An end to state-assisted idleness: The private sector is the key to reducing long-term unemployment, says Robert Skidelsky

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The Independent Online
SOME unemployment is inevitable, even desirable, in a free economy. The right to choose jobs will always give rise to some unemployment 'between jobs'. Such unemployment gives employers a choice of workers. It also keeps wage inflation lower than it would otherwise be.

But there is a catch. The longer people are out of work, the less desirable they become to employers. With every month out of work, skills and work habits become rusty or harder to acquire. Systems of income support, designed to increase people's life choices, can make them permanently dependent on the state.

The experience of the Eighties suggests that the recovery will leave more than half a million long-term unemployed - those who have been out of work for more than a year - and that of these, more than half will be between 18 and 34 years old. Moreover, the average person who has been unemployed for more than a year will remain unemployed for a further 20 months.

It is unacceptable in human terms that the current level of long-term unemployment should continue. The legitimacy of the benefit system is also undermined if it is seen as a device to maintain people in semi-permanent idleness. No wonder John Major has asked 'whether paying unemployment benefit, without offering or requiring any activity in return, serves unemployed people or society well'.

All industrialised countries have started to favour a policy of reducing long-term unemployment rather than paying people to stay idle. President Reagan's experiments with workfare are continuing, with modifications, under the Clinton administration. The Paris-based think-tank, OECD, stated in 1990 that 'priority should be given to active measures such as training, placement and rehabilitation programmes for the unemployed, the inactive and those on welfare, in order to break the dependency cycle, reduce inequality in access to jobs and generally integrate people into the mainstream of productive activity'. A commission paper to last week's EC summit in Copenhagen addressed this point.

Paradoxically, it was the very success of the market reforms of the Eighties in freeing up labour markets, that created the long-term unemployment problem. Subsidies to sustain lame industries became unemployment benefits for displaced individuals. Now we need to use those transfer payments to reintegrate the long-term unemployed into the labour market.

The backbone of such a strategy should be a system of training and employment guarantees, effective after a year out of work, possibly even six months for youngsters. For the unemployed there would be a graduated work incentive; from dole payments for regular attendance at Restart interviews, through to benefits plus training schemes, to market-rate payment for ordinary jobs or community work. A subsidy for taking on unemployed workers would be an incentive for providers of work or training.

Two features of such a strategy deserve notice. First, there is an element of compulsion, but it would be minimised by offering a choice between the types of effort needed to receive payment. Secondly, the guarantees should, wherever possible, take the form of incentives to the private sector. The government should see itself as buying training and jobs for the unemployed, not providing them itself.

Let us take training first. We are in a very different world from the one in which Keynesian doctrines took root. In those days, the notion that the state had a responsibility to secure an adequately trained (as opposed to school-educated) workforce was in its infancy. The assumption was that, provided demand was kept high enough, there would always be enough jobs for those seeking work in existing occupations, whether these were contracting or expanding. In particular, unskilled labour could readily turn itself to a variety of unskilled jobs.

Such an assumption is clearly unwarranted today. The rate of destruction of unskilled jobs has greatly increased. This means that a much higher proportion of today's unemployment is due to skill deficiency rather than demand deficiency. Much of the growth of non-cyclical unemployment in the past 20 years has been due to the growing mismatch between the skills required and those available. Someone who learns a trade at 20 is no longer guaranteed employment for life. Unskilled labour is very likely to be unemployed labour.

Today, the obligation of the state is well understood. Annual government spending on training and enterprise is pounds 2.7bn, two and a half times that of 1979 in real terms. Most training schemes are government run. But government training schemes are unlikely to be successful. They need constant upkeep, do not make correct use of incentives and are often seen by the unemployed and employers as irrelevant.

Training should be customised to employers' needs, not Whitehall crystal-ball gazing. Employers should be given wage-linked tax incentives to provide specialised training. Where basic training - crucial for the long-term unemployed - has to be given, it may be better to subsidise private training agencies than to rely on government schemes. An unemployed person might be given a voucher cashable at a training agency. The more successful the agency at placing its trainees in jobs, the more applicants it will get. In this way public money can be channelled to success, not failure.

Employment schemes are the second leg in this programme. I am not a great fan of workfare - sheltered employment provided by local authorities and voluntary bodies. Its drawbacks are its immense cost, a lack of satisfying jobs and its failure to lead the unemployed back to the world of 'real' work. The provision of jobs should be left mainly to the private sector, again responding to government-provided incentives.

In this year's budget, Norman Lamont announced 'Workstart', a pilot scheme to help 1,000 people, unemployed for between two and four years, back to work by offering employers a pounds 60 subsidy to hire them. The meagreness of the subsidy and the targeting of the very long-term unemployed, suggests that the Treasury would not be unhappy if it failed.

We need to be much more bold. The most ambitious idea, incorporating a Keynesian twist into a supply-side strategy, would be to have a variable element in the subsidy to ensure the creation of the required number of jobs across the cycle. During a downturn, the subsidy would be higher. When the economy recovered sufficiently to push down to zero the price an employer could demand for providing an extra job, the government would simply stop paying. But this twist is not an essential element of the scheme.

The great advantage of such benefit transfer schemes is that they convert payment for idleness into payment for effort. They will save the Exchequer money and boost its revenue.

There are problems. It would be difficult to ensure that subsidised workers are additional to existing workers - that the long-term unemployed should not gain at the expense of the short-term unemployed. An economic upturn, when the number of applicants per job is falling, is the ideal time to start. Subsidised employment would then do much to spread the influence of the upturn across the labour market, while restraining the upward pressure on wage costs. The right time to start is now.

Tomorrow: removing obstacles to market flexibility

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