Hitting business with higher taxes will trigger a cut in jobs if they add to the cost of employing staff, a member of the Bank of England's rate-setting committee said yesterday.
Stephen Nickell, one of the nine members of the monetary policy committee and a highly regarded labour market expert, said differences in countries' tax burdens helped explain their employment rates. His comments come a few weeks after the implementation of an unpopular hike in National Insurance contributions - although he steered clear of specific examples.
Professor Nickell said a 10 per cent increase in the size of the tax wedge - pay roll tax plus income tax and consumption tax - reduced the demand for labour by about 2 per cent of the population of working age.
He told a conference in Venice that between the late 1960s and the late 1990s, the world's richest nations had on average increased taxes by 15 percentage points, which in theory would cut labour demand by 3 per cent.
For taxes to reduce work, they must raise labour costs per employee so that companies reduce their demand for staff, he said.
The 16 percentage point gap between the tax wedge in the US and the average of France, Germany and Italy explained about a quarter of the gap between the two areas' employment rates.
In the UK the total tax rate on labour has fallen from a peak of 51 per cent under the first two Thatcher governments to 44 per cent under Labour. This puts it slightly ahead of the US and the fourth lowest in Europe.Reuse content