Zombie economics: Why the right are wrong about regulation and jobs

Abandoning basic principles of fairness has more to do with ideology than with good economics.

Just what should be done about unemployment, and in particular, youth unemployment? The right of the Conservative Party, most recently exemplified by Liam Fox's list of demands for the 2012 Budget, have a very simply answer: deregulate the labour market. And even commentators claiming to be on the left (George Eaton in the New Statesman) have suggested that the youth minimum wage should be frozen if the Low Pay Commission concludes that this would reduce youth unemployment.

What is most surprising perhaps is that these arguments should gain such currency at a time when the market fundamentalist model from which they draw inspiration has manifestly failed. The demand for light touch regulation of financial services (and indeed all markets) is what got us into this mess in the first place. The level of hypocrisy is staggering: senior executives must have access to undeserved colossal bonuses and salaries (because that's how the global market works apparently), but the most vulnerable in the labour market must see their wages cut and employment protection weakened.

The Tory right and their unwitting supporters on the left are essentially making zombie arguments. They have been defeated by evidence and experience but refuse to lie down and die. To begin with, the UK has one of the most lightly regulated labour markets of any major economy in the developed world. Only the USA has less protection for workers. Indeed, on almost every regulatory indicator that one could imagine, the UK emerges as a "liberal" economy. Despite the endless whining from the CBI and the small business lobby there is really very red tape left to cut. Of course, businesses -- and the Conservative Party -- always prefer less to more regulation. That is their ideological default setting. But the UK has now reached the point where another assault on employment rights or health and safety legislation will begin to remove necessary protections. David Cameron's own review, supervised by the Swedish academic Ragnar Lofstedt, concluded that there was no case for radically altering or stripping back current health and safety regulations, which he described as "fit for purpose". He also failed to find that EU regulations were in any sense gold-plated when transposed into UK law.

No doubt Fox and his acolytes will continue to assert that sweeping away employment protection could still deliver a significant jobs boost. They would say that this is merely common sense: making it easier to fire people will obviously encourage employers to recruit new workers. Yet countries with more regulated labour markets (most notably the Nordics) enjoyed employment records just as good as the UK's during the boom years. And Germany, with its supposedly sclerotic labour market, weathered the recession with lower unemployment than the USA. The most comprehensive assessment of the relationship between employment protection legislation and jobs was published by the OECD in 2006, with findings that run counter to the orthodox prescriptions of the right: careful analysis could establish no causal relationship between the strength of employment law and jobs performance over the course of the economic cycle.

Perhaps the Conservatives would benefit from looking at what happened on their watch in the 1980s and in the early period of New Labour. When the qualifying period for unfair dismissal protection was increased from one to two years, unemployment continued to rise. And when New Labour cut the qualifying period to one year, unemployment fell.

The case for freezing the youth minimum wage might appear to have a stronger foundation. It is clear that youth unemployment is too high, that the risk of a lost generation is real and that action is needed. Moreover, the international evidence also shows that applying the full minimum wage at the age of 18 can have a negative impact on youth unemployment. For example, in France, orthodox studies have shown that minimum wage increases youth unemployment in the range of 0.1-0.2 per cent -- although even the strongest minimum wage sceptic would have to admit that this is a very small effect. A similar analysis of the US experience suggests that teenage (rather than youth) unemployment may be 2-3 per cent higher as a result of the Federal minimum wage. Yet other studies point in the opposite direction. In their classic Myth and Measurement: The New Economics of the Minimum Wage, David Card and Alan Krueger found no negative impact on teenage employment from the Federal minimum wage increases implemented in the 1990-91 recession. The Netherlands implemented significant minimum wage cuts for young workers in the early 1980s during a very severe recession with no positive impact on jobs. And in the UK, removing young workers from wages councils' protection in 1986 did not produce the fall in youth unemployment anticipated by Tory ministers.

Perhaps the best interpretation of these conflicting studies is that youth minimum wages need to be handled with care. There is a strong case for specific lower rates for young workers and an equally strong case that cuts in youth minimum wages have no positive employment effects. Freezing or cutting the youth minimum wage is precisely the wrong policy to apply in an economy where the real problem is a deficiency of demand. Moreover, it suggests that the government is more than willing to abandon basic principles of fairness when the going gets tough, for reasons that have more to do with ideology than good economics. A government that was really concerned about youth unemployment would be more focused on a short-term fiscal stimulus and the reintroduction of a youth employment guarantee than tinkering with the minimum wage regime.

A cursory glance at the evidence suggests that the right are just wrong about regulation and jobs. The left should be confident in making the contrary argument and must ignore those siren voices encouraging us to accept the standard economic model. "Fairness in tough times" should be the mantra. There is no case for making the low paid and vulnerable pay the price for the excesses of those at the top.

David Coats is a research fellow at the Smith Institute

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Labour finds it easier to ignore the working class than to persuade them

The metropolitan left needs to start acting as if it is even partly as much concerned about Rochdale as it is about Aleppo.

There’s surely a deliciously bitter irony in the fact that Michael Gove’s favourite work of history is George Dangerfield’s 1935 classic The Strange Death of Liberal England. Beloved of the common reader, mistrusted by those haughty “experts” we’ve had enough of, Dangerfield tells of a British liberal consensus eroded over decades but eventually wiped out by the carnage of the First World War. For the Great War, read the cataclysm of last June’s Brexit vote, relished by Gove and the like, and you have lessons regarding the strange, ongoing death of Neoliberal England.

The year after Dangerfield’s volume appeared, 200 men marched from Jarrow to London to implore the Conservative prime minister Stanley Baldwin to bring jobs to their beleaguered town. The smooth and emollient Baldwin wouldn’t see them, which suggests that the notion of an aloof metropolitan elite turning its back on a rusting, post-industrial north is no modern invention.

Dangerfield never offers a cogent analysis of why the normally placid British began to throw themselves under police horses, go on hunger marches, join militant unions and generally abandon their consensual deference in favour of harsher doctrines. He found it as bewildering and mysterious as the tides. The death of what we might call Neoliberal England is much more explicable, if unpalatable to some. Liberal commentators have been rudely awakened to the fact that benign progressivists from Professor Pangloss to Francis Fukuyama onwards were wrong. Assuming that, left alone, “the masses” will come around to your way of thinking is rather like those churchmen who thought babies raised in silence would automatically speak English. It is presumptuous and leads to disaster.

I found myself thinking often of lines from Yeats’s “The Second Coming”. Rough beasts slouched through the streets of Batley. Corbyn, Cameron and the other indentured members of the Westminster political class lacked all conviction. Cameron utterly miscalculated the country’s mood and hugely overestimated its opinion of his own appeal and competence. Corbyn lurked silent and wraithlike on the edges of the national debate, a study in uselessness. By contrast, as Yeats put it, the worst (Farage, Johnson, the foaming and splenetic demagogues of the Mail and the Spectator) were full of a passionate intensity. They were full of something else, too, lying through their grins about extra money for the NHS. But by then the damage had been done.

Because immigration had a crude and ugly sound, it was left to only the crude and ugly of politics to mention it. This was a mistake. As Adam Shatz put it in the London Review of Books, few mainstream politicians wanted to engage with “the fabled white working class . . . which most of us have found it easier to hate than persuade”. Yet persuasion is important, however little the present leadership of the Labour Party seems to care for this element of politics. One gets the distinct impression that Jeremy Corbyn and his acolytes would prefer the purity and posturing of permanent opposition rather than the messy, compromised business of government. They offer ineffectuality and disdainful superiority dressed up as a kind of saintly decency. Maybe Jeremy feels that by not doing anything, he cannot do anything wrong. He should be disabused of this notion, and quickly.

Second, and this would seem so obvious as to not need saying, Labour needs to reconnect with its former industrial heartland. This doesn’t necessarily mean “turning to the right” or “abandoning left-wing principles”, or even embracing the dreaded “Blairism’’. But it does mean addressing (even with nose pinched between fingers) the legitimate concerns in the north and the Midlands about immigration, jobs and welfare. The metropolitan left needs to start acting as if it is even partly as much concerned about Rochdale as it is about Aleppo.

People disagreeing with you might be irritating – even galling – but it is not undemocratic. Democracy and liberalism are not synonymous. You can have one without the other. We struggled through most of the 1980s nominally democratic but unarguably illiberal. What Labour needs now is, perhaps, fewer ideologues and a few more psephologists, someone who might conceivably tell the party how voting works and how elections are won. If so, some of my former A-level sociology and politics students in Skelmersdale are probably still available for work.

Stuart Maconie is a writer and broadcaster

Stuart Maconie is a radio DJ, television presenter, writer and critic working in the field of pop music and culture. His best-selling books include Cider with Roadies and Adventures on the High Teas; he currently hosts the afternoon show on BBC 6Music with Mark Radcliffe.

This article first appeared in the 30 March 2017 issue of the New Statesman, Wanted: an opposition