Economic Theory

We need a post-Corona Ludwig Erhard

Three months ago the UK labour market was doing better than at any time in recent memory, with record numbers in employment and very high labour force participation, while the unemployment rate was at its lowest since 1974.

Now, however, we face a grim prospect. We have 7.5 million furloughed on the Coronavirus Job Retention Scheme (approaching a quarter of all in employment pre-Covid-19). We have probably at least two million unemployed already and many more have withdrawn from the workforce. Output has plunged: this week’s news of the first quarter fall in GDP is just the earliest indication.

Despite initial optimism from the Treasury and the Office for Budget Responsibility, I cannot see a rapid bounce back in employment. The government is struggling to convince thoroughly spooked employees that they should get back to work.

Those with young children are reluctant to send them back to school or nursery, particularly with teacher unions and opposition politicians claiming that it is unsafe to reopen schools. Yet without children being back at school, around 3 million parents with children under 16 will find it impossible to resume normal work.

This is on the ‘supply side’ of the labour market. But the ‘demand side’ is where the medium-term problems lie. Whole sectors of the economy are closed down – hotels and accommodation, tourism, arts and entertainment, bars and restaurants, gyms and sport – while others are severely constrained – bricks-and-mortar retailing, construction and travel are examples.

The problem is that we cannot just end lockdown, flick a switch, and go back to the same level of employment as before. Many of the jobs which existed before lockdown will have disappeared: even in normal times over a million jobs are lost in each six-month period (though usually replaced by new ones elsewhere in the economy). The current furlough scheme is masking this, holding out the false hope that all the jobs which people had will be there when furlough ends.

But for the foreseeable future, people are not going to be crowding into bars, clubs, theatres and football grounds. For one thing, for many months customers are only going to be allowed to enter public spaces in small numbers as a result of social distancing rules.

Even on the still-very-distant day these rules are lifted, there is likely to be considerable consumer resistance to a return to what we fondly think of as normal. There is evidence that people plan to travel less, to eat out less, and to save more. So anything with a business model based on crowded venues is faced with collapse. This will have knock-on effects on the rest of the economy. It is already the case, for example, that the closure of restaurants and hotels has cut the demand for domestically produced food significantly.

The extension of the furlough scheme may make political sense but it is, for many businesses and their employees, delaying the inevitable. The sooner businesses which are not going to be viable in the future are closed, the quicker people can start looking for new jobs and the quicker buildings and equipment can be repurposed. Change always offers new entrepreneurial opportunities, but these cannot be actioned quickly if people are not alert to what is really going on and are desperately hoping some miracle will occur to turn the clock back to the way we were.

So we have a double whammy in the labour market – a supply shock and a demand shock.

Getting out of this will be difficult, though not impossible. Economies have recovered from much worse, if market forces are allowed to operate.

One lesson always worth recalling is that from West Germany in the years after the Second World War, where the population was demoralised, ill and hungry, and huge parts of the productive capacity of the economy had been destroyed.

But Ludwig Erhard as Minister of Economic Affairs (and later Chancellor) went against the advice of planners, the occupying authorities and politicians: he scrapped controls and let the market operate. Within a few years his ‘ordo-liberal’ policies had reconstructed a prosperous capitalist order and sparked the Wirtschaftswunder, the West German post-war economic miracle.

The current government must show similar boldness. It has already recognised that some regulations which industry could tolerate in pre-Coronavirus days are inappropriate in the situation we now find ourselves in.

It has, for example, suspended gender pay gap reporting and is allowing construction sites to work longer. But many other rules need rethinking – planning rules which mandate complicated processes for changing the use of high street buildings, occupational rules which reduce flexibility and keep people out of jobs they could do, and a host of other employment mandates and prohibitions which act to limit job opportunities.

One key example of such employment mandates is minimum wage legislation, where Mr Sunak’s commitments in the March Budget now seem dangerously anachronistic. His Budget not only confirmed a large planned rise in the over-25 National Living Wage (and above-inflation increases in the other four minimum wage rates) but also required the Low Pay Commission to raise the NLW to reach 66% of median hourly earnings by 2024. Having one of the highest minimum wage rates in the world now looks unwise, to say the least, if the government wants to get redundant young people back to work.

We should certainly not be taking on any new employment mandates: yet this is what many are demanding. The TUC has called for large pay increases for NHS workers, while people at both ends of the political spectrum have called for a right to work at home, unless the employer can prove this would not be possible.

Both of these policies have a lot of support, but would be unwise. Across-the-board pay increases for the NHS are not justified and would add to the already huge burden faced by present and future taxpayers. Working at home is far from the panacea that some seem to imagine, and any new conditional rights in this area would lead to endless friction (and tribunal cases) between workers and employers, as has happened with the right to flexible working.

The UK labour market is in for a very rough time, and millions of people face an insecure future for the next few years. The government needs to be careful not to make matters worse by extending furlough indefinitely and adopting other superficially popular but shortsighted policies.

But beyond this, it needs a real boldness to re-energise the labour market which, sadly, it seems to lack.


Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

3 thoughts on “We need a post-Corona Ludwig Erhard”

  1. Posted 16/05/2020 at 10:57 | Permalink

    Well we haven’t got an Erhard. The closest we have got is a Greta Thunberg and her disciples. So we’re ……

  2. Posted 17/05/2020 at 09:57 | Permalink

    Agree with the thrust of this and particularly supply side reforms. It will be intriguing to see what happens to productivity, boosting which was the key to Erhard’s economic recovery of West Germany. Will zombie firms disappear (or be rescued by government intervention). Note the big hit to the hospitality industries (low productivity jobs), but will high productivity sectors take a similar hit or will they too boost productivity by shedding low productivity jobs and capital on their margins ?

  3. Posted 16/12/2020 at 19:15 | Permalink

    Occasionally people come along, almost by accident, and change the course of history. Ludwig Erhard was the right person at the right time. His position in post-war Germany was a ‘fluke’; somebody else could have obtained the job, but Erhard did, and the rest is history. Another such fluke was the civil servant John Cowperthwaite. The Colonial Office could have posted him anywhere, but he was sent to Hong Kong in 1945, and the rest is history.
    The same fluke happened during our Covid Era, in Sweden. It was a fluke that Anders Tegnell was in charge of public health when the virus struck. He happened to have been involved in the fight against Ebola in the Congo, where officials had overruled him and told him to leave the sick dying, whereas Tegnell knew that there were medical interventions which he could perform which would safe them. He decided there and then that he would never again to let politicians or public opinion overrule his medical view. And the rest is history: Sweden remained free, while the rest of the world was locked up and rendered bankrupt.

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