The Staggers

The New Statesman’s rolling politics blog

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.

By David Coats Published 28 February 2012 18:52

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

Tags: youth unemployment

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View the discussion thread.

38 comments

Fri, 2012-03-02 14:44 — Mr Danger

"Germany has legislation governing a minimum wage.

I understand it undermine your rhetoric, but facts tend to, don't they Mrdangertomyself."

Germany has no minimum wage. Some industries have collective agreements between unions and employers, but there is no statutory minimum wage.

Why do you lie about something so easily verified?

Fri, 2012-03-02 14:51 — Mr Danger

"If you look I've not pretended to present any facts whatsoever."

And you have succeeded. Not sure why that's a good thing though.

"I stand by the fact that saying 'I work hard and you plebs don't' is a gross insult from someone in a high flying job in the city or similar."

It would be, but I never said it.

"Also I suspect 10% of the total of what they are actually making is likely to be pitfiul in real terms"

10% of the entire economy's tax revenue. Not 10% of what they earn. Isn't that obvious?

"rather than rotting in the pockets of some fool who wants to buy a new sailboat or gaudy item of trash to show to their rich mates."

Not if you are a craftsman who builds sailboats. Oh well, screw them right? This country doesn't need skilled craftsmen, it needs more social workers.

"Also, 10% - would mean the rest of us pay the other 90% - even by your own logic they're not pulling their weight."

The top 1% of taxpayers pay 30% of income taxes. Completely the opposite of what you said (though in your defence, you made the claim without providing any 'facts' so somehow, by your logic, that's means its OK).

Wed, 2012-02-29 15:05 — Springland (not verified)

@ Mr Danger

You're right Greece needs to fix its tax system. Of course it's not that simple- that's a given.

When you're talking of debts on the scales of national economies, in hsitroical terms, the UK is far from being in trouble. It would take an incredible amount of time (or a continued pattern of gross stupidity) to retard economic growth so much that it becomes unmanageable.

There are a couple of likely reasons for peddling a lie about how much of a problem the deficit is or will prove to be. One is blundering incompetence by freemarket fundamentalists or a desire to create a smokescreen for the stealing of the country's wealth by a small elite. As it stands you are acting as a mouthpiece for those who are either bumbling buffoons or profiteering criminals.

So, answer the question. I'll state it more clearly. Why is having a deficit in the UK such as it is at present, a problem, given the way the economies of advanced nations have operated under global capitalism for so many years(including in the aftermath of WWII)?

Thu, 2012-03-01 19:47 — matthew fox (not verified)

It seems you don't understand the terms " no " Mrdangertomyself

Let us revisit, your actual words.

Would this be the Germany that has no minimum wage?

Germany has legislation governing a minimum wage.

I understand it undermine your rhetoric, but facts tend to, don't they Mrdangertomyself.

Wed, 2012-02-29 15:27 — sjreed (not verified)

@springland - The main reason an increased deficit is a serious problem is the people who allow us to keep a deficit by lending us the money - the bond market. If they lose confidence in our ability to repay or decide the deficit is too high, interest rates rocket and we lose billions in higher payments creating the death spiral seen in every PIGS country so far. For a country so reliant on financial services, it would most likely crash our economy. There is a reason bond rates fell immediately after Labour left office and pretending that the markets can be controlled with pleasantries and our personal calculations of previous times is laughable.

Wed, 2012-02-29 16:03 — Springland (not verified)

@sjreed

Tell me more of this bond market. It sounds like it could be a ruse by traders to have carte blanche over matters economic and force the flow of money into their own hands. Almost like governments keen to please them gave them the power to do this and then let them run amok putting us in the position we're in today. The country in general benefits little from financial services-peddle that myth elsewhere please. There is no mention from me of markets being controlled by pleasantries or 'persoanl calculations' (whatever that is meant to mean). Maybe from governments doing the job they're supposed to do but even I know that's a stretch of the imagination too far.

Tue, 2012-02-28 19:51 — Indu Pendent (not verified)

@David
The Chinese and Indian's dont respect UK regulation. There's only the one world economy and market rate for labor - its make believe to think we can go back in time and pretend the UK is influential in the world and has its own economy.

There needs to be a continuing realignment of cost of labor in the UK workforce relative to the cost of capital just like Blanchflower says. What this means in reality is further improvement in the competitiveness of UK workers relative to the rest of the World.

So cutting rather than entrenching regulation that slows down SMEs is not only essential but on its way.

e.g. in the US, its normal for people of all levels to get fired with 1 week to 1 months notice pay and no compensation. But it means US companies a more willing to take the risk of taking on more people including the harder cases if the price is right. The result? It takes people less time to find a job in the US even when unemployment is high.

Wed, 2012-02-29 17:23 — Mr Danger

"Why is having a deficit in the UK such as it is at present, a problem, given the way the economies of advanced nations have operated under global capitalism for so many years(including in the aftermath of WWII)?"

So you think the UK could survive with Debt/GDP of 250%? That's odd, since numerous countries are running into crisis at levels less than half that. I guess you think its worth the risk of bankrupting the country?

"Tell me more of this bond market. It sounds like it could be a ruse by traders to have carte blanche over matters economic and force the flow of money into their own hands."

Tell me how much of your life savings you are putting into Greek debt right now.

"The country in general benefits little from financial services-peddle that myth elsewhere please."

Utter nonsense. Tell me, how many nurses' salaries does your tax bill cover?

Tue, 2012-02-28 20:33 — nourredine (not verified)

@Indu Pendent,
Are you a boss or manager?
You seem to talk like one.
Let me enlightened you, the workers today want and demand respect at work, therefore descent wage for a full time permanent work.
Not as and when, we are not handkerchief to use and when not needed chuck in the bin.
It seems to me that you like to treat the work force like the 19th century or like China with no compensation for the loss.
You should not be Lib/Dem but tory.

Thu, 2012-03-01 11:19 — Springland (not verified)

@Mr Danger
If you look I've not pretended to present any facts whatsoever. I've only questioned yours. So if you could explain how you arrived at the 250% figure I'd be pleased to know. Also, you're mistaking the assertion I made about having the gaul to say that their work is inherently of more value than the work of others with an attack on the amount that the financial sector pays. I stand by the fact that saying 'I work hard and you plebs don't' is a gross insult from someone in a high flying job in the city or similar. It's a lot easier to play fast and loose with huge sums of money if you were a trust fund baby. Also I suspect 10% of the total of what they are actually making is likely to be pitfiul in real terms- that is it could be put to more use around the country rather than rotting in the pockets of some fool who wants to buy a new sailboat or gaudy item of trash to show to their rich mates. Also, 10% - would mean the rest of us pay the other 90% - even by your own logic they're not pulling their weight. If you think that's fair more fool you. You call yourself Mr Danger no doubt through some wildly misplaced sense of superiority thinking you're correcting the 'mad' views of those softheaded lefties. With your ass kissing scraping to the city and wonky locgic it seems you're only a danger to yourself.

Wed, 2012-02-29 18:12 — Springland (not verified)

@Mr Danger

You've pulled the 250% figure out of nowhere. I said no such thing. The country is nowhere near bankrupt and is in little danger of being. Perhaps the reasons other countries are running into crisis aren't so clear cut.

On Greek debt-Are you honestly implying I, or any others commenting here have enough life savings to help solve the Greek debt crisis? Honestly clarify becasue the comment you've highlighted and the response seem barely linked and that's how it's coming across.

Nurses pay-In combination with the tax paid by others in the country probably a hell of a lot more than the tax avoiding upper classes.

If you're following that line of attack don't dare have the gumption to state that they (the feckless rich) work for it -as if any other work that anyone else does is worthless. It is an absolute insult on par with spitting in someone's face.

Tue, 2012-02-28 20:51 — Fergus Pickering (not verified)

Respect seems to be what everybody wants but I'm damned if I know what they mean by that. Do I respect my children? No, of course I don't. I love them. Do I respect the beggar and his dog? Do I respect the butcher, the baker and the candlestickmaker? What would I respect them FOR? For being human? Then I must respect everybody. And if I respect everybody then I respect nobody.

Tue, 2012-02-28 21:14 — nourredine (not verified)

@Fergus Pickering,
Don't forget your dummy before going to bed.
Read again my comment, i was referring to workers.

Tue, 2012-02-28 21:27 — 8910steven

Making it easier to fire people will make workers more fearful of losing their jobs . People who are frightened of losing their jobs tend not to spend money .When people don`t spend money those who provide the goods and services people would otherwise have bought lose their jobs . Making it easier to fire people will CAUSE unemployment .

Tue, 2012-02-28 21:42 — DK (not verified)

@Indu Pendant: Quite right about India and China. Which is why the European Union, the U.S., Canada, Australia, and everyone who will come aboard must agree fair wages, basic labour rights, etc, and refuse to allow the sale of any products whatsoever made by labour not under those protections. That's right: it should be illegal to sell products made under those conditions in this country. The way the economy is set up now only the incredibly wealthy could afford to boycott such products, because anything affordable to "ordinary" people will almost certainly have been made by quasi-slave labour. But I'd rather have fewer things and know the people producing them have decent lives. I'd rather have things produced by people in my community who are being treated decently. I'd rather have "developing" countries investing in education rather than whoring their youth to global capital, for the profit of a tiny class of "entrepreneurs."

Wed, 2012-02-29 18:30 — Mr Danger

"You've pulled the 250% figure out of nowhere."

Well no, you kept referring to the post WW II level so I looked up the post WW II level. I'm not sure why you are suddenly so afraid of it.

"The country is nowhere near bankrupt and is in little danger of being."

You are right, but only because we aren't following your lunatic "deficits don't matter" policy.

"Perhaps the reasons other countries are running into crisis aren't so clear cut."

Perhaps? Once again you shrink away from any meaningful opinion. Its no big deal, right? Its only the bankruptcy of the country we are risking.

"On Greek debt-Are you honestly implying I, or any others commenting here have enough life savings to help solve the Greek debt crisis? Honestly clarify becasue the comment you've highlighted and the response seem barely linked and that's how it's coming across."

No its just that you sneer at bond investors for not handing our pension fund money to Greece but you wouldn't put any of your own money at risk. Typical.

"Nurses pay-In combination with the tax paid by others in the country probably a hell of a lot more than the tax avoiding upper classes."

If the upper classes are avoiding taxes they are doing a pretty poor job of it. 1% of the population pays 30% of all income tax. I guess your facts are made up.

"dare have the gumption to state that they (the feckless rich) work for it -as if any other work that anyone else does is worthless. It is an absolute insult on par with spitting in someone's face."

The financial sector paid £50 billion in taxes in 2010, more than 10% of the total. Yet you say they contribute "little". So I presume you must be a massive taxpayer yourself. So tell us, how many nurses can we pay for with the taxes on your income?

Tue, 2012-02-28 21:47 — Stephen (not verified)

Indu obviously decided not to actually read the article, otherwise he wouldn't have bothered posting what he posted.

It's clear that eroding workplace rights, health and safety regulations and employee protections has nothing to do with generating economic activity. It is merely a way for business to cut corners to improve profit and get rid of anyone who complains without fear of repercussion.

Liam Fox is a clear example of a Thaterite Conservative who's time has passed. I honestly could not believe what I was hearing coming from this man on BBCSP. Obscene.

Tue, 2012-02-28 22:01 — Benjamin Rae (not verified)

Good article. The right's economics is completely discredited now. We saw exactly where the neo liberal led. The idea that European employment regulations are the problem is utter nonsense.
It's amazing to me that anybody takes this stuff seriously

Tue, 2012-02-28 22:40 — representingthemambo (not verified)

Good aricle. The last sentence sums it up really:

"There is no case for making the low paid and vulnerable pay the price for the excesses of those at the top."

Liam Fox isn't interested in reducing unemployment, quite the contrary in fact. High unemployment alows businesses to attack working conditions more easily. He is just seizing an opportunity to increase the rate of exploitation of workers, something that he is very keen on.

http://representingthemambo.wordpress.com/

Tue, 2012-02-28 22:46 — jobsagoodin (not verified)

'And Germany, with its supposedly sclerotic labour market, weathered the recession with lower unemployment than the USA.'

Not so sclerotic since Agenda 2010 reforms. To quote wikipedia -

'In that, the programme closely resembles similar measures taken earlier in the USA (Reaganomics) and the UK (Thatcherism)'

Tue, 2012-02-28 22:51 — jobsagoodin (not verified)

'It's amazing to me that anybody takes this stuff seriously'

Well you must be amazed at the governments in France, Spain, Italy & Portugal all of whom are intending to introduce substantial Labour reforms, not to mention Germany who introduced them several years ago.

Wed, 2012-02-29 19:47 — matthew fox (not verified)

Germany has legislation relating to a minimum wage. Certain sectors of the workforce are covered by law.

Please get your facts right Mr Danger.

Wed, 2012-02-29 01:56 — Indu Pendent (not verified)

@stephen
You dont understand basic economics. The cheaper people and the easier they are to employ the more people businesses will buy. I just know this is true having built up teams.

@nourredine
Yes - I set up a reasonable sized SME which is growing and recruiting. I pay my people above the average market rate and look after those who make the effort to fit in. I get rid of crappy people who are lazy - they dont have to work for me if they dont want to. I pay massive taxes, create work for people but dont owe anyone a job.

To those who are in any doubt, I could easily dump the UK operations and transfer the labor to a Chinese business. The magic UK state fair isnt protecting UK jobs from China and India. Whats needed is the British to do what they are best in the world at which is buckling down, being clever with it and bit by bit kicking the backside of the competion.

Wed, 2012-02-29 02:05 — Bill (not verified)

Anybody who thinks regulations don't make it difficult for small businsses has never run a business. Moreover it takes thousands of overpaid people to put them into law.

The first thing Greece had to do was get rid of 150000 mostly non-jobs, so what does that tell you about regulation. Anyway, everybody knows rules are for fools.

Wed, 2012-02-29 07:49 — Luddite (not verified)

Stop making it almost impossible for some folk's to employ other folks. Labour and the left failed on youth unemployment because of their disastrous mass-immigration policy, combined with the lefts tax and welfare system; which made work for many pointless and unprofitable. It's not the right that lacks ideas, it's the political-left; that's finds itself bankrupted of ideas. The political-left is impotent without sack-loads of other people money. The only way out of this social malaise is to work our way out. So stop making employment difficult and make work pay, but there again we could all live on the state?

Wed, 2012-02-29 09:46 — MagpieView (not verified)

http://www.youtube.com/watch?v=KM05tAtEjdQ

Wed, 2012-02-29 09:47 — MagpieView (not verified)

http://www.youtube.com/watch?v=WBeNSpSnDFo

Wed, 2012-02-29 09:53 — MagpieView (not verified)

It is only is labour is absolutely free will businesses employ people when there is no or decreasing demand for their products and services. People who are on low income and scared of losing their jobs will be less likely to avail themselves of those goods and services leading to decreasing demand. This creates a downward spiral sucking ever more jobs and money out of the economy

Wed, 2012-02-29 11:42 — Wonnie Rood (not verified)

@Indu Pendent

You seem to have an incredible amount of time to comment in depth on so many articles on the NS website for someone who is so busy. Do the words fantasist and narcissist mean anything to you?

As for the rest of you deregulation cheerleaders-rules are there for a number of reasons including fairness and dignity for employees. If they get in the way of making a profit as quickly as you want to then tough-learn the basics of humanity and get back to me.

Wed, 2012-02-29 22:13 — Mr Danger

"Certain sectors of the workforce are covered by law."

And certain sectors aren't?

FAIL

Wed, 2012-02-29 12:31 — Mr Danger

Youth unemployment hits an all time high, while overall unemployment is nowhere near it. The culprit is the minimum wage. Coats just doesn't have the courage to do anything about it - better to let youth unemployment soar and wring our hands about fairness.

"A government that was really concerned about youth unemployment would be more focused on a short-term fiscal stimulus"

Maybe we should run one of the biggest deficits in the EU then. Oh wait, we already are.

Wed, 2012-02-29 12:34 — Mr Danger

"And Germany, with its supposedly sclerotic labour market, weathered the recession with lower unemployment than the USA."

Would this be the Germany that has no minimum wage?

Wed, 2012-02-29 12:45 — Springland (not verified)

@Mr Danger

Exactly what, in reality, is the problem with having one of the largest deficits in the EU?

Are there not other factors in the German economy, other than the lack of a minimum wage (so you say) that might be able to account for its relative success?

Just asking.

Wed, 2012-02-29 13:17 — Mr Danger

Ask the Greeks.

Wed, 2012-02-29 13:22 — Springland (not verified)

Greece doesn't really compare well with UK in terms of its economy-their tax system left more than a little do be desired. Again, why is a large defecit a problem, particularly when it is drawn into comparison with other advanced economies (excepting Greece)?

Wed, 2012-02-29 13:28 — mcquade

Indu, consiering you spend vast quantities of your time trolling across the entire web at all times of the day and nght, I do not believe for one minute that you're running a SME. You're nothing but another frustrated troll with vast delusions of grandeur. How's things these days on the rock and roll?

Sat, 2012-03-03 13:01 — matthew fox (not verified)

Germany - none, except for construction workers, electrical workers, janitors, roofers, painters, and letter carriers; set by collective bargaining agreements in other sectors of the economy and enforceable by law.

Do you understand the term " Enforceable by law "

Over to you MrDangertomyself

Wed, 2012-02-29 14:01 — Mr Danger

"Greece doesn't really compare well with UK in terms of its economy-their tax system left more than a little do be desired."

Well then why not just fix the tax system then, problem solved! Or maybe it isn't quite that simple?

"Again, why is a large defecit a problem, particularly when it is drawn into comparison with other advanced economies (excepting Greece)?"

Well, obviously, a large deficit leads to large debts which eventually retard economic growth and can lead to default.