However, you fail to recognise that it is in the labour market that institutional change is most urgently required. The sad fact is that the current recession was precipitated by the need to prevent inflation accelerating at a time when there were still nearly 2 million unemployed. Although wage settlements are falling, they still average 4 per cent, despite unemployment approaching 3 million. If your proposed fiscal and monetary measures are successful in regenerating growth, past experience suggests that wage inflation will begin to accelerate again as unemployment begins to fall towards the 2 million mark. Maintaining unemployment at this level simply to contain inflation is both socially undesirable and economically inefficient.
Tackling this requires institutional changes to facilitate two sorts of policies. On the one hand, there needs to be a serious attempt to upgrade the skills of the unemployed so that they can compete more effectively in the labour market. On the other hand, employers must agree among themselves to limit wage rises as the labour market tightens and not to indulge in a self-defeating 'wage-
wage' spiral. Only in this way can we be sure that the competitiveness gain from the recent fall in sterling will not be eroded. Without such changes to the way the labour market functions there is indeed little chance of any recovery being durable.
Professor of Economics
Centre for Economic
The London School of Economics
and Political Science
26 OctoberReuse content