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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What happens when a president refuses to step down?

An approaching constitutional crisis has triggered deep political unrest in the Congo.

Franck Diongo reached his party’s headquarters shortly after 10am and stepped out of a Range Rover. Staff and hangers-on rose from plastic chairs to greet the president of the Mouvement Lumumbiste Progressiste (MLP), named after the first elected leader of the Democratic Republic of Congo.

Diongo, a compact and powerfully built man, was so tightly wound that his teeth ground as he talked. When agitated, he slammed his palms on the table and his speech became shrill. “We live under a dictatorial regime, so it used the security forces to kill us with live rounds to prevent our demonstration,” he said.

The MLP is part of a coalition of opposition parties known as the Rassemblement. Its aim is to ensure that the Congolese president, Joseph Kabila, who has been president since 2001, leaves office on 19 December, at the end of his second and supposedly final term.

Yet the elections that were meant to take place late last month have not been organised. The government has blamed logistical and financial difficulties, but Kabila’s opponents claim that the president has hamstrung the electoral commission in the hope that he can use his extended mandate to change the rules. “Mr Kabila doesn’t want to quit power,” said Diongo, expressing a widespread belief here.

On 19 September, the Rassemblement planned a march in Kinshasa, the capital, to protest the failure to deliver elections and to remind the president that his departure from office was imminent. But the demonstration never took place. At sunrise, clashes broke out between police and protesters in opposition strongholds. The military was deployed. By the time peace was restored 36 hours later, dozens had died. Kabila’s interior minister, claiming that the government had faced down an insurrection, acknowledged the deaths of 32 people but said that they were killed by criminals during looting.

Subsequent inquiries by the United Nations and Human Rights Watch (HRW) told a different story. They recorded more fatalities – at least 53 and 56, respectively – and said that the state had been responsible for most of the deaths. They claimed that the Congolese authorities had obstructed the investigators, and the true number of casualties was likely higher. According to HRW, security forces had seized and removed bodies “in an apparent effort to hide the evidence”.

The UN found that the lethal response was directed from a “central command centre. . . jointly managed” by officials from the police, army, presidential bodyguard and intelligence agency that “authorised the use of force, including firearms”.

The reports validated claims made by the Rassemblement that it was soldiers who had set fire to several opposition parties’ headquarters on 20 September. Six men were killed when the compound of the UDPS party was attacked.

On 1 November, their funerals took place where they fell. White coffins, each draped in a UDPS flag, were shielded from the midday sun by a gazebo, while mourners found shade inside the charred building. Pierrot Tshibangu lost his younger sibling, Evariste, in the attack. “When we arrived, we found my brother’s body covered in stab marks and bullet wounds,” he recalled.

Once the government had suppressed the demonstration, the attorney general compiled a list of influential figures in the Rassemblement – including Diongo – and forbade them from leaving the capital. Kinshasa’s governor then outlawed all political protest.

It was easy to understand why Diongo felt embattled, even paranoid. Midway through our conversation, his staff apprehended a man loitering in the courtyard. Several minutes of mayhem ensued before he was restrained and confined under suspicion of spying for the government.

Kabila is seldom seen in public and almost never addresses the nation. His long-term intentions are unclear, but the president’s chief diplomatic adviser maintains that his boss has no designs on altering the constitution or securing a third term. He insists that Kabila will happily step down once the country is ready for the polls.

Most refuse to believe such assurances. On 18 October, Kabila’s ruling alliance struck a deal with a different, smaller opposition faction. It allows Kabila to stay in office until the next election, which has been postponed until April 2018. A rickety government of national unity is being put in place but discord is already rife.

Jean-Lucien Bussa of the CDER party helped to negotiate the deal and is now a front-runner for a ministerial portfolio. At a corner table in the national assembly’s restaurant, he told me that the Rassemblement was guilty of “a lack of realism”, and that its fears were misplaced because Kabila won’t be able to prolong his presidency any further.

“On 29 April 2018, the Congolese will go to the ballot box to vote for their next president,” he said. “There is no other alternative for democrats than to find a negotiated solution, and this accord has given us one.”

Diongo was scathing of the pact (he called it “a farce intended to deceive”) and he excommunicated its adherents from his faction. “They are Mr Kabila’s collaborators, who came to divide the opposition,” he told me. “What kind of oppositionist can give Mr Kabila the power to violate the constitution beyond 19 December?”

Diongo is convinced that the president has no intention of walking away from power in April 2018. “Kabila will never organise elections if he cannot change the constitution,” he warned.

Diongo’s anger peaked at the suggestion that it will be an uphill struggle to dislodge a head of state who has control of the security forces. “What you need to consider,” he said, “is that no army can defy a people determined to take control of their destiny . . . The Congolese people will have the last word!”

A recent poll suggested that the president would win less than 8 per cent of the vote if an election were held this year. One can only assume that Kabila is hoping that the population will have no say at all.

This article first appeared in the 01 December 2016 issue of the New Statesman, Age of outrage