Not a fiscal problem

There's one point about the government's proposed benefit cap that's so obvious I'm embarrassed to point it out. It's that spending on non-pension benefits is not so much a fiscal problem as a labour market one, and an international one at that.

What I mean is that since the 1970s there's been a decline in demand for unskilled (pdf) workers across the western world. This has led to a combination of worklessness, economic inactivity and/or poverty wages across Europe and the US. This was the main reason why, even before the crisis, over five million (pdf) working-age Brits were claiming benefits. And it's this that explained why spending on benefits rose as a share of GDP so much between the 1970s and 90s.

In this context, the UK is not obviously an outlier. The OECD estimates that in 2010 (the latest year for which we have figures), only 56% of UK people who left school before 18 were in work. That compares to 85.1% for people with degrees. But these numbers are close to the OECD averages, of 55.5% and 83.1% respectively.

The UK's problem, then, isn't that we have an abnormal number of workshy unemployables. Nor is it - as my chart shows - that working age benefits are unusually high as a share of GDP right now. Instead, it's that we have been victims of a worldwide problem.

This suggests that if we want to cap working age welfare benefits, we should get more people into work.

And herein lies a hope,. It could be that the relative fall in demand for unskilled workers has stopped recently; it has been middlingly-skilled workers who have been displaced by technology recently, not grunt workers. This is consistent with benefit spending falling as a share of GDP in the 00s.

Whether this can continue is, of course, impossible to say; knowledge of the future is a contradiction in terms. My point is simply an obvious one which Keynes made 80 years ago:

Look after the unemployment, and the Budget will look after itself.

Comments

[Luis Enrique]

David Autor has some great papers in this area

http://economics.mit.edu/faculty/dautor/policy

[Metatone]

83.1% doesn't sound like great news.

17% graduate unemployment?

[Metatone]

I also worry about scale effects.

What's the difference in numbers between skilled and unskilled (and mid-skilled) parts of the economy?

To put it another way, it seems meaningful that countries like Spain can't find employment even for all their high skilled workers. This suggests that unless we find ways to expand our economies then training more workers to a high level will just largely change their unemployed status from "unemployed unskilled" to "unemployed high skilled."

Or another example, some governmental report cited "informational biology" graduates as an example of "high skill shortages" - but while it's obviously true that the education system needs to respond to this, under current conditions there are actually no more than 1000 jobs across Europe in this skill. The scales between unemployment and high skill employment are just widely divergent.

[chris]

@ Metatone - no. The empt/pop ratio can be low because people are out of the labour force because of illness/ being home-makers or being early retired as well as being unemployed.
You're certainly right that there's a danger of unemployment among the high-skilled; this is why training and education are not enough.

[Ralph Musgrave]

Interesting article, but the Keynes quote at the end doesn’t have much bearing on the contents of the article.

The real relevance of that Keynes quote is that it rebuts the deficit and debt obsession suffered by numerous economic illiterates in high places: Rogoff, Reinhart, the IMF, the OECD, the Labour and Tory parties, etc.

As advocates of Modern Monetary Theory keep pointing out (and there is little difference between MMT and Keynes) the deficit and debt are a complete, total and utter irrelevance: the only real constraint on expanding employment is inflation (for given labour market efficiency).

I.e. ignore the deficit and debt (or the “budget” in Keynes words). Just minimise unemployment in as far as that’s compatible with acceptable inflation, and the deficit and debt will bob up and down depending on the private sector’s desire to hold debt.

[patrick]

I wonder if the effect of any decline in demand for middlingly-skilled workers will simply be to push them into competition with the un-skilled workers for the low-skill jobs. The kid who leaves school with no qualifications can't get that supermarket check-out job because it's been taken by a graduate who can't find other work, and Sainsburys and Waitrose would rather have someone polite and middle class to deal with their customers (although of course, supermarket check-out workers are being replaced by robots anyway)

[john malpas]

so importing unskilled workers serves what purpose?

[rogerh]

A spot of market analysis - the key is to look at the employment profile of one's economy. So which markets best match our employment needs? The 'unethical' ones. We might baulk at the terrorist market but recreational drugs seem a good world market. Then military kit seems expensive and unprofitable but the world's insurgents seem in need of much simpler kit - for cash and encourages the high-end sales.

Closer to home we might encourage brothels and drug dens - useful employment opportunities. We will shortly have unemployed soldiers on our hands - use them for some 'creative destruction' - better than endless planning enquiries and quickly followed by useful reconstruction opportunities. I think you get the idea.

[Staberinde]

And how do you reconcile this analysis with large-scale migration of unskilled foreign workers to the UK?

The answer to your analysis is threefold.

1. Improve the skill base through education and training

2. Increase the number of unskilled jobs

3. Reduce the number of unskilled migrants

Without (3), you simply create a magnet for foreign unskilled labour, condemning vast swathes of UK citizens to a life on benefits.