UK: WANTED - A WORLD THAT WORKS. - Europe's unemployed number 18 million - 20 million in prospect by 1995. Worldwide, a jobless underclass swells. Creating work (and more consumers) is the greatest global challenge for the decade. Simon Caulkin asks if f

Last Updated: 31 Aug 2010

Europe's unemployed number 18 million - 20 million in prospect by 1995. Worldwide, a jobless underclass swells. Creating work (and more consumers) is the greatest global challenge for the decade. Simon Caulkin asks if full employment can be achieved.

Nineteen ninety-three was Full Employment Year. You could be forgiven for not noticing. Even now, with claimant unemployment at 2.85 million (10.2%), there is studied silence on the issue at the heart of government. In so far as ministers talk about employment at all, it is to commend British policies to other European governments as a cure for 'Eurosclerosis'. In other words, they believe they are right. Officials usually avoid quantifying employment targets or assumptions, but giving evidence to a House of Commons Committee in 1992, the Government's chief economic adviser, Professor Alan Budd, argued that the 'natural' rate of unemployment (ie, the amount necessary to keep inflation in check) was '7 or 8%'. There is no official quarrel with the figures of forecasters such as the Institute for Employment Research at Warwick University which predicts that there will still be 2.5 million people out of work in the year 2000.

This reticence contrasts oddly with concern in the rest of the world. Other governments are worried about the rising tide of unemployment even if the UK's is not. For the first time in living memory, the whole developed world has employment problems at the same time. There are 18 million Europeans out of work, with 20 million in prospect by 1995. The Organisation for Economic Co-operation and Development (OECD) as a whole has 36 million jobless, up by 50% since 1990 and equalled only by the previous high of 1983. Even countries which have prided themselves on their ability to create new jobs, such as the US, or to absorb the jobless by other means, such as the European Free Trade Association (EFTA) countries and Japan, are faltering. In Japan, which has shrugged off every other business cycle since the war, the strain on the lifetime-employment ethos is especially jolting.

Accordingly, international institutions such as the IMF and OECD are falling over themselves to give advice on ways of bringing the totals down. While the OECD proposes 'active labour market measures' and integrated social and economic policies to match jobs to vacancies, European Commission president Jacques Delors has put forward a White Paper calling for wage restraint, a reduction in companies' welfare obligations and tax incentives for training to cut Europe's jobless rate in half to 5%. US president Bill Clinton will host a 'jobs summit' next month.

There is a puzzle here. Is the seemingly inexorable rise in unemployment inevitable? In that case, the international rhetoric about 'doing something about it' must be just that - rhetoric. Or is the current British approach - deregulation in the expectation that wages will come down and price workers into jobs - the right one, even if it means a high 'natural' unemployment rate while labour-market mismatches are corrected? Conversely, does it mean anything at all to talk of full employment in absolute, numerical terms, as shadow chancellor Gordon Brown has done? If so, how is it to be achieved?

As recession deepens in much of the world, these questions take on particular urgency. Answers to them, although not wholly pessimistic, are highly conditional. But because whatever route is chosen bears heavy costs, it is worth beginning with an even more fundamental question: does full employment matter? After two decades without it (in the UK at least), why is the effort to pursue it worthwhile?

Start with the idea that employment is critical because it is the nexus of all social policy. Get employment right and the rest of social policy falls into place around it. Beveridge, in the 1940s, knew well that full employment was what made the architecture of the proposed Welfare State sustainable - without it the programmes are not fundable. Today's furore about benefits - whether for invalidity or single mothers or 'scroungers' - can all be traced back to unemployment and the pressure it exerts on public finances. Likewise, if employment were higher, the ability to pay for the National Health Service would be greater and the demands on it less.

Again, there is clear evidence from the US, whose labour market policies the UK has copied, that crime is economically related to employment issues. In effect, crime acts as a 'reservation wage' for unqualified jobless youths who know that they can earn three times as much on the streets as from the low-paid jobs available to them. If some or all of the 581,000 unemployed 18-24 year-old males were in work, there would be fewer burglaries and car thefts, insurance premiums would be lower, pressure on the police would be less intense and the Home Office would not be planning to build six new prisons at a cost of £300 million to house the offenders.

Less than full employment raises intractable problems of equity. As Michael White, director of employment studies at the Policy Studies Institute, points out in his magisterial survey, Against Unemployment, a universal share in employment is the 'keystone of equity', providing a sweeping answer to three key questions. Full employment eliminates decisions over who should be entitled to work or not; it means that income support levels can be modest since people will have only a short time between jobs; and the question of social stigma does not arise for the same reason.

Unemployment, on the other hand, complicates all these issues - and adds others. For instance, the Government (in 1991, Norman Lamont, then Chancellor) admitted that unemployment, like recession, is 'the price to be paid for reducing inflation'. But if people's jobs, like the exchange rate, are one of the variables to be manipulated in the operation of economic policy, equity demands that the casualties be compen-sated by more than the minimal income support needed for job-switching.

More generally, unemployment aggravates class and racial tensions and is an important factor in the rise of far-right political parties in the UK, France and Germany. A few - too few - industrialists recognise that they are in the front line of a battle against something more than industry competitors. Nicholas Hayek, chairman of SMH Swiss Corporation for Microelectronics and Watchmaking, the company that resurrected the Swiss watchmaking industry with the mass-produced Swatch, has no doubt what is at stake: 'We're not fighting for money or finance, we're fighting to keep people working,' he says. 'If people don't work, we shall have social revolutions, wars, many problems. We have to retain at least sustainable European production capacity to keep people busy.' Oh yes, and unemployment is expensive. The Treasury has admitted that each unemployed person costs the Exchequer a net £9,000 in benefits and lost taxes, making £27 billion a year at current jobless levels. At a very rough calculation, that puts the total cost of the last decade's employment shortfall at £200 billion in today's money. If the number of job-seekers had been reduced by just half over the same period it would have released enough money to build the high-speed rail link, modernise the London underground and make up British industry's investment gap with its competitors all at the same time. Finally, in case we should forget, surveys show that far from being a soft option, unemployment for most people is one of the worst things, if not the worst, that can ever happen to them. Unemployment remains, as Beveridge underlined in his 1942 report, a social evil and a personal tragedy.

All this suggests that full employment, if practicable, is as worth striving for as it was 50 years ago. Is it practicable? It depends whose theories you believe. Most people agree that the problem is not lack of work as such. 'Until everyone in the world has an adequate standard of living it doesn't make sense to speak of lack of work to be done,' says Professor Amin Rajan, director of the consultancy CREATE. 'There are plenty of unmet needs,' agrees Andrew Campbell, director of the Ashridge Strategic Management Centre. 'What we don't have is the people to match the need with the resources to fill it. We must find such people and treasure them to death.' For the past 14 years, official policy has been to match demand and supply of labour - no surprise here - through the drier means of free-market economics. The problem, it is argued, is structural supply-side rigidities which prevent wages adjusting downwards when demand for labour is slack and, through skills shortages, adjusts them upwards all too quickly when conditions tighten. During the 1980s the Government implemented a succession of measures to remove the rigidities which kept structural (or 'natural') unemployment high. Trade unions were reformed, tax rates reduced, the labour market deregulated and unemployment benefits cut, at least in relation to average wages. At the same time, the benefit regime was tightened considerably.

Unfortunately, these measures haven't worked - or, as one commentator has put it more accurately, they are a solution to the wrong problem. What actually happened? 'The big story of the 1980s, from which we have never recovered, is the shakeout of male workers, largely unskilled but also skilled as well,' says John Philpott, director of the Employment Policy Institute. The savage contraction of manufacturing in two recessions cost a total of 1.3 million full-time industrial jobs - largely male. Employment in manufacturing has now fallen by 3 million in the two decades since 1971. Primary and utilities lost a further 500,000. At the same time, services, mainly business services, and transport and distribution, put on nearly 3 million jobs. That makes a net gain for the decade of around 1 million jobs.

That's the good news. The bad news is that these jobs were mostly part-time and badly paid. They were taken not by the men shaken out of industry but by new entrants to the labour market - mainly women returning to work after having children. Sums up Philpott: 'The UK has done better at creating new jobs than the rest of Europe - but they have been taken by people not in the labour force.' The problem 'solved' by the supply-side measures of the 1980s has been that of the participation of women, who now make up a larger proportion of the overall labour force in the UK than in other European countries.

But even this success has been bought at high cost. First, it is not clear that women and minorities should be condemned to the low-paid, low-status job sector. Second, as differentials between well-paid, full-time jobs and badly-paid, part-time jobs widen, there is worrying evidence of the growth of an army of 'working poor', living on or below the poverty line. Third, as we have seen, low pay and limited prospects are a major incentive for unqualified youth to turn to more economically rewarding crime. In effect, in the 1980s the British working class finally drew the conclusions of the unilateral abrogation of the tacit historical bargain in which they accepted grossly inadequate education in return for unqualified factory jobs at the age of 16. Crime is the regrettable but logical outcome.

There is a further dimension to this problem. As Philpott points out, even if demand for full-time industrial employees increased, there remains the residual problem of a growing 'underclass': the unqualified young, possibly children of the long-term unemployed, who have never had a job. Without special measures these individuals will not be drawn into 'the system' since they do not share the aspirations and conditioning of employed society. To the underclass, it is work which is marginal, not life on the streets. The symptoms of the underclass problem are all too visible in the poorer areas of every large North American city, and in Moss Side and Brixton in the UK.

Nor, finally, has high male unemployment performed its allotted task of restraining inflation. The long-term unemployed are of no use in disciplining wages since no one wants to hire them anyway. Moreover, as Chris Haskins, chairman of Northern Foods, points out, chronic skills shortages mean that those workers fortunate enough to be properly trained can bid up wages even when unemployment rolls are high. It is not just that the extra wages do not go into hiring the jobless: over the last decade the price of the employers' habit of buying off the well paid has been the sacking of the less fortunate. To the dismay of politicians and the astonishment of economists, this continues to happen. 'In the last three years employers have been in an extraordinarily strong situation,' notes Philpott. 'Unemployment stands at 3 million and there is no opposition from the trade unions. But pay is still forging ahead - and there is every sign that it will do so even more when the slack goes out of the market.' Although the reasons are complex, the result of this interplay of factors is simple enough. Instead of coming down, the rate of unemployment necessary to keep inflation under control - the non-accelerating inflation rate of unemployment (NAIRU) - seems to be moving ever upward, a phenomenon known as 'hysteresis'. The one glimmer of light is that unemployment in this recession didn't quite equal the figures of 10 years ago. Qualitatively, however, the situation now is as bad as it has ever been, and in some respects worse.

One-third of the unemployed have been out of work for more than a year. Nearly 20% of the 16-19 age group is jobless, as are 16% of 20-24 year-olds. Many young people have never had a job. For ethnic minorities the position is still worse. There will be some improvement as the economy picks up - but how much? Even at the high point of the Lawson boom in the 1980s, unemployment never fell below 1.6 million, compared with just under 1 million in the previous cycle. As we have seen, the Government itself does not expect unemployment to fall anywhere near 1.6 million for the rest of this decade.

What then is to be done? The issue, at bottom, is the central problem of British economic policy in the half-century since the war: how to get demand, output and employment growing sustainably without generating inflation (which kills jobs at home) or huge influxes of imports (which exports jobs abroad). At CREATE, Rajan, like many other economists, argues that labour flexibility is necessary but not sufficient. Assuming, pace the Government, that unchanged present policies are not an option, there are a number of avenues to explore; and there are synergies between them. The two most obvious, at least in theory, are active labour-market policy and stable, predictable macroeconomic measures to produce a business climate favourable to long-term decision-making.

Macroeconomic policy ideally needs to reassert full employment as an end, not a means - which may be too much for the present government to swallow. But at the very least, it can agree that policy must avoid the violent swings that caused such huge casualties in the 1980s, and the recent discovery that manufacturing matters could be a baseline for structural measures that attempt to tackle areas of weakness in the economy.

Active labour-market policy signifies programmes designed to counteract the vicious-circle effect of unemployment (the longer people are unemployed the less likely they are to get new jobs), particularly long-term unemployment, by retraining and re-skilling. The model is Sweden, which guarantees a meaningful job or training place after a year. For an active labour-market policy to work, it needs to be supported by a benefits system which positively encourages people to reintegrate into working life. By contrast, as the PSI's Michael White notes, 'What we have in Britain is a system which gives support, at a low level, for an indefinite period, and hinders any escape except through a full-time permanent job.' There is, however, a battery of other issues that impact on full employment. Wage flexibility is one example. One way of helping to reduce unemployment would be for those in work to show solidarity with the jobless by moderating pay claims, while employers resisted the temptation to buy off the claims of their better-off workers by sacking the less well off; in balder terms, an incomes policy. Since neither side shows any sign of accepting such restraint, however, and the institutions of central bargaining are in any case so weak (partly, ironically, as a result of the Government's determined assaults on corporatism in the 1980s) the aim must be to achieve the same end by making the market operate more flexibly in other respects: for example, by encouraging and improving the status of part-time work and boosting self-employment. This is not to subscribe to a low-wage, low-skills employment policy - as Haskins of Northern Foods points out, 'Future prosperity depends on our ability to compete with the high-skilled economies of mainland Europe, not the low-wage economy of mainland China' - but rather to ensure that we do not pay ourselves more than the unemployed can afford.

One of the most important factors in the UK's poor employment showing (and in its poor economic record in general) is the lack of skills of the workforce. Two-thirds of the UK workforce have no professional or vocational qualification, compared with only one quarter in Germany. So a comprehensive youth training programme, funded by all employers to prevent 'free riding' (unscrupulous non-training companies simply poaching skills from the more responsible), is a necessity to train workers into the jobs that industry still needs.

But training can make only limited headway if it is not based on sound fundamental schooling. The Labour Party's Gordon Brown has spoken of building 'the most highly skilled workforce, and the best educated population in Europe' as the only way of creating competitive advantage. This can only be a long-term programme. Expensive - but the cost of not doing it is even higher, and increasing year by year.

Countries which have maintained high levels of employment - Sweden and Japan are examples - tend to have two-tier economies. One part is exposed to the international economy and adjusts accordingly; the other, protected, in effect acts as a job sanctuary. In Japan it is the farming and distribution sectors, both grossly overmanned in international terms. In Sweden it is the public sector. In the past, the UK public sector has to some extent acted as a sponge for employment in recession. Now, however, the Government is enthusiastically de-protecting the public sector and slashing its payrolls - up to 500,000 jobs will be lost over the next year dwarfing the impact of measures introduced to help the unemployed. At a time of high unemployment when the choice is not subsidy or no subsidy, but which subsidy you prefer, this makes no sense. Some overt job creation is needed, perhaps along the lines of the lapsed Community Programme. There is another job-creation alternative, of course: to expand and encourage the existing unofficial second tier of economic activity in the black economy. This would cost nothing directly. But given the long-term side-effects of complete unregulation now visible in Italy, it may appear to be the less attractive option.

Last, but most important of all, the major responsibility for maintaining employment in the long term lies with companies. Rajan points out that broadly speaking, the 1980s' 'productivity miracle' was achieved by producing the same or even declining output with many fewer workers. The real miracle, he suggests, would be to produce rapidly growing output with more workers. This requires growing market share, which in turn requires much more emphasis on innovation, design, marketing and quality. An industrial policy would help, as president of the board of trade Michael Heseltine knows as well as anyone; so would much better education; so, as the OECD has pointed out, would a greater understanding and encouragement of the mechanisms of entrepreneurship and enterprise creation.

But above all it requires recognition of the fact that in the age of the Walkman and personal software, classical economic assumptions about supply and demand are stood on their head. In the 'revised sequence', supply creates demand, not vice versa - whole industries based on the personal stereo and software exist to prove it. In the revised sequence, as Rajan notes, the quality of labour conditions markets and products. Without it, innovative, industry-creating products aren't possible. Sony and Microsoft are tangible manifestations of the link between labour quality and employment. Rover in the UK, which now spends £35 million a year on training and education, and which has committed itself to lifelong employment for those who consent to learn and change, is another. As Rajan sums up: 'Full employment in this day and age depends on outstanding competitiveness.' Bearing all these possible approaches in mind, we can now return to the original question. Is full employment possible? Probably, yes - given the political will, heavy investment, a willingness to experiment and the inscription of job-creation and protection, with incentives to match, in the objectives of every manager in the land. As to whether it's realistic - that's a different matter. Judge for yourself.

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