8 July 2020

A job creation scheme is a sticking plaster at best

By

Chancellor Rishi Sunak is bringing forward a job subsidy scheme for under 25 year-olds. The intention is apparently to ‘create’ up to 350,000 jobs at a time when there is expected to be a huge surge in joblessness as the furlough scheme unwinds.

The proposal has been welcomed by the CBI, the TUC and the Labour Party, though with the predictable qualification that it should be bigger: a £2 billion exchequer cost is not enough.

While Mr Sunak’s policy activism will probably be popular with the public, we should not expect too much from this scheme. While Mr Sunak was a teenager when job creation schemes were last in vogue, and his SPADs were probably not born, there is a long experience of such schemes to reflect on.

Job subsidies are not a new phenomenon: they have a history going back well over one hundred and fifty years. A striking example last century was the “Papen Plan” in the dying days of Weimar Germany. This was a scheme paying a substantial wage subsidy for each extra worker recruited by a firm after the announcement of the plan. The UK has itself seen a variety of schemes, including the Temporary Employment Subsidy of the 1970s, the Community Programme of the 1980s and the Workstart Scheme of the 1990s.

Spending on such schemes was far greater in continental Europe during the period of high unemployment in the 1980s and 1990s. While our spending peaked at less than 0.1% of GDP, at one time Sweden and Belgium were putting 0.68% of GDP into job subsidies, with Ireland spending almost 1%. It was not money particularly well spent.

Recruitment subsidies suffer from a number of drawbacks. There is usually considerable deadweight loss: workers are taken on who would have found work anyway in the absence of the subsidy. Thus the payment simply boosts their employers’ profits. There is very likely to be substitution, where one group of workers— in this case, the young unemployed—is taken on at the expense of another group—say, older workers or women returners, who become unemployed instead. More perniciously, schemes can have a displacement effect. Inevitably some firms are more able to take on subsidised workers than others—larger firms, expanding firms, firms with better contacts with Jobcentres. These firms get the benefit of subsidies while others, such as smaller businesses and the self-employed, do not; they lose out in a competitive environment and have to shed labour or close their business.

The estimates of these effects from studies of programmes conducted in many countries in the late 1980s and 1990s suggest that they can be substantial. Ireland’s Employment Incentive scheme showed a cumulative deadweight and substitution effect of 95% in one study. Dutch recruitment subsidies may have had deadweight and substitution effects of between 76 and 89%; deadweight losses alone on Australia’s Jobstart schemes during that period were estimated at between 67 and 79%.

This all suggests that the cost of schemes per unit reduction in unemployment is likely to be far higher than the subsidy per worker participating in the scheme. The scheme seems likely involve firms being paid around £7000 per recruit over a full six-month period. But even if combined deadweight, substitution and displacement is kept down to, say, 40% – which would be a great achievement – the cost of a temporary reduction rises to nearly £12,000 per individual. If the offset effects rise beyond 40%, the cost per unit reduction in unemployment rises correspondingly. Even if we weight this against savings in job-seekers allowance and other benefits, it doesn’t look a particularly attractive proposition for public expenditure.

Moreover this sort of scheme is expensive to operate: the form-filling, recruitment costs and training costs, plus management oversight will cost firms far more than the £1000 per recruit that the government appears to be offering. Plus, with this age group, you will almost certainly have a high drop-out rate as young people find other job opportunities or decide to go back into education during a six-month period. The benefit to employers of the scheme of getting ‘free’ workers are therefore likely to be more limited than is claimed, which means that the government may struggle to find enough private sector employers willing to take young workers on.

I am not surprised to see the government has dreamed up a scheme like this, faced with the levels of youth unemployment we are likely to face in coming months. But we should not expect very much from it. The real challenge is to deregulate the labour and product markets on a sustainable basis to encourage job creation over the longer term, rather than short-term sticking-plaster schemes of this kind.

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Professor Len Shackleton is an Editorial and Research Fellow at the IEA

Columns are the author's own opinion and do not necessarily reflect the views of CapX.