Economic View: Pick 'n' mixing offers a solution to jobless crisis

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High unemployment can be solved, and it is clear what form the solutions have to take. But this dramatic conclusion of the two-year Jobs Study conducted by the Organisation for Economic Co-operation and Development, and presented to ministers in Paris this week, is not necessarily good news for politicians grappling with the problem.

For it is a bitter medicine. The solutions the OECD's experts have identified require many European governments to accept that in a changed world they cannot continue to run their economies in the way they have for the past 50 years.

In other countries such as the US and UK they require acceptance that fiercely contested policies which have removed traditional union, workplace and social security rights have nevertheless created more jobs.

During the past two years it is clear that the governments of almost all industrial countries have come to accept, to some extent, the diagnosis presented in the OECD's exhaustive research.

Briefly, it is that almost all the unemployment in the industrial world has structural causes, as the chart (top right) demonstrates.

Boosting the economy through the traditional methods of lower taxes or lower interest rates would make some difference to the jobless total but not much. Structural unemployment has ratcheted up due to the effect of existing industrial relations practices and benefit structures in a world economy that has suffered a series of shocks ranging from higher oil prices in the 1970s to the introduction of new information technologies.

By and large, most governments accept the validity of this view - even those, like the Germans, who earlier resisted it.

At the OECD meeting this week Lorenz Schomerus, a German economy minister, said: "Since all the studies considered reliable demonstrate that Europe's growth and employment problems are largely of a structural nature, our policy response must take the form of measures to improve these structures."

The recent programmes announced by the German government take this as their point of departure, he added.

It was hard to find a minister at the annual Paris get-together who disagreed. However, you only have to read reports of new strikes in Germany this week to see the stumbling block. Governments might have reached a consensus but they have not marketed it to their electorates.

Who can blame them? Although Margaret Thatcher won re-election in 1983 and 1987, she was one of the most hated of British politicians because of her determination to destroy union influence and deregulate the economy. It was a divisive strategy that will not play well in other countries.

It is clear that many Continental politicians see their task as choosing the best point on a trade-off between unemployment and inequality, a trade- off that has pushed Britain and the US towards the low unemployment, high inequality end, and countries like Sweden and France to the other extreme.

Earnings inequality has risen faster in Britain, the United States, and New Zealand - the three countries most praised by the OECD for their labour market flexibility - than elsewhere in the industrialised world. Other countries would like to move a bit further towards the British end but are not prepared to go all the way.

The British government argues passionately, privately supported by OECD economists, that the notion you can have either flexibility or fairness, but not both, is bogus.

Angela Knight, economic secretary to the Treasury, stressed that unemployment was the biggest source of inequality.

"Clearly the most effective way to tackle what is called social exclusion is to create jobs,'' she said. But she agreed that the message of fairness through flexibility, as opposed to fairness versus flexibility, had not yet been widely accepted.

It is not an easy message to sell at a time when growth has slowed in Europe and unemployment is rising. Any attempt to tackle the economic structures that underlie high joblessness will bring governments into a head-on clash with vested interests, including the unions whose role is threatened by industrial decline and job flexibility, at a time when the public has a low opinion of economic policies, anyway.

Some OECD governments are not happy about the organisation's direct criticism of their current anti-unemployment strategies. For example, this week the OECD made public its objections to some members' training or public sector work schemes, which it argues merely qualify the jobless for another subsequent spell of unemployment.

Yet it looks inevitable that many will follow at least some of the organisation's advice. Although most Continental governments remain attached to some of the things swept away in Britain during the Thatcher years - whether a minimum wage, collective bargaining or high unemployment benefit levels - they are likely to adopt a pick'n'mix of policies from the organisation's list (see box, left).

Will the OECD see member countries adopt the radical programme of reform it thinks will be necessary to make a big impact on the unemployment numbers? Definitely not at a time when headlines across the industrial world shout of more job losses, and we have been told by an influential Wall Street guru that "downsizing" is bad for the economy.

The gap between public opinion and the OECD view of the way the jobs market works is clearly huge. Britain would like to see the think-tank spread the gospel by publishing some detailed research into the numbers, much as the Council of Economic Advisers did recently for the US.

Exactly which jobs have gone and which have been created? How much do the new jobs pay compared to the old ones? How mobile are people between jobs and how do their earnings vary over their career?

In the US, the CEA found that two-thirds of the net 8 million jobs created since 1992 paid higher than median earnings. Evidence like this could perhaps provide the kind of proof that will be needed to swing public opinion.

Early research due to be published soon by the OECD suggests that there has been no trend towards greater downsizing during the past two business cycles, except perhaps slightly in the US. Elsewhere, job destruction and creation have varied during the cycle but stayed unchanged on average.

However, the terms of new jobs have changed, with more short-term contracts or part-time work, for instance. In addition, young people are more affected by downsizing than other groups, forming a bigger chunk of the group of labour market "outsiders".

There has always been a split between those who have full-time, permanent jobs on good terms and the rest, but the split is becoming wider.

Having an unsatisfactory job might be better for your income and well- being than being unemployed but it will not disguise the fact that your position relative to other people with other jobs has deteriorated. This goes a long way towards explaining why the message of flexibility has made little impression on public opinion.

How to cure unemployment: the OECD prescription

Increase the flexibility of working patterns - encourage short-term and part-time work

Eliminate restrictions on businesses to encourage enterprise

Make wage and labour costs more flexible by removing restrictions on wage-setting

Reform social security systems which make it expensive to hire workers

Reinforce active labour market policies (eg the employment service, training schemes)

Improve education and training with an emphasis on learning throughout life

Reform unemployment benefits to reduce the poverty trap, which makes it too expensive to take a job because of lost benefits

Increase competition in the economy to encourage growth

Encourage the creation and spread of technical know-how