Coffee House

Raise the tax threshhold and let youth prevail

26 February 2012

Youth unemployment is approaching crisis levels in Britain. For almost two decades, Britain’s more flexible labour market had favourable effects on youth employment. But the re-regulation of
the British economy has narrowed the difference between our jobs market, and that of the continent. Meanwhile the British poverty trap has been strengthened by a dysfunctional welfare state:
British workers can in some circumstances keep as little as 5p in every extra pound they earn if they find work. Who would break their back for less than 50p an hour? We’re paying people not
to bother, so little wonder that most of the employment rise — in the last government, and under this one — is accounted for by a rise in foreign-born workers. A third factor: minimum
wage for young people is also set at a rate above that normally judged harmful to employment prospects, as Tim Worstall has pointed out.

Net result? Our youth unemployment is now even worse than that of the Eurozone, as the below graph from Citi shows:

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Michael Saunders, whose analysis we often cite on Coffee House, draws this conclusion:

‘UK firms seem to be reluctant to hire younger workers and, where they do, show a preference for foreign staff. For example, over the last year, employment among UK-born workers fell by
208,000, while employment among foreign-born workers rose by 212,000. We advocate a lower minimum wage for people aged below 25 years, a further easing of regulations over firing people, and a
requirement that all UK schoolchildren have to study at least two foreign languages to at least age 16 years (ie GCSE standard). The UK aims to be a major centre of global service industries, and
such industries probably prefer people who can communicate easily to a range of global contacts.’

I’m not saying that ‘foreigners are taking our jobs’ — just that if you pay people not to work, as the British welfare state continues to do, then they’ll
take you up on your offer. (The IDS reforms are years away, and Osborne’s recent decision to increase welfare payments by 5.2 per cent, in line with a freakish inflation blip, will have only
strengthened the welfare trap).

The British government has been pathing the road towards welfare dependency, and ought not to be surprised if so many young people walk down that road. The above graph shows a failure of British
government policy, not of British youth. But this leads us to a fourth factor, which Saunders refers to above (and I’ve referred to before — you might call the ‘Pret A Manger factor’): a preference by employers for
foreign-born workers. Again, this is not the fault of the employers but the state. If I was getting just 5 per cent of every pound I earned, I’m not sure I’d be serving sandwiches with a smile.

You can’t change a culture overnight. But you can change the tax system. All of this strengthens the case for an emergency tax cut for the low-paid in the next Budget. Raising tax thresholds
to £10,000, as the Liberal Democrats propose, is the only idea being taken seriously inside the Treasury. It sounds strange to say it, but for those wanting to see taxes cut for the low-paid
Danny Alexander is our best bet.

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Show comments
  • Edward McLaughlin


    And so, according to your framework, we can have only the two options: using a badly managed, inefficient British manufacturing base; or resorting to the services of a more efficient foreign counterpart.

    Is that it then? Are we never again to aspire to make anything ever again?

    Just because it happened one way in the past, it has to be that way always?

  • Tiberius

    Fraser, I’m glad you admit that whatever IDS does, it will take years to undo the current situation.

    Falling standards in education, the social chapter, the minimum wage, and worsening welfare dependency are all products of New Labour’s term in office.

    Perhaps next time you want to praise something from this destructive creed, you’ll hold back – they did diddly squat for this country and its people.

  • JohnPage

    I’m not sure why the analysis lobbed in the comment about two foreign languages at GCSE. Peripheral to employment in the UK, surely?

    Michael Saunders is out of touch on this too. GCSE French is vastly easier than the O level French which some of us took. It’s easy to blag your way through with minimal knowledge. A qualification with no benefit to the world of work.

  • starfish

    Design/spec process may well have selected ‘off the shelf’, but I suspect they are not completely standard

    Point is it was done here, not in Korea

    And we will get tankers to time, specification and on budget – something that British industry is rarely capable of

  • Baron

    libertarian, sir, oh, such sweet, sweet music to Baron’s ears, you so right, the eyes of the barbarian from the East are misting, but you know what? nobody is fugging listening to you, my friend, you may as well go, hide……

  • dorothy wilson

    Ps to previous post: That said, there is room for considerable improvement in the way most of the consultancies/agencies treat candidates.

  • dorothy wilson

    Kevin: There are no controls or rules to ensure recruitment “consultants” are qualified in the areas in which they recruit.

    I have worked with people in career development situations over many years. One of my clients, who had a degree and experience in marketing but had taken time out for family reasons, was made to feel very small by a recruitment “consultant”. The client was told she did not have up to date experience in marketing so could not be placed. It later emerged that the “consultant” had previously worked as a hairdresser.

    Basically, recruitment “consultants” are sales people. However, it has to be remembered that the fees the recruitment consultancies/agencies receive are paid by the companies that have the vacancies. Those consultancies thus do not have any responsibility towards the candidates.

  • Ostrich (occasionally)

    Starfish 27th, 9:19am

    “Anyway, the important jobs (design/spec etc)
    were retained in the UK.”

    No, they weren’t. What are being bought are “off the shelf” standard ships.

  • starfish

    On top of this, we are ruled by people who seem intent upon denying any and every lifeline. For example: only last week, the Royal Navy’s two new tankers were ordered not from a yard which might employ our craftsmen (and as importantly, train young people) but from Korea

    Yep – let’s continue using MOD contracts to subsidise British jobs in poorly managed, inefficient comnpanies with huge labour costs

    Worked really well in the past doh!

    Meanwhile in the real world if you want to buy tankers where do you go….?

    If there hadn’t been political interference I expect the new carriers would have been built there too

    Anyway, the important jobs (design/spec etc) were retained in the UK,

  • Kevin

    Re unemployment, one factor that may need investigating is the recruitment process. What controls exist to ensure that intermediaries between job seekers and employers are qualified in the industries for which they are recruiting? If they are not qualified, that surely would represent a glaring inefficiency in the labour market. Job seekers would be unable to identify the areas they need to work on to meet the core skills shortages, as they would be unable to have constructive conversations with informed individuals. Similarly, intermediaries would be unable to assess skills themselves, as they would not understand them.

    Organisations and processes exist for objectively assessing applicants’ skills. These seem like the way forward, much as sport is going in the direction of objective statistical assessment of athletes rather than relying on the subjective judgment of “talent scouts”.

  • Spondulicks

    Only two hs in “threshold”.

  • daniel maris

    Rhoda’s right. None of these marginal suggestions will prevent migrants taking the lion’s share of new jobs.

    I think we need to put in place an employment guarantee for young people leaving school or university. No doubt that would be ruled illegal by the EU which would perhaps require us to disguise as an educational initiative.

  • Maddy1

    The threshold would eliminate a lot of uneconomical tax collecting amongst the marginal groups. Some people paid accountants to prove they do not need to pay tax a disaster for this low income section but not for rich accountants. This also would allow time to be spent on the real earners and evaders. Unfortunately we have allowed a whole group of people who do not believe in paying tax, and did not pay tax in their own country to settle here! anybody abusing the limit should be penalized severely.

  • John Millington

    The real issue here is the attitude problem which is rooted, as is mentioned, in the perception that one shouldn’t work if they can make as much from welfare. It’s that attitude which also makes people unemployable and so I think raising the threshold does very little to combat the source of the issue – it just tackles the peripheral, and that isn’t really going to solve anything.

    Individuals have to work because they have to work, period. If the IDS reforms are years away then perhaps the government should invest in HSIDS2.

  • Mudplugger

    Wanderwide is right – we would be better served with an Income Tax system which started at 1% for the lowest earnings, rising by 1% increments at many thresholds, up to a maximum of 60%.

    That way, everyone pays something (no representation without taxation), but each increment is so small it is never worth creative accounting to avoid the step.

    We now have the IT systems to make that simple, so why not do it ?

  • Pot Head

    The demographic lesast likely to be out of work is illegal immigrants.

    And imagine the difficulties they face in finding a job?

  • libertarian

    Fraser and Michael Saunders

    This is my area of expertise and I’m here to tell you that you are wrong. Companies DO NOT on the whole favour overseas workers they are in a lot of circumstance the ONLY applicants they get, which is why lowering the minimum wage won’t make a blind bit of difference.

    Change the ability to fire would make a huge difference because then an employer can take more of a chance on hiring someone who may not work out.

    But lets put some misconceptions to bed.

    Unemployment has not much link to a lack of jobs

    We have a massive skills shortage in the UK in sectors such as engineering, manufacturing, IT and Care.

    The single biggest issue for a large number of NEETS is that unless the job is deemed “sexy” i.e. music, media or sport then very few people are prepared to start at the bottom and gain real on the job experience.

    Most employers will tell you that the basic problem is attitude and lack of work ethic

    We have far too many graduate and virtually no vocationally trained young people

    The current apprenticeship scheme is a top down over bureaucratic system that is of little benefit to employers and needs to be radically overhauled so that its bottom up.

    Whilst we insist on paying more in benefits than people can take home after tax we will have massively high unemployment and we will also continue to have job/skill shortages that will ONLY be filled by overseas workers

  • Alan Douglas

    It is NOT a level playing field. The UK min wage to UK benefits gap is 5p – but the gap between UK min wage and say Polish “benefits” (if any) will be huge. It pays East Europeans to travel and lodge, AND pay UK tax rates, so of course they will seek our jobs, they actually get something in return.
    Alan Douglas

  • oldtimer

    With chumps in charge, over many years, we should not be surprised at the national predicament.

  • Edward McLaughlin

    It doesn’t matter what you say about whether foreign workers are taking our jobs. Our people are made surplus in their millions – and millions of foreigners have come to take their place. Your gaily coloured graphs are an ameliorating sop.

    On top of this, we are ruled by people who seem intent upon denying any and every lifeline. For example: only last week, the Royal Navy’s two new tankers were ordered not from a yard which might employ our craftsmen (and as importantly, train young people) but from Korea.

    It’s your game Fraser and it’s an endgame. You’ve been arguing us down this road for years and I hope you are satisfied.

  • Wanderwide

    The trouble with raising the tax threshold to £10,000 is that it will leave an even greater proportion of the population free to vote how to spend other people’s money at no cost to themselves. The only way to make people care how taxes are spent, and to make them want government spending to fall, is to require all those eligible to vote pay at least some income tax. There should be no representation without taxation.

  • Ed P

    It’s much worse in Spain, but they have adopted a policy of job-sharing for the young unemployed. While not offering permanent positions, the scheme does allow twice as many to obtain work experience – very useful for if/when things pick up. But it would require some political will & relaxations of IR rules here, so I’m not holding my breath.

  • tom jones

    Could we not keep doing Pensions & disability benefits using the inflation rate, but change other benefits? I have no problem whatsoever with pensioners getting a 5%+ rise, but people who can work and don’t shouldn’t be getting these massive rises when working people are struggling to keep their homes and their children clothed. Seems like not working still pays in Britain today.

  • Dave B

    The minimum wage will be an important factor in youth unemployment.

  • Rhoda Klapp

    Nothing Fraser suggests will stop overseas labour from soaking up any expansion. More thought required. But a government that treats us all as fungible labour units is not about to fix this. A fundamental attitude change is required, and MilkSnatcher is onto something along those lines.

  • MilkSnatcher

    Fraser your award of LibDem of the year is assured.
    Admirable though it is, cutting these taxes will not create jobs. Cut employer’s NI, return taper relief, extend the patent box to copyright, call off the dogs of the HMRC from small businesses, and make it compulsory for every poltician who jumps on the rich-bashing bandwagon (ie most of them) to wash his or her mouth out with soap and repeat 100 times “Making money is not a bad thing” might in about 100 years raise the ordure or our economy from the pit into which it has slid.

  • Fat Jacques

    If marginal benefit withdrawal rates are the issue, wouldn’t a change to those withdrawal rates be more targeted than a change in Income Tax rates for all?

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