Taxes, Benefits and Legislation
Taxes and Benefits
As we have already learned, economic inactivity within the labour force is a cause of labour market failure. Governments can provide incentives to work to correct this market failure. It can change how it deals with taxes and benefits in order to achieve this goal.
Income Taxes
Lower marginal tax rates. This means workers get to keep more of their earnings. It will be an incentive to work and will increase labour supply.
Increase the Personal Allowance. The Personal Allowance is a tax-free portion of a person’s income. In the UK (2018), the first £11,500 somebody earns is completely tax free. The government can look to increase this so people on the lowest incomes have an incentive to work.
Benefits
Lower benefits. Reduces the replacement ratio. Increases incentives to work, increases the participation and labour supply. Reduce the effect of the unemployment trap.
There have been some changes to legislation.
1. Benefits cap – to a maximum limit on one certain people can earn from benefits. Prevents people from being better of not working than working.
2. Universal Credit (2013) – all benefits combined into one benefit. It’s paid to people looking for work and those on low incomes. Reduces number of people in poverty. Makes it easier for people to move into work.
Legislation
UK and EU implement legislation and regulation in labour markets e.g. to stop unsafe practices and to prevent employees from being exploited.
Legislation means to put specific laws in place e.g. flexible working hours – where people have the right to request flexible working hours if they wish.
Regulations are rules, which are often put in place so that UK or EU legislation is met.
Many businesses complain that current levels of regulation and legislation in the UK and EU is too high. This impacts the level of jobs available from firms. One example of this is the laws around maternity leave and paternity leave.
This is particularly a problem for small-medium sized businesses. There are incentives in place in order to reduce the burden of regulations for small and medium businesses.
The Working Time Directive
This is a directive that sets rules around working hours in the EU.
A limit to average weekly working hours of 48 hours per week.
Minimum amount of paid leave a year is 4 weeks.
Minimum daily rest period of 11 consecutive hours in every 24 hours.
Average working hours for night workers shouldn’t exceed 8 hours per 24-hour period.
Positives and Negatives of the Working Time Directive
+ Minimum amount of paid leave which is standard across all jobs
+ Ensure workers are not overworked
- Increases employment costs
The UK decided to opt out on the weekly working hours. This means that employees could formally agree to work for more than 48 hours per week. Employers can ask employees to work more, but they cannot force them to work more.
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