• Unemployment? It’s The Fault Of The Jobless Themselves

    The latest figures showing higher unemployment may have dashed hopes that, in our fifth year of recession-induced stagnation, we have at last begun to recover, but we are still being offered the same old excuses. The problems arise, we are told, because of factors beyond our control – the Christchurch earthquake and the euro-zone crisis.

    No one would argue that these factors have been helpful; but the real reasons for continuing high unemployment are very much within our control. People are out of work because that is what free-market theory dictates.

    The theory takes a very simple view of how markets work. If the supply of a particular commodity exceeds the demand, the price will fall. So far so good; that is generally true of commodities, like sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.

    Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.

    There are several points to make about this. First, bringing wages down is seriously at odds with the government’s declared goal of closing the gap, in incomes and living standards, with Australia. It is a little odd that closing the gap requires us to accept lower incomes.

    Secondly, the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.

    That demand could easily be raised. A more buoyant economy would mean that employers were keen to take on more people, but that could only happen with a change in policy – and that is negated by the government’s insistence that, as the theory requires, wages must be cut. If the government’s priority is to cut incomes and therefore spending, there is no hope of increasing demand in general and demand for labour in particular.

    The government, though, continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. They refuse to recognise that labour is not merely a commodity, but is really another way of describing people’s working lives and their standards of life – that it determines the cohesion of families, the life chances of children, the strength of our society.

    In any case, after four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred. Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.

    This explains so much of government policy. It is why workers’ rights at work have been weakened. It is why benefits are removed so that even solo mums with young children are forced back into the labour market, whether or not there are jobs. It is why the level of benefits is being cut and the minimum wage is held down while top salaries zoom upwards. It is why the government lends covert support to big overseas employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees. It is why the government seems so relaxed about unemployment.

    The government has worked hard to put a euphemistic gloss on this policy. When the Prime Minister recently listed ten priorities in public policy, the first goal identified was to “reduce welfare dependency”. Few of those who no doubt nodded in support of such a policy would have stopped to understand that this is merely part of an overall strategy to force down wages.

    And the sad truth is that, even if the strategy succeeded in its immediate goal, it would still be bad news. Lower wages would just mean less purchasing power, and that would mean a more sluggish economy, tougher times for retailing, less money for investment – and it would mean the jobs market chasing its own tail downwards.

    If we are really concerned, as we should be, at our lack of competitiveness in international terms, there is a much more obvious, more effective and fairer way of dealing with it than heaping the burden on to the poorest in our society. A lower exchange rate would immediately cut costs across the board and ensure that everyone made a proper contribution to becoming competitive.

    But the theory doesn’t allow that. The exchange rate must be manipulated as a counter-inflation tool, whatever the impact on competitiveness. Isn’t it time that we kicked a theory that serves us so poorly into touch?

    Bryan Gould

    13 August 2012