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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If the SNP truly want another referendum, the clock is ticking

At party conference in Glasgow, I heard Scotland’s governing party demand a future distinctly different from the one being sketched out in Westminster. 

Nicola Sturgeon described Glasgow as the “dear green city” in her opening address to the SNP party conference, which may surprise anyone raised on a diet of Ken Loach films. In fact, if you’re a fan of faded grandeur and nostalgic parks, there are few places to beat it. My morning walk to conference took me past chipped sandstone tenements, over a bridge across the mysterious, twisting River Kelvin, and through a long avenue of autumnal trees in Kelvingrove Park. In the evenings, the skyline bristled with Victorian Gothic university buildings and church spires, and the hipster bars turned on their lights.

In between these two walks, I heard Scotland’s governing party demand a future distinctly different from the one being sketched out in Westminster. Glasgow’s claim to being the UK’s second city expired long ago but I wonder if, post-Brexit, there might be a case for reviving it.



Scottish politics may never have looked more interesting, but at least one Glasgow taxi driver is already over it. All he hears in the back of his cab is “politics, fitba and religion”, he complained when he picked me up from the station. The message didn’t seem to have reached SNP delegates at the conference centre on the Clyde, who cheered any mention of another referendum.

The First Minister, though, seems to have sensed the nation’s weariness. Support for independence has fallen from 47 per cent in June (Survation) to 39 per cent in October (BMG Research). Sturgeon made headlines with the announcement of a draft referendum bill, but read her speeches carefully and nothing is off the table. SNP politicians made the same demands again and again – devolved control of immigration and access to the single market. None ruled out these happening while remaining in the UK.

If Sturgeon does want a soft Brexit deal, though, she must secure it fast. Most experts agree that it would be far easier for an independent Scotland to inherit Britain’s EU membership than for it to reapply. Once Article 50 is triggered, the SNP will be in a race against the clock.


The hare and the tortoise

If anyone is still in doubt about the SNP’s position, look who won the deputy leadership race. Angus Robertson, the gradualist leader of the party in the Commons, saw off a referendum-minded challenger, Tommy Sheppard, with 52.5 per cent of the vote.

Conference would be nothing without an independence rally, and on the final day supporters gathered for one outside. A stall sold “Indyref 2” T-shirts but the grass-roots members I spoke to were patient, at least for now. William Prowse, resplendent in a kilt and a waistcoat covered in pro-indy
badges, remains supportive of Sturgeon. “The reason she has not called an Indy 2 vote
is we need to have the right numbers,” he told me. “She’s playing the right game.”

Jordi McArthur, a member for 30 years, stood nearby waving a flagpole with the Scottish, Welsh and Catalan flags side by side. “We’re happy to wait until we know what is happening with Brexit,” he said. “But at the same time, we want a referendum. It won’t be Nicola’s choice. It will be the grass roots’ choice.”


No Gerrymandering

Party leaders may come and go, but SNP members can rely on one thing at conference – the stage invasions of the pensioner Gerry Fisher. A legendary dissenter, Fisher refused this year to play along with the party’s embrace of the EU. Clutching the
lectern stubbornly, he told members: “Don’t tell me that you can be independent and a member of the EU. It’s factually rubbish.” In the press room, where conference proceedings were shown unrelentingly on a big screen, hacks stopped what they were doing to cheer him on.


Back to black

No SNP conference would be complete without a glimpse of Mhairi Black, the straight-talking slayer of Douglas Alexander and Westminster’s Baby of the House. She is a celebrity among my millennial friends – a video of her maiden Commons speech has been watched more than 700,000 times – and her relative silence in recent months is making them anxious.

I was determined to track her down, so I set my alarm for an unearthly hour and joined a queue of middle-aged women at an early-morning fringe event. The SNP has taken up the cause of the Waspi (Women Against State Pension Inequality) campaign, run by a group of women born in the 1950s whose retirement age has been delayed and are demanding compensation. Black, who is 22, has become their most ­articulate spokeswoman.

The event started but her chair remained unfilled. When she did arrive, halfway through the session, it was straight from the airport. She gave a rip-roaring speech that momentarily convinced even Waspi sceptics like me, and then dashed off to her next appointment.


Family stories

Woven through the SNP conference was an argument about the benefits of immigration (currently controlled by Westminster). This culminated in an appearance by the Brain family, whose attempt to resist deportation back to Australia has made them a national cause célèbre. (Their young son has learned to speak Gaelic.) Yet for me, the most emotional moment of the conference was when another family, the Chhokars, stepped on stage. Surjit Singh Chhokar was murdered in 1998, but it took 17 years of campaigning and a change in double jeopardy laws before his killer could be brought to justice.

As Aamer Anwar, the family’s solicitor, told the story of “Scotland’s Stephen Lawrence”, Chhokar’s mother and sister stood listening silently, still stricken with grief. After he finished, the delegates gave the family a standing ovation.

Julia Rampen is the editor of The Staggers, the New Statesman’s politics blog

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

This article first appeared in the 20 October 2016 issue of the New Statesman, Brothers in blood