1) Executive Summary
This report was commissioned to examine how the government can help improve and influence incentives in the Irish Labour market. This research draws attention to the fact that in June 2018, unemployment in Ireland stood at 5.1% (statista.com). Although this figure has decreased from previous years, Ireland still has an unemployment rate greater than many other EU countries (statista.com). To reduce this unemployment rate, it is recommended that the Irish government:
• Alter the current tax structures to create a greater incentive to work.
• Alter the social welfare payment conditions.
• Create greater incentives to take up education to up-skill our workforce.
This report was put together to provide information based on evidence as to what governments can do to create incentives in the Irish Labour market. The idea of this report was to firstly understand why people become unemployed and remain unemployed but secondly, to provide recommendations as to how to increase the labour supply in Ireland. The report is constructed by firstly providing the rationale behind unemployment and why individuals decide to remain unemployed. Based on this rationale, the report provides recommendations and solutions to negate the motive to remain unemployed. The report will discuss how tax policies, unemployment insurance, incentives to educations can all influence the motivation to work and what the governments can do to create a greater incentive in the Irish labour market to work.
3) Reasons for Unemployment in Ireland
A major disincentive for employment is a high income tax rate. Ireland has one of the highest marginal tax rates in the world. The OECD highlights that in 2016, Ireland with a top rate of 52% is in the top 15 OECD countries to have a marginal rate above 50%. Generally, this rate is applied at earnings of around €70,000. Such countries include Sweden (€67,000), Denmark (€65,000) and the Netherlands (€68,000). (OECD Tax Database-OECD). However, In Ireland people begin to pay at a slightly lower rate of 49%, at a substantial lower level of earnings. This results in a greater proportion of people’s incomes being taxed at a higher rate in Ireland. For example, once PRSI and USC are included, people will pay this higher tax rate of 49% on anything above €33,801. (Ireland-OECD). As evidence that higher income tax rates lead to greater unemployment, a study was conducted by Newell and Symons (1990). This study found that external factors such as: a taxation system that makes increases in wages quite small after taxes are paid and an increase in unemployment payments relative to the average wage were big contributors leading to a disincentive to work. Based on this research, it is key that the Irish government should alter their taxation system by reducing the threshold at which income begins to be taxed at the higher band rate. Then the Irish government will likely see greater increases in the supply of labour particularly for those who are middle income earners.
4) Measures to Increase Labour Supply:
a) Examples of Changed Tax Policies
Evidence suggests that lower income taxes are one of the most powerful engines of job creation and rising prosperity. The Heritage Foundation conducted a recent study which looked at the rates jobs were created in high tax states such as New York and California, compared with low tax ones such as Texas and Florida. The difference was significant, by a large margin, the low tax states did much better. (Telegraph-Take a lesson from the US)
In the US, there are federal and state income taxes. Everyone is liable to pay federal taxes, but state taxes depend on the state in which you live in. Certain states don’t levy any additional income taxes at all, including Texas, Florida, Alaska, Nevada, New Hampshire, Tennessee, Washington and Wyoming. The remainder impose some additional income tax, up to about 13pc on top of the federal rate in California and New York City. So, throughout the country there are wide variations in the different rates of income tax you are liable to pay. (Telegraph-Take a lesson from the US)
Interestingly, chief economist ‘Stephen Moore’ of The Heritage Foundation study, compared the rate of job creation between low and high tax states. Most people observing this study might expect the highest rates to be in New York, home to Wall Street’s dominant financial industry, or in California, where the tech giants of Silicon Valley have been creating wealth on a huge scale. However, that wasn’t how it turned out. Much more new jobs were created in zero-tax states such as Texas and Florida than in either of their higher tax competitors. (Telegraph-Take a lesson from the US)
Between the years 2008 and 2013, California lost jobs overall, even though certain tech companies created large employment in San Francisco. Texas, by contrast, created 1m new jobs. For every new job in California, Texas created two. For every new job in New York, Texas created five. (Telegraph-Take a lesson from the US)
This hypothesis can be furthered backed up by going back further as the results become even more dramatic. During the period from 1990 to 2014, Texas had created 65pc more jobs and Florida 46pc more. During this period on the national scale, the US as a whole has seen employment levels rise by only 27pc, but California has only created 24pc more jobs and New York 9pc more. Overall, the nine states that don’t have their own income tax all performed better over that period than the nine highest tax states, which also include Hawaii and New Jersey. (Telegraph-Take a lesson from the US). This example provides evidence that lower income tax countries tend to experience a greater supply of labour and thus greater employment. Ireland, based on this example and the research above should apply this method to create a greater incentive to work in the Irish labour market.
b) Unemployment Insurance
If the Irish government wish to create incentives in the labour market, it is important that unemployment insurance is reduced. Unemployment insurance is a disincentive to work. It can be understood as an income replacement program. The replacement ratio is:
Net income from Unemployment
Net income from employment
In Ireland, replacement ratios tend to be high and high (RR’s) reduce the incentive to work. Evidence gathered by the Department of Public Expenditure showed