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    12 February 2014updated 07 Sep 2021 11:07am

    Slaying the giants

    Poverty and the quest for full employment

    By Alex Shattock

    Beatrice and Sidney Webb, and their student William Beveridge, laid the ideological foundations for the modern welfare state and the postwar economic consensus. As 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 reassess their theory that achieving “full employment” is a prerequisite to eliminating poverty.

    It is worth defining the terms. Most economists do not use “full employment” 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, or of the kind caused by skills gaps and subsequent periods of retraining. Instead, I will use the term “full employment” 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 the report, Beveridge suggested that “full employment” could be said to exist when overall unemployment was at a level of approximately 3 per cent.

    As for “poverty”, I will adopt the definition used by the Joseph Rowntree Foundation: 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”.

    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: “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 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 were 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.

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    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. However, achieving it is no guarantee of eradicating poverty. In 1909, 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 had 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 on the eve of the 20th century. Temporary and zero-hours contracts leave many workers in a state of relative poverty. They face the same “under-payment” and lack of “minimum of weekly earnings” as workers did in 1897. Therefore, a policy aimed at eradicating poverty would be far more ambitious than a policy of full employment: it would have to enforce a living wage, working time restrictions and guaranteed weekly hours.

    Low unemployment can always be achieved during a “boom” because the overall demand for goods and services is high. During the Clinton years, American unemployment was as low as 4 per cent. Likewise, under New Labour in 2001, UK unemployment fell to 4.2 per cent.

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    However, “true” full employment must be sustainable in a recession. Consequently, the challenge is either to prevent recessions from occurring or to guarantee jobs during a recession. The former is not something that can be achieved easily by domestic policy, especially when the cause is related to world markets. As Nassim Nicholas 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.

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

    J M Keynes’s main 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 employment through a programme of “demand management”. This involves a high degree of public spending in 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’s theory enjoyed cross-party support in the UK until the early 1970s and was largely successful at maintaining full employment: from 1946 onwards, UK unemployment did not cross Beveridge’s 3 per cent threshold until 1972. However, it 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.

    Perhaps surprisingly, both Beveridge and the Webbs were highly sceptical of Keynesian demand management as a means of successfully achieving full employment. According to them, only highly centralised planning could achieve a consistent state of full employment. In Beveridge’s view, this degree of planning involved the creation of a national investment board; stabilising the prices of primary goods through long-term collective contracts; and strict controls on the location of new businesses.

    In an essay on the 1944 employment white paper, Beveridge was sceptical about the impact of government investment on overall demand and about interest rates as a means of stabilising private investment. This scepticism largely explains his endorsement of a more radical alternative. However, the policies within the white paper achieved full employment for 25 years, which suggests that his analysis was overly pessimistic. Furthermore, interest-rate controls are no longer viewed as a failed experiment as they were in the 1940s. Arguably, interest rates are now the primary method of government stimulus. And even if Beveridge’s analysis had proved 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 now. Therefore, Keynesian demand management remains the most proven and politically achievable route to full employment.

    Clearly, there will be strong challenges to it, but these are not insurmountable. As Robert Skidelsky argues in The Return of the Master, Keynesian economists are no longer 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 past 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 will not be 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 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 UK. But it is important to remember that even when full employment has been achieved, the modern “giant evils” of underemployment, low wages and insecure work will still have to be defeated. Those victories are equally important prerequisites to achieving a society free from poverty.

    Alex Shattock’s piece won first prize in the NS/Webb Memorial Trust Poverty Index Essay competition. A full version can be read at: newstatesman.com