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.


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Labour must reclaim English patriotism if we are to beat Ukip and the Tories

We can't talk about the future of our country unless we can discuss the past. 

I was a parliamentary candidate for Thurrock, but the place which I currently call home is Hackney, London. This distinction is worth explaining. The questions of Labour and Englishness – what exactly is the English problem that we’re trying to solve, why do we need a progressive patriotism, does it already exist, if not why not and if we had one what would it look like? – are, above all, questions of identity and place. We need to build a patriotism that includes and resonates with residents of both Hackney and Thurrock. Currently they are very far apart. 

I’m the little girl who sat on her dad’s shoulders to wave a flag at Princess Anne’s first wedding. And I was also, like Sadiq Khan, waving a flag at the Silver Jubilee in 1977. I’m an ex-Catholic, I’m a Londoner, I’m English and I’m a woman, and all of those identities are important although not necessarily equally so and not necessarily all of the time.

But I’m also a member of the Labour party, not only as a candidate, but now as an activist in Hackney. And that is where I see the difference very strongly between Hackney and what I experienced in Thurrock. 

Thurrock was Ukip ground zero last year - 12,000 people voted for Ukip in a general election for the first time, on top of the 3,500 that had voted for them before in 2010. Most of those 12,000 people had either not voted before, or had voted Labour. 

This isn’t just about being in two different places. Sometimes it feels like more than being in two different countries, or even like being on two different planets. The reality is that large swathes of Labour’s members and supporters don’t identify as patriotic, fundamentally because patriotism has been seized and colonised by the right. We need to understand that, by allowing them to seize it, we are losing an opportunity to be able to reclaim our past. 

We do not have any legitimacy to talk about the future of our country unless we can talk about our past in a better way. We have tried but our efforts have been half-hearted. Take Ed Miliband's call for One Nation Labour, which ended up amounting to a washed-out Union Jack as a visual for our brand. It could have been so much better – an opportunity for an intellectual rebranding and a seizure of Conservative territory for our own ends. Ultimately One Nation Labour was a slogan and not a project. 

There is a section of the left which has a distinct discomfort with the idea of pride in country. It has swallowed the right-wing myth that England’s successes have all been Conservative ones. This is a lie, but one that has spread very effectively. The left’s willingness to swallow it means that we are still living in a Thatcherite paradigm. It is no wonder progressives revolt at the idea of patriotism, when the right’s ideas of duty and authority quash our ideas of ambitions for equality, opportunity for all and challenging injustice. But we risk denying our successes by allowing the right to define Englishness. It’s England that helped establish the principle of the right to vote, the rule of law, equal suffrage, and the fight against racism. 

If Englishness is going to mean anything in modern England, it needs to be as important for those who feel that perhaps they aren’t English as it is for those who feel that they definitely are. And a place must be reserved for those who, though technically English, don’t see their own story within the Conservative myth of Englishness. 

Although this reclaiming is electorally essential, it is not an electoral gimmick. It is fundamental to who we are. Even if we didn’t need it to win, I would be arguing for it.

We need to make sure that progressive patriotism reclaims the visual language that the Conservatives use to dress up their regressive patriotism. Women need to be as much in the pantheon of the radicals as part of the visual identity of Englishness. Women tend to either be there by birth or by marriage, or we are abstract manifestations of ideals like "justice" or "truth" – as seen on city halls and civic buildings across the country. But English women need to be real, rather than just ideal. Englishness does need to be focused on place and connection, and it should include Mary Wollstonecraft and Sylvia Pankhurst as well as Wat Tyler and Thomas Paine. 

We can’t pretend that we’re always right. The most patriotic thing you can do is to admit sometimes that you’re wrong, so that your country can be better. I love my country, for all its faults. But I do not live with them. I try to make my country better. That is progressive patriotism. And I know all of us who want to be part of this can be part of it. 

This article is based on Polly’s contribution to Who Speaks to England? Labour’s English challenge, a new book published today by the Fabian Society and the Centre for English Identity and Politics at the University of Winchester.