At their recent meeting, G20 Labour and Employment Ministers emphasized that policies to enhance employment are key to the recovery from the financial and economic crisis. OECD’s new Tax Policy Study No. 21: Taxation and Employment suggests that well-targeted tax reforms can encourage employers to hire more people and the jobless to look for employment.

Taxing employers, through social security contributions or payroll taxes, discourages them from hiring. And taxing employees’ wages lowers their take-home pay and discourages work. Making across-the-board reductions to these tax burdens will be difficult for governments already battling to reduce their deficits. Instead, the report recommends targeted reforms to generate the greatest employment gains at the most efficient cost.

In addition to getting more people into work, these reforms will reduce dependency on benefit payments and pension incomes. In light of rapidly ageing populations, this is critical to ensuring the sustainability of social security systems around the world.

The Study suggests that governments should consider tax cuts for employers who hire low-skilled workers - particularly youth and the long-term unemployed. “By lowering the cost of hiring these workers, tax cuts can reduce unemployment amongst the groups hardest hit by the crisis”, said Jeffrey Owens, Director of OECD’s Centre for Tax Policy and Administration.

To give all people an incentive to work, the report proposes a number of reforms targeted at three groups that tend to be under-represented in labour markets across the world: low-income workers; second earners (generally women); older workers. Analysis suggests tax reform would improve incentives and encourage them to work.