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21 August 2012

Mini-jobs: Will they help?

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

By Margarida Madaleno

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:

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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.