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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A swimming pool and a bleeding toe put my medical competency in doubt

Doctors are used to contending with Google. Sometimes the search engine wins. 

The brutal heatwave affecting southern Europe this summer has become known among locals as “Lucifer”. Having just returned from Italy, I fully understand the nickname. An early excursion caused the beginnings of sunstroke, so we abandoned plans to explore the cultural heritage of the Amalfi region and strayed no further than five metres from the hotel pool for the rest of the week.

The children were delighted, particularly my 12-year-old stepdaughter, Gracie, who proceeded to spend hours at a time playing in the water. Towelling herself after one long session, she noticed something odd.

“What’s happened there?” she asked, holding her foot aloft in front of my face.

I inspected the proffered appendage: on the underside of her big toe was an oblong area of glistening red flesh that looked like a chunk of raw steak.

“Did you injure it?”

She shook her head. “It doesn’t hurt at all.”

I shrugged and said she must have grazed it. She wasn’t convinced, pointing out that she would remember if she had done that. She has great faith in plasters, though, and once it was dressed she forgot all about it. I dismissed it, too, assuming it was one of those things.

By the end of the next day, the pulp on the underside of all of her toes looked the same. As the doctor in the family, I felt under some pressure to come up with an explanation. I made up something about burns from the hot paving slabs around the pool. Gracie didn’t say as much, but her look suggested a dawning scepticism over my claims to hold a medical degree.

The next day, Gracie and her new-found holiday playmate, Eve, abruptly terminated a marathon piggy-in-the-middle session in the pool with Eve’s dad. “Our feet are bleeding,” they announced, somewhat incredulously. Sure enough, bright-red blood was flowing, apparently painlessly, from the bottoms of their big toes.

Doctors are used to contending with Google. Often, what patients discover on the internet causes them undue alarm, and our role is to provide context and reassurance. But not infrequently, people come across information that outstrips our knowledge. On my return from our room with fresh supplies of plasters, my wife looked up from her sun lounger with an air of quiet amusement.

“It’s called ‘pool toe’,” she said, handing me her iPhone. The page she had tracked down described the girls’ situation exactly: friction burns, most commonly seen in children, caused by repetitive hopping about on the abrasive floors of swimming pools. Doctors practising in hot countries must see it all the time. I doubt it presents often to British GPs.

I remained puzzled about the lack of pain. The injuries looked bad, but neither Gracie nor Eve was particularly bothered. Here the internet drew a blank, but I suspect it has to do with the “pruning” of our skin that we’re all familiar with after a soak in the bath. This only occurs over the pulps of our fingers and toes. It was once thought to be caused by water diffusing into skin cells, making them swell, but the truth is far more fascinating.

The wrinkling is an active process, triggered by immersion, in which the blood supply to the pulp regions is switched off, causing the skin there to shrink and pucker. This creates the biological equivalent of tyre treads on our fingers and toes and markedly improves our grip – of great evolutionary advantage when grasping slippery fish in a river, or if trying to maintain balance on slick wet rocks.

The flip side of this is much greater friction, leading to abrasion of the skin through repeated micro-trauma. And the lack of blood flow causes nerves to shut down, depriving us of the pain that would otherwise alert us to the ongoing tissue damage. An adaptation that helped our ancestors hunt in rivers proves considerably less use on a modern summer holiday.

I may not have seen much of the local heritage, but the trip to Italy taught me something new all the same. 

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear