Tory NI Tax Pledge - Protecting at least 150,000 jobs.

Recently, we've heard that the Tories are not planning on putting through Labour's proposed NI tax increase if they win the election.

Somehow this has been portrayed by Labour as a "Tax Cut", although it's clearly not. Apparently, by "cutting taxes" the Tories have shown their true colours and are obviously trying to help their "Rich Friends in Business".

What they are actually trying to do is cut the cost of employing people.

National Insurance Tax isn't a nice fluffy way of sustaining the NHS, it's a direct tax on employment. And, like all things in life, if you make something more expensive (say, employing someone) the amount of that something that is bought drops.

Economists have a funky tool for measuring this effect, it's called Elasticity. Simply, this just reflects what the change in the number of units of something are sold if the price changes.

For an Elasticity of 1, a 5% increase in price leads to a 5% reduction in units sold.
For an Elasticity of 2, a 5% increase in price leads to a 10% reduction in units sold.

Take a tin of beans. Tesco are selling a 415g tin of beans for 64p. Assuming the Elasticity of Beans is 1.3, if they raise the price to 70p (a 9.4% increase) they will sell 12.2% fewer tins of beans than they did previously. Obviously, as volume is falling faster than the price is increasing, this will mean their revenues drop and their shareholders get very angry (Obviously, Tesco's shareholders are actually interested in profit, not revenue, which changes the picture somewhat. This is irrelevant when it comes to jobs though).

We can use this method to look at what happens when the wages a company has to pay for a given job change.

Obviously if wages increase, employment will decrease. Effectively, this Tax Increase says that employers have to pay more to each employee. This will lead to a reduction in employment, which even the Chancellor has admitted.

What is quite interesting is that he's completely failed to say how many people will be made unemployed by this Tax rise. However, we can use the calculation shown above to provide an estimate:

There are 28.86 million people employed in this country, according to the latest ONS figures.

If the Elasticity of Jobs is 1, then for each 1% rise we will lose 1% of the workforce. Darling says this is manageable. 1% of the workforce is 288,600 people. Over quarter of a million productive, tax paying workers will be fired. These people generate approximately £1,700 million in Income Tax, £700 million in National Insurance. Their companies pay just over £700 million to employ them. If they all sign up to Jobseekers Allowance, that's another £1,000 million each year to cover all these job losses. We're looking at a total of about £4 Billion pounds, just to pay for the fall-out of these Tax rises.

If the actual Elasticity is 0.5, we're looking at "only" 144,300 people unemployed and £2Bn of costs reflected in this. If the Elasticity is 2, it's double, with 577,200 people losing their jobs and £8Bn of costs.

The problem we have (and probably the reason Darling hasn't admitted to how many jobs will be lost) is that we don't actually know the Elasticity of Jobs. It's bloody hard to measure. It changes based on which country you're in (some are more likely to keep you around even if you cost more: Japan for example) or how much you earn (Those who earn the most turn out to be quite elastic).

Estimates vary from 0.5 to about 1.5 (looking at people who are highly paid).

What this means is that among the 288,600 people fired (assuming an Elasticity of 1) we'd actually expect a lot more of the high earners to lose their jobs (afterall, an additional £100 per year for someone earning £10,000 is a lot less than the £10,000 for someone earning £1m). This means the estimates above, which are driven by UK average wages, could even be too low.

But, in amongst all these figures, we're missing the important thing, the Human element. Even if we take the low-end estimate of an elasticity of 0.5, if Labour are re-elected they will then condemn nearly 150,000 people to lose their jobs. Do we think these will come from the Public Sector?

This means that the Tories have pledged to protect at least 150,000 productive, private sector jobs. Won't these be the exact people needed to drive the recovery?