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Roads to full employment

Published online by Cambridge University Press:  26 March 2020

J.R. Sargent
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Abstract

Can unemployment be cured by flexible labour markets? This current nostrum had little to do with the maintenance of full employment, with little inflation, throughout the 1950s and 1960s. The secret of that success can be traced to the high level of investment, which stimulated both supply and demand in the economy, and enhanced the employability of labour. Downward pressures exerted on the cost of labour appear to have had some effect on unemployment in the 1980s, but are likely to run out of steam before it is reduced to a tolerable level. Attention now needs to be concentrated on enhancing the employability of labour. But whether this is attempted through tax incentives to investment or other means, its purpose will be liable to be thwarted unless accompanied by general restraint in the upward adjustment of real wages.

Type
Articles
Information
National Institute Economic Review , Volume 151 , February 1995 , pp. 74 - 89
Copyright
Copyright © 1995 National Institute of Economic and Social Research

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Footnotes

∗

The Review is pleased to give hospitality to CLARE group articles, but is not necessarily in agreement with the views expressed; responsibility for these rests with the authors. Members of the CLARE Group are M.J. Artis, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.FG. Scott, Z.A. Silberston, J.H.B. Tew, S. Wadhwani and M. Weale.

References

Notes

(1) The dichotomy was elegantly presented in 1984 by the then Chancellor of the Exchequer, Mr Nigel Lawson, in the Mais Lecture to the City University.

(2) ‘Full employment in a market economy’, National Institute Economic Review, No. 150, November 1994.

(3) ‘European unemployment: a survey’, Journal of Economic Literature, June 1994, (page 614).

(4) Unemployment, Oxford University Press, 1991.

(5) See W.A. Brown, ‘The scope for an incomes policy in the 1990s’, Table 1, (paper submitted to the Institute for Public Policy Research Commission on Social Justice).

(6) Layard, Nickell and Jackman are not among those who unreservedly condemn collective bargaining. They think that it can help to contain unemployment if it is coordinated at industry or national level (op. cit. page 483).

(7) ‘Why has Britain had full employment since the War?’, Economic Journal, September 1968. The findings of this article are confirmed, with some qualifications, in Matthews, Feinstein and Odling-Smee, British Economic Growth 1856-1973, Oxford University Press, 1982.

(8) This is true of the period Matthews was writing about, although the subsequent ‘Barber boom’ of 1972-3 was initiated by the full panoply of ‘Keynesian’ measures. It proved to be the Gotterdammerung of the Keynesian era.

(9) Since the beginning of the 1980s, this lesson has become familiar in the opposite sense.

(10) The high figures in Table 2 for the growth of the capital-labour ratio in 1979-82 no doubt reflects the ‘shake-out’ of labour as manufacturing was forced to adjust to the appreciation of sterling as well as to the sterner cast of the government's economic policy. Some of this adjustment may have continued to affect the 1982-6 figure. It seems probable that, if we could make allowance for this once-for-all decline in the amount of labour manning a unit of capital, the capital-labour ratio in 1979-86 would be found to have grown at a lower annual rate than in 1976-9.

(11) The results first appeared in an article in the Bank of England Quarterly Bulletin, June 1976, ‘The cost of capital, finance and investment’, by Flemming, Price and Byers. Revised and updated figures have appeared in June issues of the Bulletin in subsequent years, but the published series ends in 1984.

(12) ‘Real interest rates: past and future’, Maurice Scott, National Institute Economic Review, No. 143, February 1993.

(13) ‘The value of investment incentives for manufacturing industry 1946-74’, in A. Whitby (ed.), The Economics of Industrial Subsidies.

(14) For a discussion of these reforms, see the Clare Group article by Scott and Sargent, ‘Investment and the tax system in the UK’, Midland Bank Review, Spring 1986. It is likely that the adverse effect of the changes introduced by the 1984 Budget was felt particularly by small firms. Investment by small firms accounts for an insignificant part of the total, but it may help to leaven the lump in an altogether more significant way.

(15) The influence which intervened between the two series in the 1955-68 period was probably the surge of investment to which we have referred earlier. We return later to this and to the effects on real product wages which it may subsequently have had.

(16) For the sake of the argument, we here suppress the distinction between real product wages, which are of interest to employers, and the real wages which concern employees, i.e. measured after income tax and employees' national insurance and other contributions and related to retail prices.

(17) If we refer back to Chart 4, the transition from E1 to E'1 would appear as a rightward shift of the positive relationship which seems to have prevailed in the 1980s between unemployment and the rate of growth of real wages, as indicated by the plotted points.

(18) In Figure 1 b, as in Figure 1a, the distance OA represents the real wage with which the period begins, and so is longer in Figure 1b.

(19) This is perhaps the ‘post neo-classical endogenous growth scenario’ which appears to have tickled Mr Gordon Brown. The intellectual basis for case (d), in which the long-run growth rate of labour productivity is positively linked to the share of investment in the GDP, has been laid by M.F.G. Scott, A New View of Economic Growth, Cambridge University Press, 1989.

(20) See W.E.G. Salter, Productivity and Technical Change, Cambridge University Press, 1960.

(21) See the lower half of Table 1, columns (1) and (5). Our figure of 2½ per cent for 1984-83 is made up of 2·7 per cent for the total gross stock of capital less 0·2 per cent for employment. Hours of work were much the same in manufacturing in 1993 as they were in 1984, and this is assumed to have been the case for employees as a whole. For non-residential capital, the growth rate of the gross stock between 1984 and 1993 was 3·0 per cent per annum, compared with Madison's figure of 3·2 per cent for the net stock between 1950 and 1960. The CSO does not publish figures for the net stock in constant prices. We should note that it is not easy to establish reliably what has been happening to the capital stock since the early-1980s. See Mayes and Young, ‘Improving the estimates of the UK capital stock’, National Institute Economic Review, February 1994.

(22) This is an approach which the Director of the National Institute has described as ‘the ideal solution to the problem of unemployment’. See the National Institute Economic Review, No. 150, November 1994, ‘Full employment in a market economy’.

(23) This particular problem is likely to become worse with increased mobility of labour within the European Community and greater mutual recognition of qualifications.