Cost of hiring graduates shot up after Reeves’ tax raids
The cost of hiring graduates and other young Brits in entry-level roles increased by seven per cent in real terms after Chancellor Rachel Reeves hiked employers’ national insurance and raised the national living wage, economists have found.
A new set of forecasts and analysis by the National Institute of Economic and Social Research (Niesr) has called the Labour government’s growth plans into question, posing questions on the state of public finances, graduate hiring and immigration plans.
Fresh analysis has shown that the lowering of the salary threshold for employers’ national insurance contributions (NICs), combined with a rise in the tax rate to 15 per cent, in Reeves’ first Budget raised the cost of hiring entry-level workers by seven per cent between 2024 and 2025.
The tax hike added some £25bn to government revenue each year.
Economists warned that the rise in NICs, combined with a rise in the national living wage, was “dampening labour market dynamism”.
Researchers said: “Firms have become more cautious about expanding payrolls and more reluctant to take risks on new job matches, contributing to a decline in job-to-job transitions and slower reallocation across the sectors, which risks weighing on productivity growth.”
Niesr director Stephen Millard said younger workers had been particularly affected, adding: “We do feel the labour market is particularly difficult for entry level workers.”
Graduates hit in labour market woes
Official statistics on jobs and hiring trends have been bleak across the last 18 months, with the unemployment rate rising from four per cent to 5.1 per cent over the period and the number of vacancies rapidly dropping.
Niesr economists said workers in retail, IT and catering had been most affected by higher labour costs.
They also warned that AI could place an “upward pressure” on the rate of unemployment over a longer period of time, though current evidence suggested it had not driven workforce reductions.
Forecasters at the think tank suggested unemployment would peak at 5.4 per cent this year and then fall slowly next year.
The latest analysis did not include a full consideration of the effects of the Employment Rights Act on the labour market, though economists warned that it could intensify the “burden” on employers.
Growth forecasts downgraded
Niesr forecast growth of 1.4 per cent this year, which was far higher than the level projected by analysts at EY, saying activity would be boosted by higher government expenditure across the year.
This was a slight downgrade on a previous forecast. Niesr also said growth would slow to 1.3 per cent in 2027 and 1.1 per cent in 2028.
In an early warning for public finances, Niesr said estimates pointing to the possibility of a sharp decline in net migration to as close as zero, as Warwick University academic James Bowes has suggested, could put strains on the public purse.
Should immigrants arrive in the country at the same rate as those leaving, leading to no change in population growth, analysis suggests the UK economy would be 3.6 per cent smaller by 2040 while the budget deficit could widen by around 0.8 per cent of GDP.
In today’s prices, it would leave the gap between tax intake and public expenditure around £37bn bigger. The budget deficit in the current financial year is projected to be £138bn as a result of Reeves’ move to loosen fiscal policy and spend more on areas such as health, education and defence.
Economists at the think tank warned that the government’s aversion to reducing the public debt in the near term left public finances in a “precarious” position given the vulnerability to future shocks.