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Abolishing employers’ National Insurance contributions for young people – a NICe election policy?

Authors: Ceri Hughes Ceri Hughes

05 December 2013

Today’s (5 November) Autumn Statement brought promises of a cut in National Insurance contributions (NICs) from April 2015 for young people (under the age of 21) who earn less than £813 per week. The HM Revenue National Insurance calculator suggests that contributions would be in the region of less than £4 per week for an 18 year old employee doing 35 hours and paid at the minimum wage. The rationale behind this policy change being that this cost significantly influences the likelihood of an employer taking on a young person. But similar schemes have consistently failed to live up to expectations.

Under the current Youth Contract, employers are already offered a wage incentive of up to £2,275 if they take on an 18-24 year old who has been out of work for at least 6 months. But the uptake so far has been poor, suggesting they are not pitched at the right level to have an impact on employer recruitment decisions: fewer than 5,000 payments were made in the first year against a target of helping 160,000 young people over three years.

This tallies with wider evidence on the impact of wage subsidies and previous initiatives which have introduced temporary ‘holidays’ from NICs with limited results. In 1995, it was hoped that a National Insurance holiday targeted at employers taking on someone that was long-term unemployed would have a substantial impact on long-term unemployment – potentially supporting 130,000 people per year. These large positive effects never materialised.

As such, abolishing NICs may just be a less targeted means of offering small incentives to employers to take on a young person. It is therefore likely to be associated with a lot of deadweight, with employers not having to pay contributions for an employee that they would have recruited anyway.

Even if the measure has the desired effect it is estimated that it will cost the exchequer in the region of £500 million per year. Could this money be better spent elsewhere? Our research has highlighted a number of policy changes that would be likely to have a much greater impact on levels of youth unemployment. These include ensuring that careers guidance for young people is properly resourced and of sufficient quality, and that young people leave school with meaningful experience of work.