Mini-jobs: Will they help?

A new legal category of work might help people into unemployment.

The creation of "mini-jobs", which allow people to take on work without paying tax or national insurance, is being considered by the Treasury as one of a package of measures to make it easier to create employment.

The idea – being promoted by some influential Conservative MPs – is modelled on a scheme in Germany, in which employees can earn up to €400 a month (about £314) without giving up any of their salary, and employers pay only a flat rate to cover pensions, social insurance and wage taxes, making administration simpler.

People can hold several mini-jobs up to the €400 a month tax-free limit, with the only impact on their income being the reduction of unemployment benefit over a certain threshold. Between €400 and €800, workers pay tax on a sliding scale.

As discussed in an ex-ante appraisal of Germany’s 2003 mini-jobs reform by the DIW Berlin, the plan is essentially a subsidy on low earnings so as to increase employment in low wage markets and to ease the long-term unemployed into the labour market.

Firstly, on the supply side, it is argued that welfare recipients are unlikely to enter the labour force when the already low wages they have access to are further depressed by social security contributions. Secondly, on the demand side, DIW argue that:

Given limited downward wage flexibility in the low wage sector due to binding minimum wages, SSC have to be borne at least partially by the employer of low-skilled workers, thus reducing their employment.

The Free Enterprise Institute, which has spearheaded the appeal for "mini-jobs" in the UK, has praised the German reform for lowering youth unemployment, increasing turnover in the jobs market, and increasing temporary work by two per cent in ten years. The report goes on to lament the fact that temporary workers account for just six per cent of the UK labour force, in contrast to Germany’s 15 per cent.

While the merits of increasing temporary employment are at best contentious, German commentators have criticised the mini-jobs model for creating "a massive disincentive for the unemployed".

Rather than bridging the gap between the labour market and the marginalised, they argue, mini-jobs have further ostracised the peripheries of the labour force by trapping them in low-wage jobs that offer no margin for progression. It is held that the subsidies, by inflating the value of low-wage jobs (as is intended) will lead people to substitute longer-term, more stable sources of income with mini-jobs. This, one can argue, while soothing unemployment in the short run, can have hazardous effects for income inequality, as well as stifle the development of a skilled labour force. Similarly, employers will be encouraged to fragment existing full-time jobs into series of mini jobs, thus extending the potential evils of the reform beyond those that are currently excluded from the labour market.

Consequently, the subsidy (as predicted by the aforementioned DIW paper) may reduce tax revenue without actually reducing welfare subsidies. This is confirmed by Johannes Jakob of the Federation of German Unions, who contends that the most viable option consists in combining welfare with a tax-free mini-job.

While the initiative may induce some people to temporarily seek employment, it is likely that mini-jobs will prove an expensive and structurally venomous distortion of the labour market.

John Lennon in a Mini Cooper. Well how would you illustrate mini jobs? Photograph: Getty Images
Photo: Getty Images
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A simple U-Turn may not be enough to get the Conservatives out of their tax credit mess

The Tories are in a mess over cuts to tax credits. But a mere U-Turn may not be enough to fix the problem. 

A spectre is haunting the Conservative party - the spectre of tax credit cuts. £4.4bn worth of cuts to the in-work benefits - which act as a top-up for lower-paid workers - will come into force in April 2016, the start of the next tax year - meaning around three million families will be £1,000 worse off. For most dual-earner families affected, that will be the equivalent of a one partner going without pay for an entire month.

The politics are obviously fairly toxic: as one Conservative MP remarked to me before the election, "show me 1,000 people in my constituency who would happily take a £1,000 pay cut, then we'll cut welfare". Small wonder that Boris Johnson is already making loud noises about the coming cuts, making his opposition to them a central plank of his 

Tory nerves were already jittery enough when the cuts were passed through the Commons - George Osborne had to personally reassure Conservative MPs that the cuts wouldn't result in the nightmarish picture being painted by Labour and the trades unions. Now that Johnson - and the Sun - have joined in the chorus of complaints.

There are a variety of ways the government could reverse or soften the cuts. The first is a straightforward U-Turn: but that would be politically embarrassing for Osborne, so it's highly unlikely. They could push back the implementation date - as one Conservative remarked - "whole industries have arranged their operations around tax credits now - we should give the care and hospitality sectors more time to prepare". Or they could adjust the taper rates - the point in your income  at which you start losing tax credits, taking away less from families. But the real problem for the Conservatives is that a mere U-Turn won't be enough to get them out of the mire. 

Why? Well, to offset the loss, Osborne announced the creation of a "national living wage", to be introduced at the same time as the cuts - of £7.20 an hour, up 70p from the current minimum wage.  In doing so, he effectively disbanded the Low Pay Commission -  the independent body that has been responsible for setting the national minimum wage since it was introduced by Tony Blair's government in 1998.  The LPC's board is made up of academics, trade unionists and employers - and their remit is to set a minimum wage that provides both a reasonable floor for workers without costing too many jobs.

Osborne's "living wage" fails at both counts. It is some way short of a genuine living wage - it is 70p short of where the living wage is today, and will likely be further off the pace by April 2016. But, as both business-owners and trade unionists increasingly fear, it is too high to operate as a legal minimum. (Remember that the campaign for a real Living Wage itself doesn't believe that the living wage should be the legal wage.) Trade union organisers from Usdaw - the shopworkers' union - and the GMB - which has a sizable presence in the hospitality sector -  both fear that the consequence of the wage hike will be reductions in jobs and hours as employers struggle to meet the new cost. Large shops and hotel chains will simply take the hit to their profit margins or raise prices a little. But smaller hotels and shops will cut back on hours and jobs. That will hit particularly hard in places like Cornwall, Devon, and Britain's coastal areas - all of which are, at the moment, overwhelmingly represented by Conservative MPs. 

The problem for the Conservatives is this: it's easy to work out a way of reversing the cuts to tax credits. It's not easy to see how Osborne could find a non-embarrassing way out of his erzatz living wage, which fails both as a market-friendly minimum and as a genuine living wage. A mere U-Turn may not be enough.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.