The 1990s – “Full Employability” replaces Full Employment
Speaking to Conservatives at a meeting in Northampton on 27th October 1989, Chancellor John Major declared that “Inflation must go. Ending it cannot be painless. The harsh truth is that if the policy isn’t hurting, it isn’t working”. For those who were in any doubt, the target of such pain was revealed a little over 18 months later when Major`s successor as Chancellor, Norman Lamont, notoriously stated in parliament (on 6 May 1991), that “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.”
Unemployment continued to rise, and peaked at over 2.8m in 1993. Yet despite Chancellor Lamont`s candid claims about the necessity and role of mass unemployment, an international and cross-party consensus was emerging that levels of unemployment were caused not by current government policies but by the legacy of much earlier policies, in the form of the welfare state, and the behaviour allegedly encouraged by such systems.
An influential 1991 book “Unemployment, macroeconomic performance and the labour market” by London School of Economics economists Richard Layard, Stephen Nickell and Richard Jackman led to the 1994 OECD Jobs Study which set the scene for the new employment policies of many governments, there were to be no aspirations to full employment, the goal now was full employability in a deregulated or “flexible” labour market.
Everyone must be employable, but not everyone can be employed
The 1990s saw the introduction of what has become known as the “full employability” paradigm. The persistence of monetarist doctrine meant that unemployment was still the weapon used to fight inflation, so there could be no question of governments implementing policies that might lower unemployment to a level where it would no longer exert sufficient downward pressure on wages. Instead, the attention of elites was focused on “optimising the labour market” through measures to increase the effective labour supply, known in the jargon as “supply-side reforms”.
The 1994 OECD Jobs Study had a particular focus on what it regarded as the negative roles played by any existing legal and financial protections for workers – such as legislated minimum wages and social security payments. Employment security provisions were also considered to be constraints on employment levels because they allegedly encourage firms to adopt an overly cautious approach to job creation.
It also encouraged governments to
“legislate for only moderate levels of benefits, maintain effective checks on eligibility, and guarantee places on active programmes as a substitute for paying passive income support indefinitely”
In the UK, the goal of increasing employability was initially focused on the long-term unemployed. The Liberal Democrat politician and economist Chris Huhne, writing in the Independent in 1993 (How to put the nation back to work – 21 February 1993) outlined the particular problem of long-term unemployment as he saw it:
“A new initiative will be necessary now that long-term unemployment is rising again. Employers are more reluctant to hire people who have been out of work for a long time, and they in turn become demoralised. Like unsold flowers, they are moved further back in the florist’s shop, each time reducing their chances of sale. They fail to compete with those in work, so that there is a rise in the amount of unemployment needed to contain wages.”
For Huhne it was the reduced employability of the long-term unemployed that made them a less attractive commodity in the labour market. Huhne cited the estimates of “leading labour market specialists” Richard Layard and Stephen Nickell who claimed that if unemployment was cut to below “some 8 per cent” then “wage pressures would begin to rise. Wages would steadily outstrip the potential growth of the economy, resulting in accelerating prices”.
The way to get unemployment below this level in Huhne`s eyes was to be found in Sweden’s active labour market policy where
“there are incentives to employers who hire the long-term jobless, and the training genuinely prepares the unemployed for useful jobs”
So the solution was to spend tax-payers` money on in-work subsidies for employers, and to spend yet more money to train both those who would get work and those whose unemployment was necessary to “contain wages”.
Earlier in the article Huhne had acknowledged that the unemployed do not choose their fate:
“Unemployment is overwhelmingly involuntary. People do not choose redundancy. The idea that high benefit levels have encouraged the work-shy is even more absurd today than it was in 1979. The latest calculations by the Organisation for Economic Co-operation and Development show that the number of people who could expect to get benefit worth 70 per cent or more of their previous income if they became unemployed has fallen from 1,870,000 in 1985 to 425,000 in 1991/2.”
The New Labour government and unemployment
The election of a Labour government in May 1997 gave its new Chancellor, Gordon Brown, the chance to implement his long-promised “New Deal” for the unemployed, which he had first mentioned in 1993 – the year that unemployment reached its peak. In countless speeches and radio and television appearances during the 1994-97 period Brown referred to the New Deal. The use of the term no doubt played well with the Labour Party faithful and with prospective voters, it couldn`t have been more misleading however, for the term referred of course to President Roosevelt`s economic programme in the midst of depression-hit America. Roosevelt`s New Deal included government-created jobs, but in stark contrast there was no intention from Brown to have a Labour government create jobs, instead, the government`s part of the bargain was to transform more of the unemployed into market-ready “jobseekers”.
The “New” Labour government employed the aforementioned labour economist Richard Layard as a consultant to implement the New Deal`s welfare-to-work approach to unemployment. In a paper that year Layard reaffirmed the approach to the labour market he had helped to formulate in 1991:
“Active labour market policy increases the number of employable workers, and thus reduces the unemployment needed to control inflation”
Earlier in the same paper Layard demonstrated what passes for a social conscience in the world of mainstream labour economists when he compared the plight of the unemployed to that of the working poor:
“Unemployment is one of the major sources of misery in our society. Being unemployed makes a person much more unhappy than being poor. So a civilised society should not tolerate our present levels of unemployment.”
Of course the policy which creates unemployment does so in order to create “downward pressure on earnings” which produces the ultimate policy goal – the working poor, whose low wages translate into high profits for their employers.
In December 1997 the minutes of the Bank of England`s Monetary Policy Committee showed the same concern, namely, that the long-term unemployed were not “competing” and thereby, as it put it, not exerting as much “downward pressure on earnings” as the short-term unemployed. The following paragraphs taken from those minutes demonstrate the thinking (the letter “A” before each paragraph stands for Annex):
A41 The relationship between unemployment and earnings was then considered: in particular, did short-term unemployment exert more downward pressure on earnings than long-term unemployment?
A43 Whatever the reason, the implications for the effect of long-term unemployment on wage pressure were the same: when the proportion of long-term jobless was high, for a given level of total unemployment, workers would probably realise that they could not be replaced so easily, and hence that their bargaining strength was higher.
A44 The empirical evidence in general supported a more powerful role for short-term unemployment in putting downward pressure on wages. Some studies suggested that only short-term unemployment mattered. But recent Bank research had suggested that, although short-term unemployment was more important, the potential downward effect of long-term unemployment on wages should not be disregarded.
The “New Deal” for young people was up-and-running nationwide from April 1998, and for adults from June 1998. The sham nature of this cynically-named scheme would have been apparent to anyone who studied the minutes of Monetary Policy Committee`s June 1998 meeting, which revealed a concern that wage rises indicated a need for unemployment to rise:
“the earnings data suggested that it was more likely that unemployment was below the rate compatible with stable inflation. In that case, it was probable that unemployment would have to rise to hit the inflation target on a sustainable basis.”
The Bank of England raised interest rates to 7.5% that month in its bid to raise unemployment, and when the Treasury Select Committee`s Report was published on 29th July 1998, MPs on the committee noted that the Monetary Policy Committee`s position was that “unemployment must rise if the inflation target is to be met”.
Brown`s “New Deal” had been conceived at the height of the last recession but it was being implemented during a boom.
The debate on unemployment in the mainstream media
July to September 1998 was marked by an unusually open debate in the mainstream media on the amount of unemployment needed to control inflation. On July 22nd the economics editor of the Financial Times (FT), Martin Wolf wrote an editorial entitled “The adversity test” where he forecast that
“Adversity is now on the way, in the form of rising unemployment”
Wolf made no reference to the newly implemented New Deal nor why his forecast flew in the face of a scheme which was supposed to lower unemployment. His concern was that:
“the rise in pay inflation: earnings in the private sector have recently been growing at an underlying rate of 6.2 per cent, well above the rate consistent with the inflation target of 2.5 per cent“
And in Wolf`s estimation what was required was:
“a cumulative shortfall of between 2 and 4 per cent of GDP is needed, depending on the responsiveness of earnings to changes in unemployment, if inflation is to be brought back to target”
and he found “disturbing” the “the nature of the coming slowdown and the lack of public awareness of its imminence”
Two days later a letter was published in the FT from Peter Robinson, of the Institute for Public Policy Research. Robinson wrote:
“Sir, It was refreshing to see Martin Wolf spelling out what has been implicit in Treasury documents for the last 12 months: that a rise in unemployment is perceived to be necessary by the government in order to curb inflation (“The adversity test”).
I would be even more explicit than Mr Wolf. If he and his FT colleagues are right that the “natural” rate of (claimant) unemployment consistent with steady inflation is between 7 and 8 per cent, then we are in for a rise in unemployment of at least three-quarters of a million.
If the Treasury is right that we fell below the natural rate in the first half of 1997, then claimant unemployment has to rise by at least one third of a million. I say “at least” because of course the current orthodoxy tells us that unemployment initially has to rise above the natural rate before inflation will fall. So the Treasury must be bargaining for at least half a million extra claimant unemployed.
These kinds of figures do not amount to a mere minor correction in the labour market. They signal major economic and social costs, which are likely to throw much of the government’s agenda off course.
On the other hand: is there anyone else out there who is uncomfortable with this orthodoxy and thinks that we do not need another damaging recession? As Martin Wolf has said, at least let us have an open debate on these matters.”
On August 7th the Guardian reported on an interview Gordon Brown had given the previous day. Headed “UK will avoid recession, says Brown”, the article, without mentioning prospects for unemployment or the New Deal said:
“Mr Brown said the economy was witnessing a “justifiable and necessary slowdown” but that he could see no signs that growth would grind to a halt. “I am confident that we are on track to avoid recession””
and finished with a threat from Brown, predictably aimed at wages, not prices:
“the Chancellor repeated his warning that a failure to exercise pay moderation could trigger further tough action from the Bank.”
A week after this interview, economist Robert Chote noted in the FT how candid the Bank of England had been the day before (in both its inflation report and minutes)
(Unemployment must rise to hit inflation target, Bank warns, Financial Times – August 13, 1998)
“Unemployment will have to rise if inflation is to be stabilised at the government’s target rate, the Bank of England said yesterday. But it refused to predict by how much the jobless total would need to increase.
The Bank has rarely been as explicit as it was yesterday that unemployment must rise, but it remains reluctant to quantify the impact.”
Chote contrasted the Bank`s relative candour with that of Gordon Brown whom he said:
“concedes that the economy faces a “necessary slowdown”, but becomes evasive when asked about the implication for unemployment.”
Another FT editorial, this time anonymous, entitled “Bank calls the turn” was published on September 11, and was blatant in calling for an increase in unemployment of up to half a million:
“unemployment must now be allowed to rise – perhaps by 500,000 – to bring the economy back to a non-inflationary path. To achieve this the Bank would need to lower rates very cautiously, until it is convinced that the domestic economy and private sector wages are responding to the treatment.”
adding helpfully that:
“the Bank must find the persuasive power to carry public opinion through what may prove to be a long, dark tunnel.”
Four days later a reply to this, in the form of a letter to the FT`s editor from Geoffrey Dicks, UK economist at Greenwich NatWest, was published under the title “Something wrong with natural rate of unemployment theory, surely”. Dicks pointed out that the NAIRU (non-accelerating inflation rate of unemployment) theory implicit in the FT editorial`s analysis says that:
“there is a level of unemployment that is consistent with stable inflation. If the authorities try to hold unemployment below that level, all that will happen is that inflation will continue to rise – and at an increasing rate.”
While the FT`s editorial`s concerns had been prompted by a sustained growth in earnings inflation , Dicks also pointed out that the FT`s editorial writers had failed to notice that price inflation had not been behaving as the theory predicts:
“By arguing for a 500,000 rise in unemployment you are implicitly saying that unemployment has been below the natural rate for some 2 1/2 years. If the strict theory of the NAIRU has any validity, by now inflation should surely be on an increasing (accelerating?) trend? Is it? Quite the reverse. Does this not imply that there is something wrong with the theory?
The distinction is not trivial. Sacrificing the jobs of 500,000 people to a theory which appears to be contradicted by the evidence could hardly be more irresponsible. Fortunately the Monetary Policy Committee appears to be more pragmatic than you are.
While Dicks` position is less dogmatic than the other commentators we shall later see that he, like the Monetary Policy Committee, is certainly not above advocating the use of unemployment as a weapon against inflation, albeit in a more pragmatic way.
On September 25, the BBC, at least on its website, if not on its broadcasts, had apparently decided to ditch its bogus claim to “balance” in an article entitled “Why unemployment has to rise”
“the Bank of England recognises that, however painful, unemployment has to rise for the government to hit its inflation target. And the bank is determined to reach this goal.”
Once again there was no mention of the New Deal or the Chancellor`s thinly-veiled support for the Bank`s only means of achieving an inflation target set by the government.
Inflation hawks proved wrong
Already by February 1999 the evidence was going against predictions of the inflation hawks who had called for a big increase in unemployment. In an article triumphantly entitled “How wage inflation has been tamed” published in the Independent on February 16th, Lea Paterson outlined the changed position of the Bank of England since the previous June:
“EIGHT MONTHS ago the Bank of England was so concerned about inflationary pressures in the labour market that it hiked UK interest rates up to 7.5 per cent. Unemployment was unsustainably low, the Bank said, and would have to rise in order to keep inflation in check.
Since that shock rate rise last June, unemployment has fallen further and employment has risen. Official figures out tomorrow are expected to show unemployment staying close to 20-year lows. Despite this, the Bank felt comfortable cutting interest rates half a point to 5.5 per cent this month and leaving the door open for further cuts in last week’s quarterly inflation report.”
Similarly, 6 months later in August 1999, Geoffrey Dicks was able to point out in the FT that:
“Where a year ago many were arguing that only a large increase in unemployment could stabilise inflation, today a lower level of unemployment seems to carry little or no inflationary threat.”
Dicks rhetorically asked “What is going on?” and went on to answer his own question with a brief (and simplistic) historical analysis of the 80s and early 90s, before concluding that:
“In a recession the trade-off between unemployment and earnings is stark. The trade-off is far more muted in the recovery phase of the cycle. “
Despite the fact that his article was entitled “Unemployed need not pay for low inflation”, Dicks went onto say “you get more inflation bang for your unemployment buck in the recession phase of the cycle” and even when he returned to the prospects for the UK economy during the boom, he concluded
“It is unlikely we can keep lowering unemployment without seeing any inflationary consequences.”
The debate in the mainstream media during the late 1990s on the subject of inflation, unemployment, and wages was characteristically narrow even if it was uncharacteristically candid. While the level of unemployment deemed necessary to control inflation was up for discussion, there was no questioning of the right of an elite to impose the poverty, misery, and social exclusion of unemployment on people, in pursuit of an inflation target.
It is highly significant that the fundamental dishonesty behind Gordon Brown`s New Deal was not pointed out by any of the mainstream commentators when circumstances provided such an ample opportunity. The fact that a programme ostensibly aimed at getting people into work was implemented when the Bank of England was raising interest rates in order to raise unemployment would have been irresistible for any truly objective journalist.