A balance between living standards and unemployment

Our tax system encourages people to retire rather than retrain - exactly what is not needed by an ageing society with fewer people of working age
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Yesterday, news of 1,300 job losses at Ford of Halewood; the day before, the lowest unemployment total for six years. This should be a useful reminder for those of us who write about economics that generally cheering overall news will often conceal particular stories of despair. In terms of crude numbers, the destruction of jobs at Halewood may be small by comparison with the creation of jobs, for example, from that other story this week - the building of the new runway at neighbouring Manchester airport. But it is small comfort to people who lose their jobs.

Our unemployment rate of 6.7 per cent may appear very good by the standards of continental Europe, but there are still nearly 1.9 million people unemployed.

Most of the comment about the jobs figures was partisan. Supporters of the Government crowed, arguing that this showed the benefits of British economic management. Opponents sneered, claiming that the figures were fiddled and that the new jobs being created were largely part-time or low-wage. Neither side seemed interested in what are surely the biggest questions. How low can unemployment go? And does a low level of unemployment inevitably go with a high level of job insecurity?

Everyone knows that if unemployment falls beyond a certain point, the shortage of labour pushes up wage rates and hence inflation. This rate, called by economists the non-accelerating inflation rate of unemployment, or NAIRU, is reckoned to be about 6.5 per cent in the UK, which would mean that we are approaching that now. The trouble is that nobody knows what the number is until we reach it, and in any case the number may be different depending on the rate at which unemployment is coming down.

That is common sense: a rip-roaring boom, with unemployment whizzing down, is more likely to create inflation than a gradual expansion with the total only creeping downwards. A relatively stable business cycle (something that British policy-makers have not been very good at achieving) is likely to result in a lower NAIRU.

So far there is no sign of wage pressure in the UK, and the fact that the US has got down to 5.5 per cent unemployment without any serious inflationary pressure makes one believe that we could get back to the 5 per cent level that Keynes reckoned was effectively full employment.

That is the up-side. The down-side is this. To keep inflation down with that relatively low level of unemployment probably needs a high level of job insecurity. You can dress that up by talking about "flexible labour markets", but using euphemisms does not alter the fact that one of the powerful forces holding down wages is fear of losing the job. Britons looking at European labour legislation which supposedly preserves workers' rights should note that Germany in December had nearly 4.2 million unemployed.

If higher insecurity is the price of lower unemployment, what should decent societies do to soften its impact? People who reject the continental model of labour protection - I think rightly, because double-digit unemployment rates are a disgrace - should have something to put in its place.

There is no single answer, but here are some elements of it. One, mercifully now widely recognised, is training. It is axiomatic that if jobs are going to disappear and be replaced by other ones, people need to be trained to do the new jobs. The trouble is, we do not know what those new jobs are. Two years ago, nobody knew that there would be jobs for people setting- up Web site pages. Fitting people to jobs is a much more subtle, complex and intuitive operation than advocates of government intervention on training often admit. Yes, governments can act, but employers and employees can do much more.

Why should employers pay to train people who then up and leave? A top management consultant answered that by saying: "If we train our people they know we are increasing their human value and hence their market value. So they stay. If we didn't train them they would go to someone else who did." Wise words; would that all employers saw things that way.

A second element is saving. A world where people change jobs more frequently is a world where people need a cushion of savings. People do increase their savings if they are worried about their future. An article by Professor David Miles in the forthcoming issue of the Economic Journal shows that "insecurity about future income breeds cautious consumers". But there is surely a powerful case for explicitly encouraging people to set aside funds for a rainy day as a normal and natural part of their planning. We give tax relief for people to set aside money from income to provide their pensions, which is fine. But we have no scheme to enable people to save free of tax to provide for a period of unemployment, or the costs of retraining so that they can get a new job. We have a tax system that encourages people to retire rather than retrain - exactly what is not needed by an ageing society with fewer and fewer people of working age for every dependent.

A third element is culture. One of the great cultural changes in the past quarter of this century has been the growth of women in the workforce - the idea that it is normal for a woman to have a job. But there has been a corresponding cultural trend throughout the developed world for men, especially men aged over 50, to leave the workforce. And in some parts of the developed world the culture has developed where it is normal for young men not to be employed. The stigma that a previous generation would have attached to the state of unemployment has disappeared. In many ways the disappearance of that stigma should be welcomed - it was cruel and pointless. But to sustain a world of low(ish) unemployment, down to 5 per cent or less, would require the rebuilding of the cultural idea that it is abnormal for young people not to be in work.

Besides, if the developed world is to continue increasing living standards, it has to find ways of using every able-bodied (maybe one should say able- minded) individual. Each year, every developed nation will see a larger number of the people supported by a proportionately smaller group of working age. We will have to keep as many people as possible working just to keep the economy on the road.

We can see the prize of lower unemployment, and that is worth having for itself. But behind it lies the prize of maintaining living standards. Fail at the first test and we lose the second.