Topic Videos

National Insurance and Unemployment - Chains of Reasoning

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 29 Jan 2022

In this video we explore two analytical chains of reasoning on how the rise in national insurance (tax) might affect unemployment.

National Insurance and Unemployment - Chains of Reasoning

Analyse how a rise in national insurance might affect unemployment in the UK economy

Chain of reasoning (1)

  • National insurance is a direct tax on earned income. The UK government has announced a 1.25% increase from April 2022 to help fund health and social care.
  • As a result, higher national insurance contributions will lead to a fall in the real disposable income of millions of households.
  • So, if disposable income drops, people have less spending power and therefore consumption will decline
  • Since consumer demand is the biggest % of AD, this tax rise might lead to a contraction of real GDP
  • Consequently, businesses will reduce output and may decide to control costs by reducing their payroll
  • This can then cause an increase in cyclical (or demand-deficient) unemployment

Chain of reasoning (2)

  • National insurance is also paid by employers including thousands of small businesses
  • So, a rise in national insurance will increase the average cost of employing all workers and lift the marginal cost of taking on new workers
  • This will lead to an increase in business operating costs and a probable fall in operating profits
  • Some businesses will raise prices, others might delay planned pay rises for staff, and some will cut employee hours or find other ways to control their costs
  • But if businesses decide to scale back employment because of the tax rise. Then this will lead to a fall in employment and cause a rise in the unemployment rate

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