Abstract
This project is tasked with reviewing four core parameters used by the Department for Transport, in its Transport Analysis Guidance (TAG) A2.3, to appraise the Employment Effects of proposed transport infrastructure investments.
The first of these parameters, the labour supply elasticity with respect to wage changes (ππΏπ), is currently calibrated at 10%. This elasticity is ratio of the proportionate change in labour supply to the proportionate change in wage that caused it. An elementary averaging of the most recent research for the UK suggests it should be approximately 22%, and within a 14% to 43% range.
Considering the age of existing research and the impacts of the Covid-19 pandemic, an empirical study is recommended to estimate both extensive and intensive labour supply elasticities using population-representative, microeconomic UK data.
The other three parameters under review are the average tax wedges on the earnings of: new workers (π1=30%), new workers including savings by not paying unemployment benefits (π2=40%), and existing workers moving to more or less productive jobs (M2MLPJ, π3=30%).
The 30% tax wedges for new and existing workers (π1, π3) serve as effective working values. However, they should be reviewed once UK price inflation returns to the Bank of England's 2% target, at which point the alignment of income tax and National Insurance thresholds with real earnings is expected to have stabilised.
The 40% tax wedge (π2) appears reasonable, but it would benefit from a study to confirm whether the non-payment of out-of-work benefits to newly employed workers results in approximately a 10% saving for the Exchequer.
This review begins with a commentary on the TAG A2.3 documentation, elements of which the Department for Transport could use in documentation updates. This is followed by the main body of the review. It concludes with a simple calibration exercise to gauge the implications of modifying the four parameters under review.
The first of these parameters, the labour supply elasticity with respect to wage changes (ππΏπ), is currently calibrated at 10%. This elasticity is ratio of the proportionate change in labour supply to the proportionate change in wage that caused it. An elementary averaging of the most recent research for the UK suggests it should be approximately 22%, and within a 14% to 43% range.
Considering the age of existing research and the impacts of the Covid-19 pandemic, an empirical study is recommended to estimate both extensive and intensive labour supply elasticities using population-representative, microeconomic UK data.
The other three parameters under review are the average tax wedges on the earnings of: new workers (π1=30%), new workers including savings by not paying unemployment benefits (π2=40%), and existing workers moving to more or less productive jobs (M2MLPJ, π3=30%).
The 30% tax wedges for new and existing workers (π1, π3) serve as effective working values. However, they should be reviewed once UK price inflation returns to the Bank of England's 2% target, at which point the alignment of income tax and National Insurance thresholds with real earnings is expected to have stabilised.
The 40% tax wedge (π2) appears reasonable, but it would benefit from a study to confirm whether the non-payment of out-of-work benefits to newly employed workers results in approximately a 10% saving for the Exchequer.
This review begins with a commentary on the TAG A2.3 documentation, elements of which the Department for Transport could use in documentation updates. This is followed by the main body of the review. It concludes with a simple calibration exercise to gauge the implications of modifying the four parameters under review.
| Original language | English |
|---|---|
| Publisher | Department for Transport |
| Number of pages | 70 |
| Publication status | Published - 31 Oct 2024 |
Publication series
| Name | Transport appraisal and strategic modelling (TASM) research reports |
|---|---|
| Publisher | Department for Transport |
Access to Document
- A review of TAG A2.3 employment parameters: labour supply elasticity and labour tax wedges
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