Incomes surge fails to allay deeper insecurities

'If technology has changed so that the market value of brawn has declined, while that of brain has risen, then the providers of brawn will, in the short term, find that they are in trouble'
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The Mori poll in the Times last week showed economic optimism - the feelgood factor - improving to its best level since August 1994. But with the Tory share of the vote jumping 4 percentage points in that part of the Mori poll taken after England's victory over Spain in Euro 96, there were suspicions that football, rather than economics, may have been responsible. If so, the feel-bad factor may have returned with a vengeance on Thursday morning. Speaking personally, there is no chance whatever of my even hinting at economic optimism to any opinion pollster this side of the World Cup in France. So there.

Others might be more influenced by the fact that real disposable income is rising by 4 per cent a year, the fastest rate since 1988. With the balance of payments deficit for last year having been revised down to under pounds 3bn, there seems little to stop this continuing for a while. A strong cyclical rise in consumer confidence seems virtually assured in the run-up to the election, which is why logic still seems to dictate that polling day will be delayed until the last possible minute.

Against this background, there is something odd about the persistence of a deep mood of economic insecurity in the UK - and, indeed, in the US. As Alan Greenspan, chairman of the Federal Reserve, said in a speech on 6 June: "Today, a truly puzzling phenomenon confronts the US economy: the pervasiveness of job insecurity in the context of an economic recovery that has been running for more than five years, inflation that has been contained, and a layoff rate that is historically quite low. Yet in the face of this seemingly good news, a sense persists that something is fundamentally wrong."

The same points could be made about Britain. Output has been growing for four years, and unemployment is a third lower than the peak reached as long ago as 1986. Nevertheless, we share with America a brooding sense of foreboding and insecurity. Things might be improving for the time being, but there is no sense of reliable advancement for most families. In Mr Greenspan's view the issue is rooted in one of those rare, perhaps once- in-a-century events, a structural technological advance.

The development of transistors and integrated circuits has, on this analysis, created a situation in which abstract ideas have replaced physical brawn as the key human ingredient in the creation of output.

Mr Greenspan points to an apparently trivial fact - that the physical weight of US GDP today is only modestly greater than that of the economy of a century ago, while the value of GDP, adjusted for inflation, is an order of magnitude larger. So what, you may ask? Well, this simple fact surely shows that those who claim there is something special about physical goods, something magic about manufacturing, are barking up the wrong tree. It is possible to imagine a country producing a huge GDP, but one that weighs almost nothing, with the difference being explained by the market value of ideas. Singapore is an example of a small economy moving in that direction, while the US and Britain are examples of larger ones.

If this is what is going on, it could account for the widespread feeling of insecurity in the population. Admittedly, over the long term, technological advance does not create either insecurity or the threat of unemployment, despite the almost universal belief that it does. To see why this cannot be the case, simply consider the fact that there are huge technological advances from one decade to the next, but that there is no long-term rising trend in unemployment observed in the UK or other developed economies. Obviously, the economy eventually finds a way of adjusting the demand for labour to recognise new technology, with no long-run change in employment, but a massive long-run advance in living standards. This is why technical development is an unmitigated long-term economic blessing for the economy as a whole.

But the same is not necessarily true of the short term, and certainly not of all members of the population. If technology has changed so that the market value of brawn has declined, while that of brain has risen, then the providers of brawn will, in the short term, find that they are in trouble. The market value of their labour will fall, and this will be reflected in a decline in their real wages (as in the US), or a rise in unemployment (as in continental Europe), or a bit of both (as in the UK).

In the US, some of the consequences of all this have been staggeringly large. For example, since 1979 the real earnings of males with a minimal 12 years of schooling has dropped by 20 per cent, while the initial wage for this group, when they first enter the labour force, has dropped 30 per cent. Other than at times of hyper-inflation, or possibly during the Great Depression, I doubt if there are many examples of such a huge backward step for such a large group of workers in the history of successful capitalist economies.

This immiseration of low-skilled workers contrasts sharply with the experiences of college graduates, who have seen continuing improvements in living standards, and have watched the premium accorded by the jobs market to extra education increasing substantially. Yet even in these privileged groups, which should be the main gainers from the technological revolution, there is also a sense of insecurity. In the UK, part of this is due to the fact that this group is disproportionately to be found in the South- east, and among homeowners, the two sectors which happened to be the main sufferers from the last recession.

Over time, the memories of these particular shocks should fade - perhaps they are already doing so. But Mr Greenspan reckons there is a deeper force at work. He believes the educated workforce is the group that implements technical advance, and therefore is most aware of the turmoil created by it. Even if the people concerned are the largest gainers from the upsurge in demand for skilled workers, they are also the most aware that incessant turnover and instability are dominating the economy. They fear they will be next to lose their jobs.

Several of Tony Blair's recent speeches have been on this topic, and it is clear that he is well aware of the political opportunities and risks these developments bring with them. The design of social security systems in an environment of constant technical change is one such problem. The need to ensure that private firms devote time and resources to enhance the skills of their workers - particularly difficult to achieve when firms cannot predict how long there will be a demand for any particular type of labour - is another. These deep-seated problems of insecurity will not be solved by a year or two of above average growth in real disposable income, however useful that might be for the Tories' rising chance of re-election.