IEA: Scrap minimum wage to tackle youth unemployment
The government has announced a £1bn scheme to get unemployed young people working again. But will it work? Mark Littlewood of the Institute of Economic Affairs argues the case for a very different solution.
The number of unemployed young people tops the one million mark and Nick Clegg is on hand with a solution – he has found £1bn to encourage businesses to put them on the payroll.
The Liberal Democrats proudly boast that they have talked their Conservative allies into embracing this policy, a feat of internal coalition diplomacy likened by a Lib Dem spokesman to persuading a ‘vegetarian to eat a kebab’.
Nick Clegg’s Youth Contract will apparently offer any private sector business willing to take on a young person a grant of over £2,000, but only if the new employee has been claiming welfare for the previous nine months. He hopes that hundreds of thousands of people can be helped by the scheme.
Reform the National Minimum Wage
Well, the Deputy Prime Minister may have sold this plan to his Tory colleagues, but he hasn’t sold it to me. When someone smashes something up with their right hand and rather feebly tries to put the pieces back together with his left, you don’t sit back and applaud. You criticise the individual for getting involved in the first place.
Nick Clegg’s policy amounts to an implicit acceptance that the National Minimum Wage (NMW) is pricing people out of employment. This is hardly surprising. With the NMW edging up to £6.08 per hour and the age qualification for the top rate being lowered to 21, it stands to reason that there will be jobs that would be created in a free market which are tragically rendered illegal by government regulation.
Those looking for their first step on the career ladder are hit the hardest and are being left to rot on the unemployment scrapheap. We can’t be sure how many full-time jobs would be available at about £11,000 a year (a figure a little below the full time NMW rate), but it seems absurd to argue that the total number would be zero.
It may be one heck of stretch to provide for a family on that sort of salary, but for a young person, perhaps still living with their parents, it represents a much better life chance than no work at all.
Clegg’s Youth Contract isn’t the solution
So, the Clegg policy is effectively to subsidise the minimum wage, rather than to muster the political courage to scrap it. No doubt some jobs will be created as a consequence. But it’s far from an ideal approach, as it establishes all sorts of perverse incentives which could be avoided if the NMW was simply reduced or abolished.
For example, if I’m looking to recruit a young worker and my ideal candidate has only been claiming Jobseeker’s Allowance for six or seven months, rather than the prescribed nine months, I’d be strongly tempted to delay their appointment to qualify for the Clegg subsidy.
In normal circumstances, that would be a ludicrous and counter-productive decision for both employer and employee, but the distorting impact of this programme may make it the best decision for the business to take after all.
Nick Clegg receives half a cheer for recognising that many young people are being priced out of the jobs market. But he also receives a deep groan for conjuring up a complex, convoluted and bureaucratic response to the problem.
Which? Conversation provides guest spots to external contributors. This is from the Institute of Economic Affairs (IEA) – all opinions expressed here are its own, and not that of Which?
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