The full employment challenge

Many technocrats think the UK is at or around full employment. What they don't say is that this requires some radical thinking about economic policy.

The Bank's chief economist Huw Pill recently said that the labour market so tight that higher interest rates might be needed to cut aggregate demand and inflation. And Sir Keir Starmer says: "We’re going to have to be fiscally disciplined." The only charitable reading of this is that it means he thinks he's going to inherit a reasonably tight labour market (albeit perhaps not as much so as now) and so a fiscal expansion would be inflationary.

Which raises a big problem. Any intelligent government will need many more workers in some sectors: in health and social care; in housebuilding; in insulating homes; or making and installing solar panels and windmills. But where will these workers come from? The answer used to be simple: migrants and the dole queues. If these are not sufficient to supply the extra staff, however, we need something else - to destroy some existing jobs. Rachel Reeves has promised to "create good jobs", but this might require the abolition of bad ones.

At full employment, doing the things we want - building houses, improving social care, greening the economy - means doing less of something else. Progress must be a matter of creative destruction.
Which jobs should be destroyed? It's here that we need radical thinking.

For a long time, many economists have thought that the labour market was micro efficient but macro inefficient. As Keynes said:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

If this is the case, then the solution to our problem is simple: higher taxes would destroy private sector jobs generally, thus making room for job creation in priority sectors.

But it might not be the case. There are reasons to think the existing system does seriously misemploy factors of production.

I don't mean that simply that people spend too much on trinkets of frivolous utility, thus creating over-employment in nail bars, takeaway restaurants or in sports car manufacturing. Instead, I'm thinking of five other mechanisms.

Agency failure. The "bullshit jobs" described by David Graeber are a product of this: middle managers would rather expand their empire of underlings than maximize "shareholder value". So to is the guard labour documented by Samuel Bowles and Arjun Jayadev: security guards, supervisors and some of legal system are in employed to ensure that agents (workers) do what principals (capitalists) want. I'd add many fund managers to this category: savers don't know that active managers on average under-perform the market and so employ too many of them.

Wrong policy choices. One obvious example here are the Border Force agents and lawyers needed to enforce an illiberal immigration policy. I'd add the lawyers, accountants and DWP staff employed to cope with an excessively complicated tax and benefit system, and the police required to enforce anti-drugs laws.

Ideology. Skill is a social construct, a product of ideology. Fund managers are considered skilled even though “the vast majority” of them are “genuinely unskilled” measured by their ability to beat the market. Conversely, care workers are considered unskilled not because they lack technique because they are disproportionately women or ethnic minorities. The result is excessive demand for some workers (many financiers and managers) and insufficient for others.

Externalities. Where the social cost of pollution is unpriced or under-priced, some industries are larger than would be socially optimum and so have too many workers. Standard examples here are those which emit carbon and other air pollutants. But these aren't the only forms of pollution. There's also risk pollution. The costs of financial crises are borne by all of us rather than internalized with the financial system, and so there is excess employment in the sector. Similarly, when Bulb went bust, we all had to pay more, reminding us that privatized utilities might employ more people than necessary. But there's something else. A lot of "journalism" and poshcuntstalkshit programmes are intellectual pollution; they degrade the public sphere and contribute to bad government.

Peer pressure. Robert Frank has shown that some types of consumer spending (such as on big cars) are fuelled by a desire to keep up with the Joneses, leading to excessive employment in those sectors. He advocates a progressive consumption tax to - in effect - ratchet down this arms race.

Here, though, is a problem. Except perhaps in our last case, higher taxes in general will not on their own destroy the right jobs. We need other policies: tax simplification; deregulation in some sectors and more regulation in others; nationalization; carbon taxes and Pigou taxes; worker democracy; cultural change to valorise care work; better financial education; and so on. It's not clear to me, however, that Labour is thinking along these lines, or even is aware of the problem.

Maybe it is right to be. Perhaps the labour market isn't as tight as Pill believes: this is a purely empirical question the answer to which must not be coloured by one's ideology. (The level of unemployment is not a sufficient metric here: what also matters are mismatches between demand and supply). Or perhaps it will be loose by the time Labour takes office.

Herein lies a paradox. In some respects, inheriting a recession would make things easier for Labour. In such a world, it could create jobs in the care sector and green economy simply by fiscal expansion - assuming it has the will to reject moronic talk of fiscal responsibility. Intellectually, there is no challenge here.

If, however, the labour market is tight, decarbonizing the economy and fixing health and social care will require much more thought.

For decades, we've thought of full employment as an ideal. Which in many ways it is: joblessness is a big cause of unhappiness. In a sclerotic, low-productivity economy, however, it also brings with challenges - ones which are largely neglected.

Comments

[Laban]

" where will these workers come from? The answer used to be simple: migrants and the dole queues"

That answer only became the default in the Blair post-EU accession world. I can just remember a capitalist system where, if you couldn't attract workers at £10 an hour, you raised your wages, and if you couldn't afford to raise wages you went out of business. Think it had a name "creative destruction".

Only post-2005 has the notion become rooted that "my coffee shop needs staff" and that it's HMG's job to import them.

This has happened in the past, of course - 60s mill-owners in Lancashire and Yorkshire, metal bashers in the Black Country, hospital recruiters in London, didn't want to pay First World wages so imported Third World people. The mills still shut and the foundries still closed, but the people remain.

The old fashioned way of getting new workers was making it possible for young men and women to get together and raise families, something so obvious that it didn't have a name, until someone coined Affordable Family Formation.

But... house prices and rents are the things you need in place to start a family.

28 used to be the kind of age when young people would settle down... now you have people with postgrad degrees sharing a house like students into their late 30s.

https://discussion.theguardian.com/comment-permalink/160668492

"My daughter recently completed an M.Sc. in user interface design, and quickly got a job at a major educational publisher. She's on £28,000 a year, can't afford to live in the city where she works (but she mostly works remotely, so she lives with me) and her student loans amount to over £40,000."

Perhaps we need to sort the situation where employers offer wages that employees can't afford to live on. Late 20s used to be the age when you bought your first house, not when you found you couldn't afford a rented room.

[Scurra]

There's also the weird assumption that all workers are interchangeably the same. I'm not talking about things like training or education, I'm simply talking about aspects of personality etc.
For instance, you could employ me as a shop assistant, but it would be a very bad idea unless you wanted to actively discourage customers.

And this is merely a manifestation of a wider problem which can be traced directly to the moment "people" became merely assets on a spreadsheet. That applies to education, health care, the criminal justice system and so on, just as much as it does to employment. It's one of those flaws that's so big that it makes the term "the elephant in the room" feel inadequate.

[jim]

I fear we are seeing a wider problem. We are entering a long period of stasis, no really good new technologies - apart from pharma and biosciences. I reckon EVs will plateau and make little contribution, fusion power will be a long way off. Semiconductor technology will get more difficult and expensive.

This is why the Americans seem to be retrenching and trying to limit the Chinese. There are few new goodies around and the US wants to have them. Europe is usefully hobbled by Russia and energy. Asia is still too chaotic. Pull up the drawbridge time. Which leaves the UK cut loose.

The UK's current employment problem is partly due to the foolishness of Brexit and partly due to everyone having a degree and wanting a degree-type job to go with it. But no such new degree-type jobs can exist outside of law and beancounting and medicine. The education system that delivered these degrees was based on a 1950s to 1970s model of employment. Now what sells is Influencer Studies and Harry & Meghan Studies.

Meanwhile we do indeed have more lawyers and accountants/capita than even the Americans. Clever people all and quite likely not paying much tax either. Bully for them, that is the new industry, no PAYE.

Solutions - take a chainsaw to all flummery, all but Charles can get a job and he can squeeze his own toothpaste. Our army has more horses than tanks - off to the pie factory with them followed by our useless tanks to the steel mills. Then scrap planning permission but ensure strict and enforcable building standards. And get a lot less fussy about who we will work with.

[D]

"I was looking for a job, and then I found a job"

[ltr]

I fear we are seeing a wider problem. We are entering a long period of stasis, no really good new technologies - apart from pharma and biosciences...

[ Forgive me, but this makes no sense. Simply look at the state of British infrastructure, hard and soft, and think of what it could and should be. ]

[ltr]

Notice that productivity in the UK has declined since 2007, which is of course what austerity unfortunately assured would happen:

https://fred.stlouisfed.org/graph/?g=XWld

November 1, 2014

Total Factor Productivity at Constant National Prices for United States, United Kingdom, France and Germany, 2000-2019

(Indexed to 2000)

https://fred.stlouisfed.org/graph/?g=XWl5

November 1, 2014

Total Factor Productivity at Constant National Prices for United States, United Kingdom, France and Germany, 2000-2019

(Indexed to 2019)

[Blissex]

«But where will these workers come from? The answer used to be simple: migrants and the dole queues.»

In a market economy, "The Markets" are supposed to adjust prices, like wages, to transfer resources from less useful to more useful productive activities, because resources are scarce. It is not the for the government to expand supply of workers or restrict the supply of jobs to make resources less scarce for "investors". But we don't have a market economy, but a rentier one.

«We need other policies: tax simplification; deregulation in some sectors and more regulation in others; nationalization; carbon taxes and Pigou taxes; worker democracy; cultural change to valorise care work; better financial education; and so on.»

A plurality of voters seem to think this is just COMMUNISM! and the policies we need are those to boost property prices and rents that are too low, as too many renters or buyers can afford their own room or live only 2 to a room.

«(The level of unemployment is not a sufficient metric here: what also matters are mismatches between demand and supply).»

One of the many things that noddy keynesianism and noddy liberalism has erased from political economy discussions is the difference between "general gluts" (all or nearly all markets have an excess of supply wrt demand) and "special gluts" (only some sectors have that). It is good that our blogger is hinting at that important but (deliberately) forgotten difference.

«For decades, we've thought of full employment as an ideal. Which in many ways it is: joblessness is a big cause of unhappiness.»

Actually for decades a large number of voters have thought of a tight housing market as an ideal. Which it is: for them taking 6 months to find a buyer or a renter for a property is a big cause of unhappiness.

The question is whether for a voter "the economy" is better when it takes 6 months to find a job or a place to live vs. 6 months to fill a vacancy or a tenancy,

For the past 40 years english politics have aimed to ensure that it takes 6 months to find a job or a place to live.

[aragon]

As penance this is almost on topic.

The young cannot get employment, and immigration was let Rip by Tony Blair (Prime-minster until 2007), but apparently we still have a Labour shortage.

In the last fifty or so years (1970-current), four factors mean the political elite could ignore the economy.

North Sea Oil (until the 2007).
Immigration - Import labour
Globalisation - Export Jobs.
Fictionalisation - Finance loots the economy (and Housing).

All of which immigrate the working class.

As their can't be a shortage of labour, perhaps the 'talk of a tight labour market' is an excuse to discipline the strikers and the working class in general, in the face of high inflation and corporate profit taking?

After all if the economic pie is not growing...the elite needs a bigger slice...

[Blissex]

«As their can't be a shortage of labour»

An Economist could tell you that there is a shortage of labour as long as the price of labour is higher than the lowest cost of living and reproduction of workers. As long as workers are not collectively on the edge of starvation, have any free time, and are not living 8 to a room, they are exploiting their employers by profiteering thanks to a shortage of labour. Just as an Economist could tell you that there is a shortage of capital as long as interest (or profit) rates are higher than zero.

But employers don't even need the analytical power of neoclassical Economics to figure that out, they just look at "The Markets", and know that the global wage rate is well below £1/hour therefore as the UK wage rate is 10 times higher can only be due to a gigantic shortage of labour in the UK, of which UK workers take advantage to exploit their employers by extracting from them a huge surplus thanks to the coercive power of the state and trade unions.

Imagine this: you ask two tradesmen for a quote for improving your conservatory, and you get two quotes:

* Mr Wang from the other side of town quotes £60 and says that by working 12 hours per day he can get it done over this week in 5 days so you can enjoy your conservatory already the next weekend.

* Mr. Briggs from your parish quotes £800 plus pension contribution plus health insurance plus paid holidays, and tells you he will be working 7 hours a day not including short breaks, and that will take 2 weeks, and he cannot start for a month because there is a labour shortage and he is fully booked, and when you mention mr. Wang's quote he says that he lives in your same parish instead of the other side of town, and the local council backs him to maintain "standards".

Therefore Peter Mandelson argued as to New Labour that in "the urgent need to remove rigidities and incorporate flexibility in capital, product and labour markets, we are all Thatcherites now" because New Labour cared about social justice, to protect exploited employers from the greed of parasitic UK workers:

* Those “flexibilities in capital, product” to make employers free to move their capital to states with more social justice (e.g. Bangladesh), and freely import the commodities produced there.

* The flexibility in “labour markets” to help employers fight the huge exploitation by UK workers by hiring immigrant workers who only expect the global wage.

It may surprise some readers, but most employers are marxist to a fault, they just do marxism the other way round.

[Blissex]

«discipline the strikers and the working class in general, in the face of high inflation»

Actually the other way round: the tool is high inflation, it is not the context, because this period of high inflation looks like a standard policy choice to discipline greedily exploitative workers, and thus also help them win the race to the bottom. Excessive wages compared to worldwide markets can be reduced via some policy alternatives:

* External devaluation: the national currency gets constantly devalued so local labour costs in nominal terms stay constants but in hard currency become more competitive. Places like Italy and Greece kept doing that, and so has the UK been doing for a long time too in a less flamboyant way.

* Internal disinflation (of labour prices): by way of triggering a recession, or by installing a government (like Pinochet's for example) keener on social justice for employers, wages, working conditions and additional costs like pensions and taxes can be lowered in nominal terms to become more competitive.

* Internal inflation (of consumer prices): by way of triggering temporary surge of inflation, while local labour costs remain constant in nominal terms, the cost of living rises making real labour costs more competitive. Among others housing cost inflation can be a powerful means to achieve that also in the long term.

The latter policy is what is happening in the UK, the BoE and Treasury seem to have planned 2-3 years of 10-20% consumer inflation to cut real UK wages by around 25-30%, with consumer inflation returning to 1-2% by the end of 2024, in time for the next general elections.