Monday, 31 March 2014

A full employment target is no longer enough

The political economy of full employment has been my principal professional interest – some might say obsession – for the past 30 years. For much of that time the concept has remained dormant, having been placed in deep freeze in the late 1970s. But every now and then a politician decides to revive the idea, suitably reframed for a new audience, as the UK Chancellor of the Exchequer, George Osborne, did earlier today.  

Even though politicians on the left long ago abandoned the Keynesian-style policy mechanisms associated with full employment in its post war heyday, they have generally been more comfortable about promoting it as an objective. Conservatives, by contrast, have to skirt round the unhelpful fact that Mrs Thatcher disliked the idea (the former prime minister claimed to always carry a copy of the 1944 employment policy white paper in her handbag, but presumably only as a reminder never to back-slide on her neo-liberal principles). Tory Chancellors, such as Ken Clark in 1994 and now George Osborne, instead evoke Churchill as an advocate of full-employment, while at the same time applying the concept to an entirely different frame of economic reference.

Mr Osborne’s task is to suggest that his current, and presumably future, agenda of tax cuts and welfare reforms is needed to propel the UK to top spot in the G7 when it comes to the employment rate (i.e. the proportion of the population in work). To Mr Osborne’s credit this is a specific full employment target – most of his predecessors have aimed more loosely at ‘a high and stable’ level of employment. However, although this is a moving target – since employment rates in other G7 countries will be changing too - it isn’t particularly stretching, and on current Office for Budget Responsibility projections will probably be met within five years without any changes to policy.

And here’s the rub. A generation ago full-employment was hard to achieve in the UK because an inflexible labour market meant wage inflation proved to be a serious problem even when the unemployment rate was close to 10%. But after 30 years of supply side reform, Mr Osborne has the good fortune to have inherited an economy with a labour market so flexible it can churn out jobs without triggering inflation until unemployment is close to, or perhaps even below, 5%. In other words, the Chancellor knows that in looking forward to full employment he is on to a winner. All he need do is sit back and wait for the economic recovery to create jobs, raise the employment rate to 75% and cut unemployment from around 2.3 million to around 1.5 million.

In aiming for full employment as he defines it, Mr Osborne has therefore chosen too easy a target. Although cyclical unemployment remains far too high, the UK’s key policy challenge today is not how to increase the number or proportion of people in jobs but rather how to increase productivity in the jobs we are creating, and hence the living standards of those doing them. So while I remain a firm advocate of jobs for all, I am increasingly of the view that full employment is no longer enough. Our stretching target must now be ‘full employment plus’.      

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