Slaying the giants of poverty and unemployment

This piece by Alex Shattock won first prize in the <i>New Statesman</i>/Webb Memorial Trust Poverty Index essay competition.

Crying shame: the social and economic effects of poverty are spreading rapidly through Britain. Photo: Karen Robinson/Panos

Beatrice and Sidney Webb, and their student William Beveridge, laid the ideological foundations for the modern welfare state and the post-war economic consensus in the United Kingdom. As both social reformers and economists, they made the important link between the provision of gainful employment and the eradication of poverty. Almost 100 years later, and following an economic crash caused by a profligate and poorly regulated financial sector, it is important to re-assess their theory that achieving “full employment” is a prerequisite to eliminating poverty. A necessary part of this analysis is the question of how “full employment” could actually be achieved, and how policymakers could overcome the political challenges it would inevitably face today.

It is important to define the terms “full employment” and “poverty”. Most economists do not use the former term to refer to a situation where every available worker in an economy has a job. Such a situation would be difficult to achieve, due to unemployment which occurs when workers are between jobs (transitional or frictional unemployment), and unemployment caused by skills gaps and subsequent periods of re-training (structural unemployment). Instead, I will use the term “full employment” to refer to the elimination of cyclical or demand-deficient unemployment, as William Beveridge did in his 1944 report Full Employment in a Free Society. According to this definition, a state of ‘full employment’ exists where the number of jobs available in any given economy does not depend on the ‘boom and bust’ of the business cycle. In Full Employment in a Free Society, Beveridge suggested that ‘full employment’ could be said to exist when overall unemployment was at a level of approximately 3%.

‘Poverty’ is also a term that is open to a number of different definitions. I will adopt the definition used by the Joseph Rowntree Foundation: ‘poverty’ is a situation where an individual or family’s resources are “so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities.” Importantly, this definition includes not only those who suffer from malnutrition and live in abject squalor (absolute poverty), but also those people whose income is significantly below the national average, to the extent that they are marginalised from the rest of society (relative poverty).

Poverty and Unemployment

According to Beveridge’s 1944 report, only a state policy of full employment could free Britain from what he termed the ‘giant evils’ of Want, Disease, Ignorance and Squalor. The fight against unemployment and the fight against poverty were one and the same, according to Beveridge: “If we attack with determination, unity and clear aim the four giant evils . . . we shall destroy in the process their confederate –the fifth giant of Idleness enforced by mass unemployment.”

The importance of this intrinsic link cannot be overstated. If poverty can be characterised as social exclusion, leading to depression, ill health and criminal activity, then gainful employment can be characterised as social inclusion, leading to a sense of purpose, belonging and engagement with the local community. Even if the welfare state we enjoy today was able to provide an adequate level of support to the unemployed (to the extent that they were brought out of poverty in financial terms), the problem of social exclusion, associated with both unemployment and poverty, would still remain. Eradicating poverty is not merely a case of increasing state benefits.

Because of this, even though we enjoy a developed welfare state today, the idea that full employment is necessary to eradicate poverty is no less true than it was in 1944. As Beveridge pointed out, it is as much an issue of self-actualisation as it is of finance: “The central problem of the lives of most of these [unemployed] young men is one of maintenance of self-respect. Rightly, they feel a need to take their places in society, achieving in their own right the means of living.”

However, if full employment is a prerequisite to eradicating poverty, achieving full employment is no guarantee of eradicating poverty. In the 1909 Minority Report of the Royal Commission on the Poor Laws, Beatrice Webb argued that there were many structural causes of poverty or “able-bodied destitution.” These causes included not only cyclical unemployment but poor education, debt and “under-payment.” Even if the state guarantees employment to every person capable of working, poverty will still exist if the other structural causes identified by the Webbs are not addressed. In Industrial Democracy (1897), the Webbs argued for a “national minimum” of working conditions and wages: “including not merely definite precautions of sanitation and safety, and maximum hours of toil, but also a minimum of weekly earnings.”

These concerns, and their proposed solutions, are just as relevant today as they were at the start of the 20th century. Temporary and zero-hours contracts leave many modern workers in a state of relative poverty, notwithstanding their employment status. They face the same “under-payment” and lack of “minimum of weekly earnings” that workers did in 1897. Full employment is therefore an important but insufficient step towards eradicating poverty. A policy aimed at eradicating poverty would be far more ambitious than a policy of full employment: in addition to creating enough jobs for those able to work, such a policy would have to enforce a living wage, working time restrictions and guaranteed weekly hours.

With this caveat in mind, I will now turn to how a policy of full employment could be achieved in the United Kingdom.

Full employment through demand management

Low unemployment can always be achieved during an economic ‘boom’. This is because during a boom the overall demand for goods and services (aggregate demand) is high. The demand for labour is a derived demand, meaning that when aggregate demand is high, businesses and government demand more labour to help them increase the quantity of goods and services they can supply, in order to meet the higher level of demand for those goods and services. Therefore, unemployment is generally very low in boom years, and figures close to full employment (3% unemployment) are fairly easy to achieve at the height of the boom. For example, during the Clinton years, American unemployment was as low as 4%. Likewise, under New Labour in 2001, UK unemployment reached a low of 4.2%.

However, these figures are not examples of genuine full employment, because they can only exist during boom years. Unemployment usually follows situations of high employment when the bust arrives. Recalling our definition, ‘true’ full employment must exist independently of the fluctuations of the business cycle. In other words, it must be sustainable during an economic recession. Consequently, the challenge of any policy aimed at achieving full employment is to either prevent recessions from occurring or guarantee jobs during a recession.

Preventing recession is not something that can easily be achieved by domestic policy, especially when the cause is related to world financial markets. Policies do exist that shield economies from global market fluctuations, reducing the initial effects of global recession on a domestic economy rather than merely compensating for those effects. These policies include diversifying the major industries contributing to GDP (for example, a strong focus on manufacturing, construction and technology as well as financial services) and robust financial regulation. A stronger regulatory regime in 2008 would have prevented UK banks from taking out dubious mortgage-backed securities without the protection of sufficiently large catastrophe funds. This would have softened the impact of the 2008 crash on the UK economy and consequently the UK labour market.

Diverse exports and robust banking regulation do not rule out the need for a Keynsian stimulus to maintain full employment, however. Keynes will always be relevant because no economy is recession-proof. As Nassim Taleb notes in ‘The Black Swan’, it is impossible to know when and how the next economic catastrophe will occur, and so it is very difficult for businesses and governments to insure against it. This uncertainty means that any statement to the effect that we are somehow beyond the days of boom and bust is truly misguided, both today and fifty years in the future.

We cannot, therefore, pursue a light-touch full employment policy on the assumption of permanent and stable growth. Measures need to be put in place that are capable of maintaining high employment when profits are down and businesses don’t want to hire, for the simple reason that we can never be sure that another recession is not waiting around the corner.

Keynes’ major contribution to economics was the theory that unemployment was created not by the inflexibility of wages, but by a lack of aggregate demand. According to Keynes, when private businesses did not demand enough goods and services to maintain high levels of employment, the government should use fiscal policy to maintain high levels of employment through a programme of ‘demand management’. This involves a high degree of public spending in the pursuit of public works programmes and an expansion of the public sector. Such investment has a ‘multiplier effect’ in terms of output and therefore employment: building a road pays not only the construction company but also the architects, subcontractors, road sweepers and the shopkeepers they all go to for lunch.

Keynes’ theory of demand management enjoyed cross-party support in the UK until the early 1970s, and was largely successful at maintaining full employment during this period: from 1946 onwards, UK unemployment did not cross Beveridge’s 3% threshold until 1972. However, Keynesianism fell out of favour during the 1970s with the onset of successive oil and currency crises, and the subsequent monetarist policies of the Thatcher government.

Objections to full employment via demand management

Perhaps surprisingly, both William Beveridge and the Webbs were highly sceptical of Keynesian demand management as a means of successfully achieving full employment. As José Harris notes in William Beveridge: A Biography, Beveridge differed from the Webbs in his belief that full employment could be achieved without high levels of political coercion. However, by the end of the war, Beveridge did agree with the Webbs’ major economic theories, including the belief that full employment could only be achieved through a planned economy. In the postscript to ‘Full Employment in a Free Society’, Beveridge argued that the 1944 Employment White Paper would be insufficient to offset the fluctuations of the business cycle: “The White Paper, when critically examined, is seen to propose no serious attack on the instability of private investment…The policy of the White Paper is a public works policy, not a policy of full employment.” According to both Beveridge and the Webbs, only highly centralised planning could achieve a consistent state of full employment. In Beveridge’s proposal, this degree of planning involved the creation of a National Investment Board to determine overall domestic investment, stabilising the prices of primary goods through long-term collective contracts, and strict controls on the location of new businesses.

Beveridge was sceptical about both the impact of government investment on overall demand, and interest rates as a means of stabilising private investment. This scepticism largely explains his endorsement of a more radical alternative. However, the fact that the policies within the White Paper achieved full employment for twenty five years suggests that his analysis was overly pessimistic. Successive post-war governments were able to successfully predict fluctuations in private investment, and achieve consistent levels of public investment through high taxation. Furthermore, interest rate controls are no longer viewed as a failed experiment, as they were in the 1940. Arguably, interest rates are now the primary method of government stimulus. And even if Beveridge’s analysis of the White Paper had proven to be correct, it would be unrealistic to suggest that a level of state planning deemed unacceptably radical by the government of 1944 could be implemented by a 21st century government. Therefore, a policy of Keynesian demand management remains the most proven and politically achievable route to full employment.

Political obstacles to achieving full employment?

However, a full employment policy based on government investment and major public works will still face major political challenges. In ‘Political Aspects of Full Employment’, the Marxist economist Michal Kalecki argued that business opposition to such a policy will  always be a powerful obstacle to achieving full employment in a democratic society. Kalecki argued that even though full employment would increase the profits of business through higher levels of production, the social function of periodic unemployment is to enable the capitalist class to exercise social power against individual workers and against the working class as a whole. In other words, business leaders will never favour the eradication of periods of unemployment, because that would end their leverage over the workers, which arises from fear of dismissal. Beveridge echoed this argument in his wartime speeches to the Nuffield College Conference series in the early 1940s, where he argued vehemently against allowing the “vested interests” to impede the adoption of policies that are beneficial from the “purely national point of view”.

Clearly, there will be strong political challenges to implementing a full employment policy. But these challenges are not insurmountable, especially now that the national political conversation is shifting from shallow discussions about character and competence to a more interesting, important debate about how we respond to the economic challenges our country faces. As Robert Skidelsky argues eloquently in ‘Return of the Master,’ it can no longer be said that Keynesian economists are excluded from that debate.

The fact that poverty is rising in the UK also suggests that there will be popular support for an interventionist employment policy. The use of food banks has increased dramatically over the last year, rail fares are rising above inflation annually, and energy bills have more than doubled over the past six years. It is clear that a manifesto policy of maintaining the economic status quo is not enough to secure an election victory in 2015. With this in mind, all parties now have the opportunity to place full employment at the top of their agenda, as Churchill did to his success in the 1950 Conservative election manifesto: “We regard the maintenance of full employment as the first aim of a Conservative Government.”

When full employment becomes the first aim of all political parties today, a significant first step will have been taken towards eradicating poverty in the United Kingdom. But it is important to remember that even when full employment has been achieved, the modern ‘giant evils’ of under-employment, low wages and insecure work will still have to be defeated. Those victories are equally important prerequisites to achieving a society free of poverty.