Remember when we used to laugh at Germany’s economy? Gordon Brown loved to contrast its sclerotic labour market with booming Britain. That was in the boom years. As Warren Buffet said, when the tide goes out you can see who is swimming naked – and today Britain looks as naked as a prince on a billiard table while Germany celebrates unemployment at near-record lows. We know where we went wrong, but it’s time for us to learn where Germany went right. It’s main insight was that the problem is a supply of willing workers, not a supply of jobs. There’s no point borrowing cash to create vacancies if you can’t find Germans to fill them.The so-called Hartz reforms were aimed at reforming the labour market, and improving the incentive to take jobs. This (and not more deficit-financed spending) is what we need in Britain and I look at this in my Telegraph column today.
One of the Hartz reforms that is being studied by the Treasury is a version of Germany’s ‘mini jobs’ scheme. The idea is to have contracts which allow anyone to earn (say) £400 a month tax-free, and have as many mini jobs as they liked but only one with the same employer. Of course, £400 a month is tax-free anyway if it’s your only source of income, but the mini jobs can be taken on top of PAYE existing employment, allowing the low-paid to top up their monthly package. One mini job would also be permissible on top of welfare. Importantly the employer also pays significantly less tax on a mini job contract, and with less regulation, so he has a greater incentive to hire. If you’re a garage owner wanting to take on some extra help at the weekend (and do it legally, not cash in hand) then the mini job would be for you.
The most powerful insight has driven reform in Sweden as well as Germany: that the problem is a supply of willing workers, not a supply of jobs. Vince Cable has dismissed the idea as a German solution to a German problem. I disagree. If work pays more, more people will want to work – and this takes us to the heart of the problem in Britain’s labour market. Weirdly, Britain is doing okay jobs-wise with employment up half a million since the election. But two-thirds of this is accounted for by foreign-born workers. Even now, in our flatlining economy, the number of foreign-born workers has been rising at 500 a day, twice the rate of British-born workers.
These sums may sound too paltry to make a difference, especially in Britain where there is a personal allowance of £8,105 a year before income tax is paid. That’s the theory. But in practise, the economics of low pay in Britain is heartbreakingly complicated. Here are two examples, both from the Centre of Social Justice (on whose advisory board I sit). The first is what happens to a lone parent of two children if she tries to tiptoe back into the world of work.
If she finds less than 16 hours a week work, she may as well not bother: every penny she earns she’d lose in benefit. If she’d hit £400 a week she’s be paying, in effect, a tax rate of 78 per cent. Now and again, it’s said that British workers are not as keen as immigrants but would anyone go to work with smile if they were getting to keep only 22p in the pound? Under mini jobs, she’d keep all the money and the welfare. From there, she’s far more likely to get a full-time job and sign off welfare completely.
Or take the example of a 21-year-old guy, not in education, training or employment:
If he works 25 hours a week, he keeps just 16p in every extra pound that he earns. So why work? I feel fairly sure that, if I was in the place of either of these hypothetical people, I would choose welfare over work. As we know, unemployment is self-reinforcing and those on benefits for two years or more are unlikely to work again. The waste of taxpayers’ money is as nothing compared to the waste of human potential. The above charts show why I dislike talk about welfare ‘scroungers’ – we have paved a road towards welfare dependency, while the road to work is studded with booby traps. Should we be so surprised that what little growth we have tends to suck in more immigrant workers, rather than move people off benefits?
These mini jobs would be a powerful gesture of support, for people who are trying to move back to work. Hopefully Iain Duncan Smith’s new Universal Credit will abolish these welfare traps – but that will take years. Mini jobs would give help now. A consensus is growing around the need to cut taxes for the low-paid (advocated by David Blanchflower, perhaps the single most influential economist on the left). I can’t really see how the Lib Dems could object.