Should Osborne target ‘full employment’?
27 January 2015
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Tax and Fiscal Policy
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George Osborne has recently taken to the cause of securing ‘full employment’. A crude analysis might suggest that this a clever political move to focus attention on a Conservative success story – namely, the labour market and the dramatic fall in unemployment over the last two years. At a time when deficit reduction has pretty much stalled, why not play to your strengths?
The danger with these sorts of ‘aims’ though, especially when they are ambiguous, is that they create the demand for action which can be counter-productive. For many political observers, for example, the term ‘full employment’ echoes the post-war period, when it was seen as a central task of government to keep as many people employed as possible.
I do not need to remind ConservativeHome readers that this economic orthodoxy ended in the disastrous wage-price spirals and militantism of the 1970s. When workers in a labour market know that policymakers will run fiscal and monetary measures with a bias to the inflationary upside in order to reduce unemployment and impose measures to increase job security, inflation expectations rise, militancy and shirking increase, and attempts to get unemployment below its ‘structural’ rate requires ever-accelerating inflation.
Nevertheless, many still hanker for this idea of an activist state guaranteeing everyone work, whether this be directly through state employment or by the now oh-so-fashionable ‘job guarantees’. If ‘full employment’ once again becomes a general government aim, the risk is that we return to a world where any job loss is mourned, and attempts are made to ‘save’ or ‘protect’ jobs rather than allowing the process of creative destruction to operate. Prior to the crisis, it was estimated that there was job churn of around four million a year, helping to facilitate the productivity improvements which tend to lead to higher wages.
Thankfully, this activist state concept is the not the idea that Conservatives are pushing for. But the ambiguity of the term means ‘full employment’ can be interpreted in many ways.
For the economist, it now means something along the lines of the ‘structural’ rate of unemployment or employment – many suggest around five per cent for the unemployment rate or 75-80 per cent for the employment rate. These are believed to be the rates at which the economy is occupying its full potential, and that any government attempts to generate more demand will increase inflation. Yet even these figures are not complete without considering the degree of so-called ‘underemployment’. What exactly a non-accelerating inflation rate of unemployment (NAIRU) even means in the context of an open-door immigration policy with the rest of the EU remains to be seen!
For the non-economist, ‘full employment’ is more complex still. Does it mean ‘everyone who wants a job having a job’? Or ‘everyone being able to work for as long as they like in a job’? With changing demographics, does it include those who are older but could work? What if people wish to work at a wage below the legal minimum?
When the Chancellor talks about the term, he has developed a specific meaning. For him, the aim is simply for the UK to have the highest employment rate in the G7. According to the OECD, our rate is currently 72 per cent, putting us above Italy (55.7), France (64.1) and the US (68.5) but below Canada (72.6), Japan (72.8) and Germany (74). The way he uses the term, then, isn’t really about ‘full’ employment – but relatively high employment rates compared to rival economies.
Yet we should question whether targeting employment rates should be an aim of policy. Employment does tend to provide a purpose for people’s lives, improves self-reliance and mental well-being. But it does not follow that we should simply create unproductive work for people in order to raise the employment rate. As Milton Friedman once quipped, we could increase employment by making those working on government construction projects use spoons instead of shovels and diggers.
This quip speaks to an important truth: it is production that improves the quality of our lives, and not employment per se. We could achieve more employment through government coercion. Unemployment is low in North Korea. But what matters is living standards driven by productivity. The history of the enrichment of the past 300 years has precisely been our increased ability to produce more for less effort. Hence we have seen the full working week drop from anywhere between 60-80 hours to just 35-40. Few would argue that this means we are not operating at our ‘full potential’.
A government therefore shouldn’t be aiming for ‘full employment’, but for minimising the barriers which allow the process of innovation to take place, whilst allowing individuals to decide the use of their time. In other words, the aim should be to create the conditions for individuals and families to enhance their satisfaction. And it this means that people wish to retire at their own expense, or a family decide that they only want one parent to go out to work, the Government should not use the tax and benefit system to try to make them take other decisions.
From a policy perspective, this approach would minimise instances in which sellers of labour cannot get employment from firms that wish to hire it (because of government regulation, including minimum wage rates) and instances where people are being artificially encouraged not to work through the interaction of the tax and benefit systems. Welfare reform and an employment law deregulatory agenda would almost certainly raise the employment rate too.
Yet it would also oppose interventionist policies in other areas, in turning dampening the employment rate. Unfortunately, there has been a tendency in recent years for direct government subsidisation of, for example, childcare provision with the stated aim of raising the maternal employment rate – even though there is substantial evidence this is against the wishes of many mothers.
Whilst employment is a good indicator of economic health most of the time then, we should not obsess about it. What we ultimately want is improved living standards and satisfaction. Many government actions currently prohibit or discourage the voluntary exchange of labour, and can be corrected. But a crude focus on the employment rate could in principle lead to policies which act against our wishes and living standards.
This article was originally published by ConservativeHome.
The danger with these sorts of ‘aims’ though, especially when they are ambiguous, is that they create the demand for action which can be counter-productive. For many political observers, for example, the term ‘full employment’ echoes the post-war period, when it was seen as a central task of government to keep as many people employed as possible.
I do not need to remind ConservativeHome readers that this economic orthodoxy ended in the disastrous wage-price spirals and militantism of the 1970s. When workers in a labour market know that policymakers will run fiscal and monetary measures with a bias to the inflationary upside in order to reduce unemployment and impose measures to increase job security, inflation expectations rise, militancy and shirking increase, and attempts to get unemployment below its ‘structural’ rate requires ever-accelerating inflation.
Nevertheless, many still hanker for this idea of an activist state guaranteeing everyone work, whether this be directly through state employment or by the now oh-so-fashionable ‘job guarantees’. If ‘full employment’ once again becomes a general government aim, the risk is that we return to a world where any job loss is mourned, and attempts are made to ‘save’ or ‘protect’ jobs rather than allowing the process of creative destruction to operate. Prior to the crisis, it was estimated that there was job churn of around four million a year, helping to facilitate the productivity improvements which tend to lead to higher wages.
Thankfully, this activist state concept is the not the idea that Conservatives are pushing for. But the ambiguity of the term means ‘full employment’ can be interpreted in many ways.
For the economist, it now means something along the lines of the ‘structural’ rate of unemployment or employment – many suggest around five per cent for the unemployment rate or 75-80 per cent for the employment rate. These are believed to be the rates at which the economy is occupying its full potential, and that any government attempts to generate more demand will increase inflation. Yet even these figures are not complete without considering the degree of so-called ‘underemployment’. What exactly a non-accelerating inflation rate of unemployment (NAIRU) even means in the context of an open-door immigration policy with the rest of the EU remains to be seen!
For the non-economist, ‘full employment’ is more complex still. Does it mean ‘everyone who wants a job having a job’? Or ‘everyone being able to work for as long as they like in a job’? With changing demographics, does it include those who are older but could work? What if people wish to work at a wage below the legal minimum?
When the Chancellor talks about the term, he has developed a specific meaning. For him, the aim is simply for the UK to have the highest employment rate in the G7. According to the OECD, our rate is currently 72 per cent, putting us above Italy (55.7), France (64.1) and the US (68.5) but below Canada (72.6), Japan (72.8) and Germany (74). The way he uses the term, then, isn’t really about ‘full’ employment – but relatively high employment rates compared to rival economies.
Yet we should question whether targeting employment rates should be an aim of policy. Employment does tend to provide a purpose for people’s lives, improves self-reliance and mental well-being. But it does not follow that we should simply create unproductive work for people in order to raise the employment rate. As Milton Friedman once quipped, we could increase employment by making those working on government construction projects use spoons instead of shovels and diggers.
This quip speaks to an important truth: it is production that improves the quality of our lives, and not employment per se. We could achieve more employment through government coercion. Unemployment is low in North Korea. But what matters is living standards driven by productivity. The history of the enrichment of the past 300 years has precisely been our increased ability to produce more for less effort. Hence we have seen the full working week drop from anywhere between 60-80 hours to just 35-40. Few would argue that this means we are not operating at our ‘full potential’.
A government therefore shouldn’t be aiming for ‘full employment’, but for minimising the barriers which allow the process of innovation to take place, whilst allowing individuals to decide the use of their time. In other words, the aim should be to create the conditions for individuals and families to enhance their satisfaction. And it this means that people wish to retire at their own expense, or a family decide that they only want one parent to go out to work, the Government should not use the tax and benefit system to try to make them take other decisions.
From a policy perspective, this approach would minimise instances in which sellers of labour cannot get employment from firms that wish to hire it (because of government regulation, including minimum wage rates) and instances where people are being artificially encouraged not to work through the interaction of the tax and benefit systems. Welfare reform and an employment law deregulatory agenda would almost certainly raise the employment rate too.
Yet it would also oppose interventionist policies in other areas, in turning dampening the employment rate. Unfortunately, there has been a tendency in recent years for direct government subsidisation of, for example, childcare provision with the stated aim of raising the maternal employment rate – even though there is substantial evidence this is against the wishes of many mothers.
Whilst employment is a good indicator of economic health most of the time then, we should not obsess about it. What we ultimately want is improved living standards and satisfaction. Many government actions currently prohibit or discourage the voluntary exchange of labour, and can be corrected. But a crude focus on the employment rate could in principle lead to policies which act against our wishes and living standards.
This article was originally published by ConservativeHome.
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