Situation vacant: a decent policy for jobs

It is possible to reduce unemployment without widening the gap between rich and poor, says Dennis J Snower
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The Independent Online
THE ELECTION campaign has not revealed any big differences on employment policy among the contending parties. Most people seem to think that regardless of who wins, not much will happen to British labour markets.

Tinkering with unemployment benefit criteria, the minimum wage, employment- rights legislation and tax breaks for hiring the unemployed - even the decision over whether or not to sign the social chapter of the Maastricht Treaty - is not going to revolutionise our employment opportunities. Why are the three main parties so timid in this area of policy-making?

One reason is that the political debate on employment is largely conducted under the shadow of a powerful myth. The myth is that the government must choose between two disagreeable options: a "flexible" labour market bedevilled by wide income disparity or an "inflexible" labour market crippled by unemployment.

The flexible market, where people's wages reflect their productivity, is allegedly achieved by reducing job security, restricting unemployment benefits and welfare entitlements, eliminating minimum wages, bashing the unions and opting out of the social chapter. The inflexible market, where people's earnings reflect politicians' judgements about fairness and social cohesion, is supposedly achieved by the opposite policies. The ultimate choice, then, is between inequality and unemployment. According to this popular view, the Conservative government, strapped for cash and supportive of market forces, has concentrated on reducing unemployment, whereas a Labour government might take a few timid steps towards reducing inequality.

This is not just a myth, it is a pernicious myth, since it blinds us to employment policies that could reduce unemployment without widening the gap between rich and poor. Thus it is important to expose the myth and get on with the urgent business of fundamental policy reform.

The trick is to recognise that much of the current employment policy is responsible for the disagreeable choice between unemployment and inequality. The system of unemployment benefits and taxes is a good example. When unemployed people find jobs, their benefits are removed and taxes are imposed. Not surprisingly this policy discourages the unemployed from seeking work. Within this misguided system, a policy of restricting the benefits will reduce unemployment and create more inequality. But what usually gets overlooked is that this unemployment-inequality trade-off is largely the outcome of the tax-benefit system. If we changed the system, we could free ourselves of this trade-off.

Since unemployment falls much more heavily on the unskilled than the skilled, the government's employment policies cannot be seen in isolation from its policies to promote skills. Currently the government spends a massive sum on unemployment support, further education and training. The question we should be asking ourselves is whether these funds could be redirected to create more incentives for people to become employed and acquire skills.

My proposal, to create unemployment and training accounts (UTAS), would fulfil this prerequisite. Under this programme, every employable person would have an unemployment account to provide support against job loss and a training account to provide funding to acquire new skills. Instead of paying taxes to finance unemployment support, further education and training, employed people would be required to make regular contributions to their UTAS. The mandatory contributions would rise with their incomes.

To maintain the living standards of the poor, the government would pay contributions for the lowest income groups, and tax the contributions of the higher income groups. People could also make voluntary contributions in excess of these amounts.

If people become unemployed, they could make limited withdrawals from their unemployment accounts instead of receiving benefits. If they wished to acquire skills, they could draw on their training accounts instead of receiving government grants, subsidies and loans. If their UTAS balances fell below a specified limit, they would receive public assistance on the same basis as under our current system. If their UTAS balances became sufficiently high, they could use the surplus funds for other purposes. At the end of their working lives, their remaining UTAS balances could be used to top up their pensions.

People would be able to borrow money on favourable terms from their training accounts, enabling them to finance their training through their future incomes. Unemployed people who developed promising job market strategies at their Restart interviews could receive government loan guarantees when they borrowed training account money. Employers' contributions to training accounts would receive favourable tax treatment.

People would be free to make withdrawals from their training accounts at any point in their working lives. Those who identified their preferred careers early in their working lives might draw substantially on their accounts soon after leaving secondary school. Those who took longer to find their niche in the labour market, and those who required retraining because of changing conditions, would make significant withdrawals later in their careers. In this way, training accounts would enable people to remain employable and adaptable throughout their working lives.

The UTAS would initially be managed largely on a Pay-As-You-Go basis (similar to savings accounts, from which people can make withdrawals even though the banks use most of the money for other purposes). With the passage of time, the UTAS would eventually be turned into a fully funded system, where individuals would have discretion over who could manage their UTAS. To guard against bankruptcy, the financial activities of private-sector UTAS fund managers would be regulated, along lines similar to the regulation of commercial banks.

Adopting the UTAS system could substantially reduce the level of long- term unemployment and promote skills. In particular, moving from benefits to unemployment accounts would give people greater incentives to avoid long periods of unemployment.

For the longer people remained unemployed, the lower would be their unemployment account balances and consequently the smaller the funds available to them later on.

And since the accounts would generate more employment than unemployment benefits, the unemployment accounts contributions necessary to finance a given level of unemployment support would be lower than the taxes necessary to finance the same level of benefits.

Furthermore, the training accounts would be better suited than the current education and training programmes to ensuring people's lifetime employability, since the accounts could be accessed whenever employees and their employers found it worth while.

In this way, employers and employees stand to gain from the switch to UTAS.

Retired people would gain through their ability to use their UTAS balances to augment their pensions. And the government would gain, since the removal of the distortions from the unemployment benefit system would promote new economic activity and thereby generate increased tax revenue.

Beyond that, the UTAS would be more efficient than the current system at redistributing income from rich to poor, since unemployment benefits and training schemes are not targeted exclusively at the poor, whereas government contributions to the UTAS would be.

In order to provide additional incentives to find work and acquire the relevant skills, the government would provide subsidies for long-term unemployed people who used their UTAS to provide recruitment vouchers or training vouchers for firms that hired them. The recruitment vouchers would reduce the cost to firms of employing the long-term unemployed; the training vouchers would reduce the cost of training them.

In short, replacing the current system with UTAS would reduce unemployment and simultaneously promote equality. While people are generally resentful of their tax burden and often demeaned by the existing unemployment benefits and training programmes, they would be more willing to contribute to personalised accounts for their own purposes. The UTAS would give people more freedom to use employment support and training funds to meet their diverse individual needs. And all this could be done without creating greater inequality or increasing government expenditure.

It is time to stop thinking about employment policy in terms of more or less flexibility, employment or equality. lt is time to stop tinkering with the traditional policy instruments and institute a fundamental reform of our labour market institutions to stimulate employment without increasing income disparity. Will the winners of the coming election have the courage to do so?

q Dennis J Snower is Professor of Economics at Birkbeck College and a co-Programme Director of CEPR's Human Resources programme. For further information on CEPR, telephone 0171 878 2900.

He has also co-edited, with Guillermo de la Dehesa, a volume entitled 'Unemployment Policy. Government Options for the Labour Market', published by Cambridge University Press, price: pounds 22.95. Fax 01223 315 052.