Tax Finance

Two broad policy routes encouraging the creation of low-productivity jobs, especially in the non-tradable sector, can be envisaged. The OECD seems to favour labour market deregulation and warns against the alternative route of tax concessions or employment subsidies. It is true that subsidies for low paid jobs would not be a viable policy against unemployment unless they had substantial effects. But the same applies to labour market deregulation, whose effectiveness is still much debated. In terms of efficiency, there may well be little to choose between the two strategies. The fundamental difference between allowing market forces to press down wages and conditions of employment in private services on the one hand and sub seizing employment there on the other is distributional. The question is whether private service workers as a whole should pay for increased employment by cuts in relative pay, or whether the costs should be borne generally out of higher taxation. There is no prima facie case in favour of deregulation with its adverse distributional effects and against subsidies without such effects. It may be that the taxpayers would not accept the direct burden of reducing unemployment and that, therefore, the costs would have to be borne by a section of society without the market power to refuse them.  This, however, would be a political judgement and could not be seriously justified on the grounds of the allocative inefficiencies of subsidies.