Sean O'Grady: Popular? Yes, but that doesn't mean it's right

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At first glance, paying an employer to take on or retain staff seems a no-brainer. Lower the cost of something – labour – and you will increase the quantity demanded. Jobs done, so to speak. Notwithstanding the apparent reluctance of ministers such as the Business Secretary, Peter Mandelson, to countenance such a move, it would have three obvious advantages.

First, boosting consumer confidence is a short-term dividend. Nothing erodes that fragile commodity more surely than unemployment, and the fear of it. Think about that. How many people did you know or hear about who were losing their jobs a year ago? And how many now? And how has that affected your own attitude to a bigger mortgage or a new car, say? Precisely.

Second, a wage subsidy would save on the costs of unemployment. If the Prime Minister is serious about wanting to help "hard-working families" (or should that be "formerly hard-working families"?) get through this then that means a huge budget to house those who will lose their homes, as well as provide all the benefits that destitute families will need to survive.

Third, and let's not be squeamish, subsidies might help the Government keep unemployment below three million as it goes into the next election.

Precedents abound in Europe. The number of full-time employees on government wage subsidies to compensate for working shorter hours in Germany is 250,000, up from 16,000 a year ago. Wales has the ProAct scheme, which provides employers with a £2,000 wage subsidy for workers on short-term hours. The TUC says that, for around £1.2bn annually (plus training costs), up to 600,000 workers could get support. That is for only one-tenth of the cost of reducing VAT from 17.5 to 15 per cent.

And next month the Government will implement its own limited subsidy scheme: a £2,500 bonus to those who take on someone who has been jobless for more than six months. The Tories, TUC and Federation of Small Business make up an unlikely coalition pushing for more comprehensive wage subsidies, but ministers seem unwilling, digging their heels in – notwithstanding the trauma in the car industry and other sectors.

Perhaps that's because the long-term costs of wage subsidies are as obvious as short-term advantages. There's the "dead weight" argument – where the taxpayer ends up paying the wages of staff who'd be employed anyway. The TUC says this can be solved by involving the unions and submitting claims for a subsidy to an independent committee. But that could be bureaucratic and unreliable.

These wage subsidies to relatively inefficient enterprises will have to be paid for by taxes on employers – and employees – in more viable companies. Before free-market arguments went out of fashion it would be pointed out that the profits made in successful firms ought to be re-invested rather than diverted to sunset industries. But that is the transfer of resources we are talking about. Short-term, emergency measures have a strong case. Longer term, the policy ends up eating itself.

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