David Blanchflower’s Not Working is an excellent critique of mainstream economics – but lacks solutions

In explaining why labour markets aren’t working, the book identifies a number of deep-seated flaws in modern capitalism.

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Since the financial crisis of 2008, employment in the US and the UK has reached record highs – yet British workers haven’t had a pay rise in ten years, and US workers have the same purchasing power as they did in 1988. This is a puzzle to most economists, who treat labour as a commodity like any other, with a price (wage) determined by demand and supply. Demand for labour appears to be strong yet wages have barely budged.

David Blanchflower’s book Not Working is a wide-ranging and impeccably researched interrogation of this problem. Blanchflower, a British-American economist, analyses mountains of labour market data from the US and the UK since the crisis in an attempt to explain why wages aren’t rising. He finds that labour markets are not functioning properly because many people classed as employees are not working as much as they would like to. Underemployment, which remains above pre-crisis levels in both the US and the UK, is the missing link between the employment rate and average wages.

Labour markets today are so flexible that some people classed as “employed” are working just a few hours a week. Meanwhile, those working full-time are faced with the constant threat of reduced hours or redundancy. With a diminished welfare state and social security system, workers feel powerless and anxious about their employment relationships. Asking for pay increases is the last thing on their minds.

Mainstream economists often respond to this argument by arguing that the problem isn’t underemployment, but low productivity. Firms’ demand for labour should be linked to productivity, as they can’t afford to pay a worker an hourly wage higher than the value of the output she produces in an hour. Productivity has flatlined since the crisis, so firms haven’t been able to raise pay. Blanchflower accepts that low productivity growth is part of the reason for low wage growth. But he also points out that the relationship between wages and productivity is complicated.

First, while the productivity of labour places a ceiling on what workers can be paid, it does not create a floor. Firms can’t afford to pay workers more than the value of what they produce – but they can afford to pay them less. Mainstream economic theory suggests that, in such a situation, workers should leave, or unionise to push for wage increases. But how is someone supposed to find a new job during a recession? How are workers supposed to unionise when there are laws preventing them from doing so? And how can they do either when losing their job would mean losing their health insurance and pension, receiving minimal out of work benefits, and being unable to pay their rent or support their family?

Greater labour market flexibility exacerbates these issues. Reductions in “red tape” make it easier to fire workers. The rise of zero-hour contracts means that many workers face uncertainty over working hours. And insecure workers are less likely to organise.

Second, productivity may affect wages, but wages also affect productivity. As Blanchflower puts it, “workers on low pay are not motivated to work harder”. The proliferation of low-wage jobs, with few opportunities for progression, is a particular problem in the UK’s regions, where productivity is much lower than in London.

Low wages also encourage firms to hire more workers rather than investing in labour-saving and productivity-improving capital. Much has been written about the threat to workers from automation, but it is the lack of automation in the UK that is at least in part responsible for problems such as poor productivity – and the lack of automation is partly a result of low wage growth.

What, then, does the future of the labour market look like? Blanchflower suggests that the UK, the US and parts of Europe may start to look more like Japan, which experienced a “lost decade” after its 1991 financial crisis not unlike that experienced in the US and the UK since 2008. Today, the Japanese economy is kept afloat by an unprecedented experiment in monetary stimulus termed “Abenomics” – after Shinzo Abe – in which the central bank has purchased government bonds worth more than the entire economy’s GDP. To avoid such endless stagnation, Blanchflower suggests we need to get back to full employment, and fast.

The book is an excellent critique of mainstream economics that explains why many advanced economies’ labour markets aren’t working. In doing so, it identifies a number of deep-seated flaws in modern capitalism.

Blanchflower’s proposed solutions are, however, less ambitious than his analysis. In arguing for full employment, he seems to propose a return to the golden age of capitalism, when states in the global North followed JM Keynes’s suggestion that they manipulate interest rates, taxes and spending to smooth the ups and downs of the business cycle. But the postwar consensus was premised upon a delicate balancing act between capital, labour and the state, which ended as soon as this propitious economic environment evaporated during the 1970s.

Capitalist systems promote conflict, not compromise, between workers, bosses and states. As long as we live in a system organised on the principle of profit maximisation, working people will not get their fair share. Rather than trying to go back to the golden age of capitalism, perhaps we should be trying to move beyond capitalism altogether. 

Not Working: Where Have all the Good Jobs Gone?
David G Blanchflower
Princeton University Press, 424pp, £24

Grace Blakeley is the New Statesman’s economics commentator and a research fellow at IPPR. 

This article appears in the 24 July 2019 issue of the New Statesman, Shame of the nation