Should employment be subsidised?

With increasing automation, it has been suggested that it will be necessary to subsidise jobs. Is there anything in this idea?

There are unlimited amounts of work waiting to be done. It can be done by people with little in the way of formal qualifications and which cannot easily be automated.

However, the suggestion of subsidy raises a key point. Real wages are the net purchasing power of take-home pay ie take-home pay minus sales taxes, in particular VAT.

Gross labour costs to employers are take-home pay, plus wage-related employer taxes, primarily NIC, plus taxes nominally payable by employees, ie employee’s NIC plus employee’s PAYE Income Tax.

The difference between the two used to be called the Tax Wedge, but the term has gone out of fashion. Another way of expressing it is to say that the incidence of all labour related taxes, including those nominally done by employees, is on the employer. Depending on pay levels, it is between 60% and 90% of net purchasing power of wages, and amounts to a huge employment surcharge falling on the employer. The UK is not the worst country in this respect, not by a long way. In Sweden, the tax surcharge on top of net real wages is more than 100%.

The consequences are that there is a substantial incentive to replace labour by capital – eg self-service checkouts – and that wages cannot fall to market-clearing levels.

Before we talk about employment subsidies, we should think about tax reforms, initially particular, through the substantial increase in tax and NI thresholds so as to take low skilled people out of tax altogether. There is no point in paying employment subsidies and then taking it back in tax.