Downsizing isn't always a dirty word

Job insecurity may not be a wholly bad thing - a fluid labour market can bring economic benefits for society
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News this week of the lowest unemployment for five years sits oddly with the continuing stories of "downsizing" - that dreadful euphemism for sacking people - by large British companies.

Even allowing for the way the unemployment figures are presented, it is clear that the job situation in Britain is slowly improving. Employment does appear to be rising, and the absolute levels of unemployment are now quite low by European standards, even if they are high compared with the United States and much of East Asia. Yet, equally, there is no doubt that job-shedding by large and not so large companies continues. Almost every time companies merge or are taken over, they find they need fewer staff; indeed that seems to be one of the principal reasons driving such mergers.

The result is the well-recognised mismatch between statistics and perceptions: the stats may say the job market is getting better, but that is not the way it feels to people fearful (quite rightly) of losing their jobs. This leads into a politicised discussion about the perils of insecurity, with, naturally, tremendous pressure to find ways of reducing it, or at least protecting people from its most damaging effects. Hardly ever in this debate does anyone ever dare suggest that (a) job insecurity may not have risen very much, or (b) insofar as it has, there might be positive benefits not just to the individuals who can take advantage of the more fluid market for their skills, but for society as a whole. Yet there is a decent case to be made for both these ideas.

It is very hard to measure actual job insecurity (as opposed to perceived insecurity) except by looking at job tenure. How long do people stay in the same job? The answer is that over the past 10 years not a lot has changed: the average has come down a little, with men changing jobs rather more frequently but women staying rather longer in their jobs.

The trouble with these measures is that it does not tell you why people move from one job to another. There is a world of difference between frequent job-hopping because the employee keeps getting offered a higher salary by a competitor, and scrambling from one short-term position to another, not knowing where the next job will come from until one is on the street. Statistically, they may look the same, but they certainly do not feel it.

I have not seen any good-quality British analysis of this, but a lot of work has gone on in America, where this cult of insecurity would seem to have been longer established. The upshot of this seems to be that though there are high levels of insecurity in the US, these are not any higher now than they were 10 years ago. For some groups they are lower.

One particular piece of work, by Henry Farber of Princeton University, has looked at downsizing in the period 1981-1993. The rate of job losses has risen a little between 1981-83 and 1991-93, but the more remarkable thing was the shift in its nature. Manual workers were more likely to lose their jobs in the earlier period, while managers more likely in the later one. In other words, job security of manual workers, far from falling, actually rose; it was people higher up the income scale who suffered an increase in insecurity.

Other studies have shown that 10-year retention rates - the chances of someone holding a job for the full 10 years - have actually risen since the early Seventies: at least they were higher in 1991 than they were in 1973. But as an article in the New Yorker which reported these studies noted, the key feature of the American economy that distinguishes it from those of Europe is the vigour with which it creates new jobs. This leads to the second point: the possibility that there are economic benefits for society as a whole from a more fluid, less secure, job market.

Obviously, there will be individual winners. Obviously, consumers will benefit from the lower prices or more flexible service that the fluid labour market makes possible. But suppose it becomes possible to run an economy at a higher rate of overall demand. Could the low unemployment of the US be the beneficial by-product of the insecurity that many US workers feel about their jobs?

Economists talk about a thing called the Nairu, shorthand for the off- putting "Non-Accelerating Inflation Rate of Unemployment", the minimum rate of unemployment below which the economy will suffer accelerating inflation. For the past few months there has been a great debate raging in the US as to whether the Nairu has come down. Indeed, economists being true to their stereotype, there has been a pretty furious debate as to whether it is a useful concept at all. The level of unemployment , after all, is only one of several influences on inflation. Such luminaries from the economists' hall of fame as the Nobel prize winner Paul Krugman and the veteran JK Galbraith have locked antlers in a debate in the pages of the International Economy magazine on this subject.

But the practical point here is that the Nairu seems to have come down, for the US has managed to hold unemployment below 6 per cent (it is 5.6 per cent now) and yet keep inflation at an acceptable 2.8 per cent. The policy-makers took a chance and seem to have won.

Kenneth Clarke is taking a chance here and he will only win if the British Nairu has come down. We have a government intent on pushing down interest rates whenever it gets the opportunity, and, thanks to a fall-off in tax receipts, running a laxer-than-planned fiscal policy, too. But there has been no evident resurgence of inflation. Just this week the producer price data was encouraging and yesterday's retail prices were OK.

In the last boom it was clear that unemployment below about 7.5 per cent would encourage a rise in inflation. We are at 7.8 per cent now. But suppose the greater perception of insecurity and the greater mobility of labour in general means that we can go on down to, say, 6 per cent unemployment or below without encouraging a surge in inflation. If we can, there will be an enormous social benefits, quite aside from the obvious economic ones.

You can go a stage further in the argument and say that a country with a fluid job market needs to be run at a higher level of demand to offer better employment opportunities for people who are displaced: that vigorous creation of new jobs is the necessary economic and social counterbalance to the rapid destruction of old ones.

To welcome job insecurity would be to push the argument too far. For the self-confident, the talented, the energetic, the skilled, the present labour market probably presents more opportunities than the slow-moving, bureaucratic market of the Fifties and Sixties. But for the risk-averse it can be a nightmare. However to fail to recognise that there are benefits which accrue not just to the evident winners but to society as a whole, is to make ourselves more miserable than necessary.