People are trapped outside our labour market, and it's hurting our economy

The IEA's Philip Booth examines how the economy is shrinking even with a strong labour market.

Employment minister Chris Grayling might be going on holiday pretty chuffed with himself after the latest employment figures. On the other hand, a lot of other ministers have much to think about as they prepare to sun themselves.

How do we reconcile booming private sector employment with a flat economy? The obvious answer is that productivity is falling. The fact that real wages are falling suggests that this may be true. But why? There are several possible explanations, none of which are mutually exclusive.

  1. Policy uncertainty in the eurozone – and to some extent in the UK – is leading companies to sit on piles of cash instead of investing.
  2. Fewer companies at the margins of profitability are going bust because interest rates are very low and because of forbearance.
  3. The government is spending ten percentage points more of national income than ten years ago. All the evidence suggests that this will lower the growth rate by about one percentage point.
  4. A recent article in the Bank of England Quarterly Bulletin suggested that it was the energy and financial sectors that have particularly sluggish productivity. One reason is declining output in the North Sea. The other reasons are entirely policy induced. It would be difficult to imagine how the government could design a "green" policy that involved reducing carbon emissions at greater cost than the current policy. If I were a "green" economist, I would be livid. The government has designed policy that leads either to less CO2 reduction for a given cost or a higher cost of a given CO2 reduction. All those solar panels really do have very little – or negative – value. In financial services, the government has chosen to impose higher capital and liquidity requirements on banks to try to reduce the risk of financial crises. This lowers the productivity of the financial sector – there will be fewer loans to businesses and individuals for a given capital base. This is a policy choice and the government could choose differently. Its policy is not irrational, but it should understand the consequences.
  5. Our appalling tax and welfare system puts in place huge marginal rates of tax and benefit withdrawal, especially for full-time workers with families. Why train, or search for another job with higher pay if an adequate one can be found quickly? Government policy has made search, promotion, training etc a waste of time.
  6. The same system has probably encouraged people to take pay cuts and thus encouraged labour hoarding in the recession. If somebody gets a £1 pay cut, most of this will be returned to the person taking the pay cut through increased benefits and reduced taxes.

Policies 4 and 6 have certain benefits in a recession. In a sense, the government is providing a generalised job subsidy to families with children. This keeps people in touch with the labour market. However, the long-term consequences could be dire.

The other thing that is deeply worrying is the level of long-term unemployment. Many people are losing touch with the labour market and staying unemployed for long periods. Our labour market is looking more like the French labour market with people trapped outside it. Nearly 500,000 people have been unemployed for over two years.

This is a tragedy and government policy may be responsible. Imagine somebody on the minimum wage of about £6 per hour whose productivity just about justifies this wage. They lose their job. Naturally, they are a little less productive in their second choice occupation. They therefore cannot get a job. Their skills then decline further – they are now even further from getting a job. They may be willing to work for a low wage (and the benefits system encourages them to do so), but it is illegal. The government then comes along and tightens maternity and paternity rights; regulates agency workers; imposes the costs of pensions auto-enrolment; increases employees’ national insurance; the list is almost endless. This all makes the worker’s productivity after costs ever-lower than the lowest wage at which it would be legal to employ the person.

I do not have figures for the UK, but in the US only a small proportion of people earning the minimum wage live in families in poverty (most are spouses working part-time, young people in families, and so on). A low wage job is a step on the ladder – nearly two-thirds of minimum wage employees move above that level within a year.

The government is determinedly removing the ladder of employment for many people with predictable results in terms of long-term unemployment.

Employment is buoyant, but poor policy choices are at least partly responsible for a labour market that, on the one hand, has many people trapped outside and, on the other, contains a large number of people who may answer the question "am I better off than five years ago?" with a strong "no" when it comes to the next election.

A French protest against unemployment. Coming to the UK soon? Photograph: Getty Images

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

 

Photo: Getty
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Tory right-wingers are furious about Big Ben – but it’s their time that’s running out

They could take both Corbyn and the present moment seriously. Instead, they are arguing about a clock.

Jeremy Corbyn, it is often said, wants to take Britain back to the 1970s.

The insult is halfway to an insight. It’s true that the Labour leader and his inner circle regard British economic policy since the late 1970s as an extended disaster that led to the election of Donald Trump and the vote to leave the European Union: a “failed experiment”, as Andrew Fisher, Corbyn’s influential policy chief, puts it in his 2014 book of the same name.

The Labour leader views the 1970s not as a blighted decade waiting for a saviour, but as a time when trade unions still had teeth, privatisation was not treated as a panacea and inequality was lower.

Theresa May doesn’t see the past four decades in quite the same light, but she does believe that the Brexit vote was, in part, the destabilising consequence of an economic settlement that has left too many people in Britain without a stake in society. This means, for now at least, an ideology that was until recently a consensus has no defenders at the top of either party.

May’s successor might conceivably be an unrepentant cheerleader for free markets and the Anglo-Saxon model of capitalism, but as things stand, whoever replaces May faces an uphill battle to be anything other than a brief pause before Corbyn takes over. Because of the sputtering British economy and the prospect of a severe downturn after Brexit – coupled with the Labour leader’s rising personal ratings – it is the opposition that has momentum on its side, in both senses of the word.

All of which might, you would expect, trigger panic among members of the Conservative right. Neoliberalism is their experiment, after all, the great legacy of their beloved Margaret Thatcher. Yet while there are a few ministers and backbenchers, particularly from the 2010 intake, who grasp the scale of the threat that Corbynism poses to their favoured form of capitalism, they are outnumbered by the unaware.

For the most part, the average Tory believes, in essence, that the 2017 election was a blip and that the same approach with a more persuasive centre-forward will restore the Conservative majority and put Corbyn back in his box next time round. There are some MPs who are angry that Nick Timothy, May’s former aide, has waltzed straight from the 2017 disaster to a column in the Daily Telegraph. That the column is titled “Ideas to Win” only adds to the rage. But most generally agree with his diagnosis that the party will do better at the next election than at the last, almost by default.

And it’s not that the Conservative right isn’t panicked by anything, as a result of some state of advanced Zen calm: many are exercised by the silence of Big Ben during its scheduled four years of repairs.

Yet you don’t even have to go as far back as 1970 for a period of silence from Elizabeth Tower. The bongs stopped ringing for planned maintenance in 2007 and for two years from 1983 to 1985, and the Great Clock stopped unexpectedly in 1976. What distinguishes this period of renovation from its predecessors is not its length but the hysteria it has generated, among both the right-wing press and the Conservative right. The Brexit Secretary, David Davis, described letting the bells go quiet as “mad”, while James Gray, a Conservative backbencher, went further, dubbing the repairs “bonkers”.

The reason why the bongs must be stilled is that they risk deafening and endangering the workers repairing the bell. Working around them would further extend the maintenance period, potentially silencing the clock for ever. The real divide isn’t between people who are happy for the bell to fall silent and those who want to keep it ringing, but between politicians who want to repair and preserve the bell and those who risk its future by squabbling over a four-year silence. There may well be “mad” behaviour on display, but it certainly isn’t coming from the repairmen.

The row is a microcosm of the wider battle over parliament’s renovation. The estate badly needs urgent repairs to make it fire-safe and vermin-free – in the past year, the authorities have had to spend in excess of £100,000 on pest control, with bed bugs the latest pest to make a home at Westminster. If it isn’t made safe, it could burn down.

The cheapest and most secure option for MPs is to decamp down the road to the Queen Elizabeth II Conference Centre, just a few minutes’ walk from parliament. But the current delay, facilitated by Theresa May, increases the cost of repairs. The Prime Minister has also weighed in on the row over Big Ben, telling reporters that it “cannot be right” for the bell to go quiet. Westminster’s traditionalists, largely drawn from the Conservative right, talk up the importance of preserving the institution but their foot-dragging endangers the institution they want to protect. As for May, her interventions in both cases speak to one of her biggest flaws: while she is not an idiot, she is altogether too willing to say idiotic things in order to pander to her party’s rightmost flank. That same deference to the Tory right caused her to shred or water down her attempts to rejig the British economic model, ceding that ground to Corbyn.

A Labour victory at the next election isn’t written in stone. The winds blowing in the opposition’s favour are all very much in the control of the government. The Conservatives could embark on a programme of extensive housebuilding, or step in to get wages growing again or to turn around Britain’s low productivity. Philip Hammond could use his next Budget to ease the cuts to public spending. They could, in short, either declare that the experiment hasn’t failed and vigorously defend it, or write off their old project and create another one. They could take both Corbyn and the present moment seriously. Instead, they are arguing about a clock, oblivious to the reality that their time is running out. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

This article first appeared in the 24 August 2017 issue of the New Statesman, Sunni vs Shia