The Chancellors full employment ambition is not quite what it seems

The Chancellor's "full employment" ambition is not quite what it seems

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The UK’s Chancellor of the Exchequer, George Osborne, has announced that his priority is jobs. In his words (from his Twitter account, successive tweets):

“This week sees biggest personal & business tax cuts for two decades. Part of our plan to build an economy that supports full employment”.

“Today I have set an ambition for the UK to have the highest employment rate in the G7 – best place to create a job and to get a job”.

This is more than slightly confused. Firstly, it is by no means clear why business tax cuts should necessarily lead to higher employment. Employment is a cost of doing business and is already tax-deductible: cutting corporation tax does not directly boost jobs, although it may encourage investment. The Chancellor is planning to cut the employer’s contribution to National Insurance, but this should be viewed in conjunction with the rollout of compulsory workplace pensions which include an employer’s contribution. It is therefore by no means clear that the tax cuts for businesses would actually boost jobs. They may just boost profits and shareholder dividends.

It is also by no means clear why personal tax cuts should lead to higher employment either. True, the rise in the personal allowance takes more people out of income tax, but National Insurance commences at a much lower level and there are no plans to raise the threshold. But more importantly, taking working people out of tax does not increase the incentive to work if untaxed working incomes are higher than unemployment benefits – which in most cases, due to the minimum wage and earned income tax credits, they are.

So the first of these tweets is distinctly odd in the claims it makes for the effects of tax cuts. But it gets worse. What on earth is “full employment”, anyway? Is it 0% unemployment for all working-age adults, and how does this relate to the UK’s labour force participation rate, which is about 70%:

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(h/t Duncan Weldon)

 Are we expecting the labour force participation rate to rise, or is “full employment” only for the 76% of men and 68% of women who want to work and/or are able to work? Recent policies aimed at getting single mothers, sick and disabled back into work have clearly been intended to raise the participation rate, and of course the state retirement age is rising. How does this square with the “full employment” mandate? Increasing the participation rate will actually increase unemployment unless the economy is growing enough to accommodate the influx - though young people delaying their entry to the workforce in order to study offsets this to some extent. But is the economy growing strongly enough for unemployment to fall to near-zero with  a rising participation rate?

Alternatively, is “full employment” the Non-Inflation Accelerating Rate of Unemployment (NAIRU), beloved of economists, which historically has been estimated as about 5% for the UK? For the last thirty years, inflation control has been more important than full employment. We do not have the employment levels of the 1960s and 70s – but we don’t have the inflation either. If the government defines “full employment” as a lower unemployment rate than the NAIRU, this surely sets it at cross purposes with the Bank of England’s inflation-targeting mandate. Which is more important – full employment or inflation control?

In short, the Chancellor has not defined what he means by “full employment”. Or – has he? In the second tweet, he says he wants the UK to have the highest employment rate in the G7. Here are the employment rates for the G7:

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(From An International Perspective on the UK – Labour Market Performance, ONS Jan 2014, pdf)

The UK is fourth, but there isn’t much between it and the top three. And as Ben Chu pointed out on Twitter, the UK’s employment rate is higher than almost anywhere in Europe except Germany. So perhaps the Chancellor’s definition of “full employment” has nothing to do with absolute percentages. It is to do with international rankings. If the UK is top of the G7 league for employment, it has achieved “full employment”.

I don’t often comment on politics, but in my view this is an overtly political move by the Chancellor that has very little to do with labour market economics and everything to do with the 2015 election. The UK’s Labour party has traditionally been the party that supports full employment, and its manifesto includes a compulsory jobs guarantee for young people and the long-term unemployed. In arguing that the Coalition’s policies will restore full employment, Osborne is trying to pull the rug out from under Labour’s feet.

But whether or not “full employment” (whatever that means) can be achieved by either party is not the point. As Simon Wren-Lewis points out, the Chancellor is strangely silent on the UK’s awful productivity and the low wages that go with it. Yes, the UK seems to be able to generate jobs at a remarkable rate: indeed the strong performance of the UK’s labour market in recent years has puzzled many economists, given how poor the UK’s growth has been. But its strong employment performance appears to come at the price of its international competitiveness and the living standards of its population. The UK’s export performance is dismal and real wages have been falling for years.

Full employment (however defined) is no doubt desirable, but not at the price of the UK becoming a low-wage, low-productivity economy. We need a highly productive, internationally competitive economy which generates well-paid jobs. So far neither political party has really addressed this issue.  I can’t help feeling that for both of them, the UK’s productivity and competitiveness problems have been consigned to the “too difficult” pile. What a pity. 


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