Academic journal article National Institute Economic Review

Roads to Full Employment

Academic journal article National Institute Economic Review

Roads to Full Employment

Article excerpt

Can unemployment be cured by flexible labour markets? This current nostrum had little to do with the maintenance of full employment, with little inflation, throughout the 1950s and 1960s. The secret of that success can be traced to the high level of investment, which stimulated both supply and demand in the economy, and enhanced the employability of labour. Downward pressures exerted on the cost of labour appear to have had some effect on unemployment in the 1980s, but are likely to run out of stream before it is reduced to a tolerable level. Attention now needs to be concentrated on enhancing the employability of labour. But whether this is attempted through tax incentives to investment or other means, its purpose will be liable to be thwarted unless accompanied by general restraint in the upward adjustment of real wages.

It has become fashionable nowadays to think the unthinkable. Among the unthinkables of the 1980s which has recently been having some attention is the idea of full employment as an objective of government policy. Generally accepted in the 1950s and 1960s, the idea became buried in the 1970s by the increasing concern of the public about inflation and the decreasing confidence of economists that anything but inflation could result from pursuing it. When the Labour prime minister was forced to acknowledge, in the autumn of 1976, that to 'increase employment by cutting taxes and boosting government spending' was no longer an option, he was bowing as much to the external pressures on sterling as to the changing climate of economic opinion. But after the former had passed, the latter took a firm hold on the Conservative government which came to power in 1979. Fiscal and monetary policy, it was then held, affected only the rate of inflation, and would be dedicated to reducing it. What happened to employment would depend upon the functioning of the 'real' economy - productivity, enterprise, flexible markets - over which the government's influence was best when least.(1) As time went by, however, it became increasingly difficult to believe that the rising trend of unemployment could be dissociated from the fiscal, monetary and exchange-rate policies which eventually succeeded in bearing down on the rate of inflation. In doing so, it was now suggested, these policies had neglected to take into account that there were obstacles preventing the price of labour from adapting (in the way that the new economics had thought that it would) to the prices of the goods and services which people worked in order to buy. The markets for goods and services were seen as relatively free, or at any rate subject to international competition, while the market for labour was everywhere in chains. Since these prevented money wage increases from responding fully to the falling trend of price increases, real wages became 'too high' for employment to be maintained at earlier levels. Under the influence of this analysis, the governments of the 1980s gradually shifted away from the view that they could do nothing about unemployment, and initiated today's more active policy which seeks to improve the capacity of the labour market itself to resolve the problem.

In this article, the problem we are concerned with is the unemployment we see as likely to remain when the present cyclical recovery has run its course. It is of a type, sometimes described as 'structural', which is unlikely to be eliminated solely by increasing demand for goods and services, even if higher and possibly increasing inflation is tolerated as a consequence. Andrew Britton, expressing what is probably a representative view, suggests that 'structural' unemployment in this sense is 'of the order of 2 to 2 1/2 millions', in the UK.(2) In the currently fashionable prescription for it, the code-word is 'flexibility' of the labour market. This has its own interpretation. Wages should be enabled to fall (or to moderate their rate of increase) in response to slack conditions in the labour market; but if wages were to rise more rapidly or vigorously in response to an increase in the demand for labour, that would not be the flexibility the doctor ordered. …

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