Honesty is the best policy when it comes to jobs

`If we are to have a grown-up debate on solutions to mass unemployment, politicians of all parties should openly admit that there may be a price to pay and address how best to share the pain'

Just in case you missed it, something remarkable happened at last week's rather low-key G7 jobs summit in Lille. A politician - a British one at that - came clean about the cost of tackling joblessness. Okay. So Education and Employment Secretary Gillian Shephard gave her overseas counterparts a somewhat rose-tinted account of Britain's recent record of job creation. But in stating that the pain of any kind of change and restructuring would have to be faced up to, Mrs Shephard displayed a degree of candour not shown since former Chancellor Norman Lamont let slip that he considered rising unemployment a "price well worth paying" in the battle against inflation.

What Mrs Shephard failed to mention, of course, was that the Government's policy of deregulated flexibility means that the pain she talks about has been very unevenly distributed, has increased working poverty and threatened social cohesion.

Those tempted simply to berate Mrs Shephard, however, ought to think again. If we are to have a grown-up debate on solutions to mass unemployment politicians of all parties should, instead, openly admit that there may be a price to pay and address how best to share the pain.

Ironically, the political task in this respect would be eased somewhat if the current consensus on macro-economic policy could be challenged. Part of Britain's jobless problem is due to the masochistic macro-economic policy being inflicted in the quest for so-called "stability". But though the aim is laudable, the chosen means has severe shortcomings. As the late Nobel Laureate, Professor James Meade, continually argued, it makes best sense to base financial policy on a target for money GDP. Such an approach has the merit of attempting to maintain greater stability in output and employment rather than simply to preserve price stability in line with an essentially arbitrary target rate of inflation. Yet even with inflationary pressures subdued, mainstream politicians in the Government and opposition parties appear reluctant to accept this, seeming to prefer "hair-shirt economics" despite the evident harm being done to the real economy.

One of the consequences of the current vacuum in macro-economic thinking is that policy debates focus almost exclusively on supply-side solutions, such as better skills provision. This causes problems since supply-side measures cannot hope to prove fully effective if demand is constrained - which helps explain why unemployed people themselves are often amongst those most sceptical about the value of more training. None the less, the supply side clearly does matter since even a controlled demand expansion would at best hit inflationary pressures at around 1.75 million unemployed (6 per cent of the workforce). So what are the supply side options for tackling core joblessness?

The option favoured by the Tory right is to deregulate the labour market still further and cut welfare to the bone. However, the social problems associated with a flexible labour market are already apparent and a "more of the same" approach could impose intolerable social costs.

Those on the left nostalgic for the pre-Thatcher era might prefer instead to push demand to a level consistent with very low unemployment and implement some form of "pay policy" to reduce the wage pressure that would inevitably arise. Unfortunately, this option - while meriting renewed consideration - is totally out of fashion. A more radical option still would be to encourage "work-sharing" - but in the absence of income-sharing, which may be difficult to achieve, this could raise hourly labour costs and serve to increase rather than lower core unemployment. This leaves one with perhaps the best option - ie employment programmes targeted at the long-term (one year- plus) unemployed.

As the chart shows, long-term unemployment has fallen during the recovery. But the experience of the Lawson boom in the late 1980s suggests a core of at least 500,000 long-term jobless. Few would disagree that helping these people into jobs is justified on grounds of fairness. And, as Professor Richard Layard and his colleagues at the LSE have demonstrated in countless studies, providing jobs for the long-term unemployed would not stoke inflation. If left unaided, the chronic jobless remain outside the active labour market. Unlike their short-term unemployed counterparts in the dole queue, they exert no disciplining influence on wage bargainers. So reactivating the long-term unemployed is efficient as well as fair.

For this group - many, though not all, of whom lack skills - the essential policy choice lies between making them more employable, thus pricing them into better paid jobs, or pricing them into the types of jobs they can perform without new skills by means of subsidies or adjustments to taxes and benefits. An obvious problem with radical tax/benefit reform - such as the introduction of Citizens' Income - is that while this may improve incentives for the lower-paid it will have implications for tax rates and work incentives further up the earnings scale. Training meanwhile is expensive and the track record of government training schemes both in Britain and abroad is poor.

On the face of things, therefore, job subsidies paid to employers, or the provision of temporary jobs in the public or voluntary sectors, look a better bet. Indeed, so long as the gross cost of jobs programmes does not exceed the cost of unemployment to the Exchequer, they should be self- financing, at least in the medium term.

The self-financing argument for a wholesale onslaught on long-term unemployment in this way rests on the assumption that each subsidised job shortens the dole queue. But it can be argued that some of the subsidised jobs would have been created anyway, while others will displace existing jobs. If this occurs the net impact of measures to help the long-term jobless will be reduced and the net cost raised. The counter-argument of advocates of job subsidies is that even if some job displacement occurs, those displaced will be more employable and better able to fill job vacancies than the long-term unemployed. This, it is said, will reduce wage pressure in the labour market, thus providing a spur to further job creation.

This latter argument has considerable intellectual merit but has yet to be put seriously to the test. The Labour Party, attracted by the possibility of a "free lunch", has deployed the argument in announcing plans for a new deal to in effect abolish long-term unemployment amongst 18-25-year- olds. However, more conventional analysis indicates that jobs programmes could entail on-going net expenditure. A sensible position is to remain agnostic on this issue and policy makers should thus err on the side of caution when assessing the likely cost of jobs programmes.

A crude calculation suggests that serious meaures to help 500,000 long- term unemployed back to work might require net public spending of up to pounds 2bn per annum - still a very cheap lunch but not a totally free one.

Assuming that a future Labour government would not be prepared to fund this spending by higher borrowing, cutting other public programmes, or raising business taxes the burden would have to fall on personal taxation (pounds 2bn is equivalent to a penny on the standard rate of income tax).

Ultimately, therefore, an effective package of measures designed to cut long-term unemployment that incurred a net cost would entail a redistribution of income from employed "insiders" to formerly unemployed "outsiders".

It may be comforting to think that all that is needed is to "tax the rich", close tax loopholes, or raise capital gains or inheritance taxes. The reality is that a large part of the burden of extra taxation would have to fall upon people on around average incomes and above, many of whom, although "comfortable", do not think of themselves as affluent (and are increasingly concerned about their own job and income security).

One sales pitch for policy makers would be to emphasise the advantage of lower unemployment - for example, higher output of private or public services and reduced social problems, such as crime.

But if insiders do not consider the price of low unemployment worth paying, or are unwilling to pay it, they will either resist tax increases through the ballot box or press for compensatory wage rises which could sabotage the entire job-creation exercise. No wonder politicians prefer to talk about free lunches.

The political constraints on measures that would make a serious impact on unemployment without further eroding the social fabric of Britain are considerable. Politicians and commentators who dislike the unequal pain imposed by deregulated flexibility ought to spell out which members of society will have to pay the price of a more constructive programme of national renewal and full employment and set out the hard choices. Those not prepared to be honest about the necessary means should at least be honest enough to abandon the goal.

The author is director of the Employment Policy Institute. He writes in a personal capacity.