Forced into work?

Earlier today, Tim Montgomerie, referring to a Times leader, tweeted:

(1) Record, unexpected jobs growth. (2) Massive reform of welfare incentives. Could the two be connected?

The answer could be: not much.

To see why, let's ask the question we must ask about all theories in the social sciences: what's the mechanism? Through what channel might "a tilting of the welfare system away from one that favours the dole towards one that favours work" reduce unemployment?

One possibility is that it encourages the unemployed to fill the jobs that are available rather than wait for the ideal job or lounge around the house.

If this were the case, we'd expect to see an inward shift of the Beveridge curve. We should see lower unemployment and fewer unfilled vacancies because the jobless would rather take the jobs that are available.  

But this hasn't happened. My chart shows that since the Tories took office, the number of unfilled vacancies has risen. What's happened is a move along the Beveridge curve, rather than an inward shift in it. This corroborates micro-level evidence that the Help to Work scheme had only small effects in getting people into employment.

The big story since 2010 is not that the unemployed have been filling vacancies faster but rather that there's been an increase in the demand for labour.

Now, there are many reasons why the demand for labour has risen. But, in fairness to Tim, benefit reform might be one. Forcing the unemployed to look harder for work might have increased the effective supply of labour and so bid down wages which in turn has increased demand.

Personally, I suspect that whilst there's something in this, the power of this mechanism might be weak. For one thing, many of the unemployed want to work anyway, because for many of them joblessness is a source of great misery. For another, the minimum wage limits the extent to which wages can fall. And for a third, the price elasticity of demand for labour might not be very high, in part because the market is lumpy - it's probably less than unity (pdf) - which means that a given fall in wages won't create many jobs.

Very many things in the social sciences are true but not very much so. I suspect the idea that benefit reform has priced people into jobs is one such case.

But perhaps I'm wrong, and the reforms have worked as Tim thinks. Even if this is true, though, I'd keep quiet if I were he: does he really want to argue that the government is directly responsible for falling wages?

Comments

[Dave Timoney]

Given Montgomerie's audience at The Times and elsewhere, I suspect the answer to your closing question is yes.

[Ben]

Here is what is forcing people out to work, and has been doing since 1997:

insane housing costs
insane care costs

By design. Housewife/husband provides value but it can't be taxed. The state hates this as it doesn't show up on GDP and they can't get a slice of the action.

Up goes GDP and we are all poorer.

[Ralph Musgrave]

Chris says “Forcing the unemployed to look harder for work might have increased the effective supply of labour and so bid down wages which in turn has increased demand.” Bit of a dodgy statement that.

As Keynes rightly pointed out, a cut in everyone’s wage achieves very little. That’s because of everyone’s pay (including for the sake of simplicity the pay of employers) falls by X%, then prices fall by X% and we’re all back where we started. The only effect the latter X% change has is that the REAL VALUE of the stock of base money and the national debt rises by X%, which raises private sector savings in real terms a bit, which induces more spending. That’s called the “Pigou effect”. But it’s not a brilliant way of reducing unemployment.

In contrast to the above OVERALL cut in wages, what workfare does do is cut the cost of marginal or not desperately suitable employees for the employer. That in theory ought to cut unemployment (or more accurately, reduce NAIRU, which in turn will result in unemployment falling).

Also Chris says “For another, the minimum wage limits the extent to which wages can fall.” I suggest min wages are irrelevant: the important point is (as I implied just above) that the cost of labour to the employer is cut: employees still get benefits / min wage or whatever.

Strikes me that workfare works in theory, but governments in practice make a complete dog’s dinner of it, as seems to be the case with the Work Programme.

[Chris Purnell]

"Very many things in the social sciences are true but not very much so."

This is actually too Delphic for me to share its inner meaning. Could you mean 'true but not sharing the full characteristics of truth?' Which would be Wittgensteinian without the language game characteristics.

[Frances Coppola (@Frances_Coppola)]

Here's Fraser Nelson arguing rather more strongly than Montgomerie that the "jobs miracle" is due to IDS's welfare reforms:

http://www.telegraph.co.uk/news/politics/10973875/Whats-the-secret-behind-our-jobs-miracle-Welfare-reform.html

Unsurprisingly, he doesn't mention falling wages. He doesn't mention the large number of retired people who have rejoined the workforce in the last few years, either - no-one's claiming that benefit reforms have forced them back to work (though they might argue the Bank of England has). Fraser has always been a tad selective with statistics.

Giles Wilkes discusses both, though:

http://freethinkecon.wordpress.com/2014/06/16/when-the-price-stays-down-and-the-quantity-goes-up/

[TickyW]

Giles Wilkes's thoughts on the subject are the most illuminating. There is no mystery - traditional economic analysis provides an adequate explanation. And it does seem as if the welfare reforms are playing their part.

[guthrie]

On the other hand, what's the cost of the welfare 'reforms'? IN terms of extra money spent, people harassed and their lives made a misery etc?