Is full employment possible?

Peter Hain is promising "full employment in our generation." If we're lucky, everyone will ignore him. Full employment - if it is attainable at all - is like falling asleep. It's achievable - if at all - only if you don't aim for it.
Back in the 60s, governments were committed to full employment. And this commitment ultimately proved self-defeating. The belief that governments would guarantee full employment led to wage militancy, shirking - vindicating Kalecki's forecast that the threat of the sack would lose its power - and over-investment as firms anticipated continued high demand.
The upshot was a profit squeeze, accelerating inflation, the crises of the 1970s and rising unemployment.
By contrast, we've recently been nearer (relatively) to full employment than we have been for years, and yet subjective insecurity - the fear of losing jobs to immigrants, offshoring or imports - is high. This is no accident. It's insecurity that makes fuller employment possible, by restraining wage demands, and so lowering the Nairu: it's not as if every boss can use this tactic to combat wage militancy.
In this context, Hain's hubristic aim for full employment is counter-productive. If people become confident that full employment is possible, job security will rise and with it wage militancy or shirking, making full employment even more unlikely.

Comments

[Bob B]

I agree with most of that - especially the bits about/from Kalecki.

Peter Hain has an inherited a problem with his new ministry, neatly summed up by a predecessor in post, Alan Johnson, in a Parliamentary exchange on 11 October 2004:

Alan Johnson: I assure my right hon. Friend [Frank Field] that I have looked at everything to do with the constituency of Birkenhead since I got this job. I cannot say that I have committed all the figures to memory yet. He makes an important point, which is at the heart of the debate: how do we ensure that we provide assistance, in the new world we are in, to those people, many of whom went on to incapacity benefit during the dark years of the 1980s and early 1990s, when the number of people on the benefit trebled from 700,000 to 2.6 million? Those people were used conveniently to try to keep the unemployment figures down. We now have high employment and low unemployment, which is why we need to turn our attention to this group of people.
http://www.publications.parliament.uk/pa/cm200304/cmhansrd/vo041011/debtext/41011-01.htm

Tony Blair set the target back in 2005: "More than one million people on incapacity benefit wanted to work, he said."
http://news.bbc.co.uk/1/hi/uk_politics/4224721.stm

Gordon Brown can hardly renege on that one.

[Igor Belanov]

I thought you considered yourself a left-wing economist? Keith Joseph would have been proud of that post.

[Vindico]

Absolutely spot on! Just wait till somebody explains to Hain that less government will lead to more jobs. Smoke should start pouring from his ears after about 30 seconds and he should suffer a full meltdown within 2 minutes flat! Government cannot and should not aim to manage the eocnomy as suggested with such language; it is thier job to ensure a stable framwork whithin which the rest of us can carry on with our lives.

[chris]

Igor - no non-left-wing economist would ever cite Kalecki, more's the pity. A natural inference of what I'm saying is that capitalism and sustained full employment are incompatible. What's "right-wing" about that?

[Scratch]

In all fairness I can think of few more concise descriptions of the malevolence inhering in capitalism.

Personally, I'd have headed it Treat 'em mean, keep 'em keen.

[Scratch]

Damn, beaten to it.

[Igor Belanov]

You do seem to be suggesting that, until the glorious day of world revolution arrives, job insecurity and poor working conditions will have to be the norm, otherwise unemployment will rise. Unless you're an advocate of a revolutionary policy in the here and now, then basically that's a very conservative position, ie. trying to improve your lot is a waste of time.

[Jonathan]

Two points. First, Kalecki wrote this in the mid-1940s before the post-war boom saw full employment in developed economies thanks in part to formal and informal social pacts that helped overcome these problems. Second, globalisation has so undermined the power of labour so that expansion and high employment have gone hand-in-hand with stagnant or falling labour shares in national income. There's still a reserve army - just much of it is now in China etc

[reason]

I find this an interesting argument and it has very dark undertones, especially if like me you believe that job insecurity is a welfare minus. It seems to me that given that a feeling of oversupply in the labour market implies FALLING real wages and rising real wages are needed for development (as against growth) this all is a good argument for some sort of wage standard model (like award wages in Australia was for a very long time). Any thoughts?

[reason]

P.S. Another option would be that it is a good argument for finding ways to increase the costs to both employers and employees of ending employment contracts. Like tenure for instance or long service leave. (Also encourages employers to invest in employees by the way). The neo-liberals will kill me for that. But that would seem to be a welfare implication.

By the way I would like to see a formal model with this argument built into it. It definitely does not fit the standard neo-classical analysis because it has power relationship implications.

[reason]

Of course there is an obvious flaw in the argument - it assumes that only the stick works and the carrot is completely ineffective (in total contrast with what happens with senior management). Surely, good incentive contracts would solve this issue.

[Bob B]

"It seems to me that given that a feeling of oversupply in the labour market implies FALLING real wages . . "

By EU standards, America has a relatively low standardised rate of unemployment but despite that:

"The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

"As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s."
http://www.nytimes.com/2006/08/28/business/28wages.html?ex=1186113600&en=b54a3218cb84d082&ei=5070

[Roger Thornhill]

To me the ideal would be towards a low level of long term unemployment. Short term (month or two) unemployment is less of an issue, IMHO.

As a direct target I would say we should not focus on it, but just allow the economy to grow via low taxes, low interference, Rule of Law and a small State.

[Planeshift]

The idea that job insecurity keeps wage demands under control is also related to the idea that the existing unemployed are doing us all a favour - we keep our wage demands down because we are afraid of joining them. With full employment we can be confident of finding another job if we lose our existing ones, with unemployment we are not so sure.

So next time we read a bigoted rant about dole scroungers we should remember that they perform a valuable economic function!

[Mark Wadsworth]

Agreed, in a roundabout sort of way.

Also, what Rog T says.

[Blissex]

«the existing unemployed are doing us all a favour - we keep our wage demands down because we are afraid of joining them. With full employment we can be confident of finding another job if we lose our existing ones, with unemployment we are not so sure.»

That function pales in comparison to another: that having people living off benefit means less marginal competition for jobs, more leverage for employees. Of course then conservatives have been forcing benefit receivers to look for jobs to reduce that effect.

As many of the people on benefit could get jobs paying a lot more, their reduced consumption reduces prices for the employed, in particular for rent, houses and durable goods.

«So next time we read a bigoted rant about dole scroungers we should remember that they perform a valuable economic function!»

Pigheaded idiots don't realize that paying a small amount to people to prefer idleness over competing for jobs may more than pay for itself in better wages and working conditions. Competition and leverage determine prices and salaries more than other things.

Note: of course are asset owners, bosses, pensionsers or civil servants
with a safe job are rentiers and of course their interests are in as much
competition for jobs and wages as low as possible.

As the Conservatives and New Labour are keen to say, less unemployment protection means sharper competition for jobs, and lower overall wages. New Labour ministers have even gone as far as saying that Polish immigrants have been lowering wages in parts of the public sector like the NHS, unlike the unemployed on benefit who don't compete for those jobs...

[Blissex]

«By EU standards, America has a relatively low standardised rate of unemployment»

By and large the standardised rate of unemployment is a pointless number because of at least two reasons:

* The rate has been redefined over time:

http://WWW.ShadowStats.org/
http://WWW.Weedenco.com/welling/Downloads/2006/0804welling022106.pdf
«If the numbers don't seem real to the man in the street, they probably aren't.
Real unemployment right now -- figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression -- is running about 12%.
Real CPI right now is running at about 8%.»

* The USA labour force in effect (because of immigration and substitutability) includes a percentage of some dozen million unemployed Mexicans and a some hundred million unemployed Chinese and Indians. Counting just legal USA residents as if they were not exposed to wage competition from those sources is a joke.