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Employment up – but is it just an Olympic boost?

Unemployment in London is falling far quicker than anywhere else. Are the Olympics distorting the figures?

Employment is on the rise.

201,000 people have found jobs since last quarter - a 0.4 per cent increase that has led to the highest employment rate since 2009. Furthermore, unemployment has dropped by 0.2 per cent to 8 per cent, meaning that 46,000 fewer people are out of work. Active population has risen by 117,000 to 9.1 million, meaning that 0.3 per cent more people are vying jobs.

A disproportionate amount of this rise in employment has come from London, leading some to believe that we are floating inside a rose-tinted Olympic bubble.

Unemployment is down 1.1 per cent on quarter, compared to the UK average of 0.2 per cent. Similarly, quarterly employment has increased by 1.4 percent, as opposed to the national average of 0.4 per cent. However, temporary employment in the capital has seen a 4.2 per cent yearly decrease; a figure that would seemingly contradict the notion that the buoyancy of the labour market is fleeting. At a national level, temporary workers as a percentage of total employed labour force has remained largely unchanged at 6.3 per cent for the past two years. This may suggest that the April-June 2012 figures are unaffected by the previous (infrastructure) and future (Games-related services) demand for temporary work. While the short-term employment impact of the Olympics is undeniable, truly illustrative figures are yet to come.

Indeed, London is doing well relative to the rest of the country (particularly when compared to Yorkshire and the Humbert, East Midlands, and West Midlands, where unemployment actually increased this quarter), but so is the North East, for instance, noting a quarterly decline of 0.9 per cent in unemployment.

Nonetheless, there is reason to consider the figures with guarded optimism. As recent trends have shown, the increase in employment defies economic logic when GDP barely limps forward. As quoted by the Financial Times:

"The implication is that either the economy is doing appreciably better than the national accounts data show, the labour market is doing significantly worse than the hard data show, or productivity has genuinely weakened sharply," said Howard Archer, an economist at IHS Global Insight. "The jury is currently very much out as to what the actual answer is but it could very well be a combination of all three."

As noted in previous analyses of labour data, productivity seems to have slumped in the wake of declining capital investment. This troubling scenario is compounded by underemployment. Part-time employment has risen 1.9 per cent this year (0.7 per cent this quarter). But more worryingly, the percentage of people who have forcibly undertaken part-time work for lack of a better option has increased by 12.6 per cent since last year (1.1 per cent quarter-on-quarter).

Moreover, of the 201,000 newly employed, 12,000 are unpaid family workers, representing a 12.4 per cent quarterly increase and 17.7 per cent year-on-year. In a similar vein, self-employment has increased by 0.9 per cent this quarter, and government supported training and employment by 17.7. These numbers suggest that that the 0.4 per cent increase in employment is more hollow than hoped. There are 0.1 per cent fewer employees compared to last year, insinuating that employement has been artificially increased by government programmes and that people have been forced into entrepreneurship.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.