of the country, it‘s possible to compare these to firms elsewhere in the country, to see if the lower “tax on jobs” created employment.
And it didn’t - at least not to any degree. This paper shows that “the payroll tax experiment has not had a significant effect on employment in the target region.“ It estimates that the average firm that got the tax break created less than one-tenth of a job as a result.
This experiment has been replicated elsewhere. Sweden has also tried regional variations in the equivalent of NI contributions, and has also found no great employment effects.
There are two reasons for this. First, wages rose in response to the lower payroll taxes, so the overall cost to many firms of employing labour did not fall as much as the tax fell. Secondly, the price-elasticity of demand for labour is low. Multiplying a low elasticity by a small cost change gives us a tiny number indeed.
My strong suspicion is that all this would also be true for the UK. We know from the effects of minimum wage laws that the price elasticity of demand for labour generally is low. And with capital powerful and labour weak, higher employer NICs are highly likely to be passed onto workers in the form of lower wages than they would otherwise get. The combined effect is that very few jobs would be destroyed.
And herein, I fear, lies the farce within the way this issue is debated by the two main parties. Cameron’s comments display an ignorance of both experimental evidence and the principles of tax incidence. And yet Labour cannot point this out, because to do so would be to draw attention to the fact that a rise in employers’ NICs would amount to, in all probability, a wage cut.
And some people wonder why we’re repelled by the election campaign.