Unemployment

The European Perspective

Angus Maddison, Bote S. Wilpstra, Angus Maddison, Bote S. Wilpstra

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429675164
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1982. Unemployment was a major scourge of the advanced capitalist countries in the 1930s, but in the golden age of post-war expansion which lasted until 1973, it had seemingly been vanquished by enlightened economic policy. Since 1973, unemployment has re-emerged as a major problem, along with accelerated inflation and problems of structural adjustment imposed by soaring energy prices.

The rise in European unemployment came in two surges as a result of the generalised recessions of 1974-5 and 1980-1. At the beginning of 1982 unemployment in the European Community was running close to 10% of the labour force compared with a 'norm' of under 2% in the 1960s.

These abrupt and serious changes in the labour market have created major new dilemmas for economic policy and have stirred significant and acrimonious theoretical controversy.

For this reason it is useful to analyse the policy issues and the academic debate in a comparative perspective. The present volume contains three comparative papers on the employment policy discussions in Germany, the Netherlands and the UK as well as papers examining the theoretical adequacy of Keynesian, monetarist, structuralist and Marxist reactions to the new issues. The papers are all accompanies by a critique from the discussants.

THE UNEMPLOYMENT POLICY DISCUSSION IN THE U.K. IN THE 1970s

M.FG. Scott, Nuffield College, Oxford.

What Has Happened

The full employment era in the U.K. lasted from the Second World War until 1966. As can be seen from Table 1, it was characterised by a low unemployment rate, moderate inflation, and a rate of growth of the gross domestic product which, while low by the international standards of the time, was high by the U.K.’s own historical standards.

After 1966 the situation deteriorated, with unemployment rising and inflation accelerating. After 1973, it became even worse, and now the rate of growth also slowed down. Since 1976 the unemployment percentage has remained above 5 and, by mid-1981, had climbed to above 10, the highest since the 1930’s. The rate of growth of retail prices reached nearly 25 per cent per annum in 1975, was brought down to about 8 per cent per annum in 1978 by a temporarily successful incomes policy, but accelerated once more when this collapsed in 1978-79. Wage and price increases then moderated as unemployment rose, profits were squeezed and the exchange rate appreciated. From the middle of 1979, output fell.

To some extent, the rise in unemployment has been ‘voluntary’. It has been due, that is, to more generous unemployment benefits in relation to earnings at work after tax, to changes in registration habits, and to some other such changes. However, a study by Nickell (1979) puts the effect of more generous unemployment benefits at no more than about a 0.2 points increase in the unemployment percentage, and Laslett (in Scott with Laslett, 1978, chapter 10) has estimated that the whole ‘voluntary’ increase has probably amounted to only about 1 point, thus lifting the average from 1.7 per cent in 1955-66 to 2.7 per cent of employees. Nevertheless, some take the view that the ‘voluntary’ increase has been appreciably more than this (see, e.g. Wood 1972), and one hears reports that, for example, London Transport cannot obtain workers to fill vacancies, and that seasonal workers in holiday resorts cannot be easily found.

In searching for other explanations of the rise in unemployment, one naturally turns to see what has happened to employment. Table 2 gives the main figures. Total numbers of employees in employment grew until 1966 and then fell. This is also what happened to male employment, but female employment grew (with some fluctuation) throughout the period, so that women now represent 41 per cent of all employees, as compared to only 32 per cent in 1950. It is the change in the industrial pattern of employment which explains most of this change in the sex-ratio. The male-determined industries (especially manufacturing, but also agriculture, mining, and the railways) have declined, whereas education, medical services, public administration and other services have expanded.

Since, for most of the period, an average woman employee only cost 0.65 times as much as an average male employee, the growth of numbers employed exaggerates the growth of male-equivalent employment. In Table 3, an attempt has been made to allow for this, and also for three other factors which have all tended in the same direction, that is, to make numbers employed grow faster than ‘true’ employment. These factors are: the decline in the length of the working week; the increase in holidays with pay; and the growth of part-time work. While the estimates are uncertain, they suggest that, since 1955, ‘true’ employment has probably grown about 1 per cent per annum more slowly than numbers employed. On this reckoning, total employment virtually stopped growing after 1955. However, these estimates do not alter the fact that the rate of decline in employment accelerated after 1966, just when unemployment started to rise.

North Sea Oil and Gas as a Cause of Unemployment

It has been suggested by some that the discovery and exploitation of oil and gas in the North Sea has been responsible for a substantial part of the rise in unemployment in the U.K. The argument seems to be as follows. Oil and gas from the North Sea have substituted for imported oil, or have been exported, and so have substantially improved the U.K.’s balance of payments on current account, thus tending to raise the value of the pound in terms of foreign currencies. The exchange rate has been further strengthened by an inflow of capital from OPEC countries and elsewhere which would have been much smaller had there been no prospect of oil and gas production. This strengthening of the exchange rate has reduced the competitiveness of U.K. export industries or those competing with imports, and especially of manufacturing industry. The result has been a decline in employment in those industries and a rise in unemployment.

One can put the argument in another way. North Sea oil and gas represent a big structural change in the U.K. economy. They compete most directly with traded goods industries, since they are essentially providers of foreign exchange. If resources were perfectly mobile, or if wages and prices were perfectly flexible, there would be no unemployment, but neither is the case. The structural change in the pattern of output required then leads to more unemployment since the non-traded goods industries do not absorb the redundant workers from the traded goods industries straight away. The decline in manufacturing is not smoothly and quickly offset by a expansion in other sectors of the economy, nor is the decline prevented by a sufficient fall in factor payments in manufacturing relative to those elsewhere. The effect of the capital inflow is similar. Ideally, investment in the U.K. should increase to match the inflow and the resulting worsening of the current account of the balance of payments. However, the capital is mostly invested in short-term deposits and investment does not increase. Instead, the worsening in the current account tends to reduce output, income and savings in the U.K., and unemployment rises.

There are three criticisms which may be made to this line of argument. First, in so far as North Sea oil and gas have increased real incomes in the U.K., or have provided extra resources via the capital inflow, they have reduced inflationary pressures (especially if real wage resistance is strong). They have therefore reduced the necessity for deflationary measures by the U.K. Government, and this has tended to increase employment and reduce unemployment. This point is further discussed in the next section. Secondly, putting that point aside and assuming that total output has been unaffected (apart from the ‘pure gain’ resulting from the rent element in North Sea oil and gas) the magnitude of North Sea oil and gas output (taking account of its related financing) has been too small to account for much of the fall in manufacturing output below trend. In the Appendix we estimate that less than a fifth of this fall can be attributed to oil and gas, and the effect of this on unemployment should have been largely offset by gains in employment in non-traded goods industries (including services). Thirdly, so far as capital inflows are concerned there have been other factors at work besides the prospect of oil and gas revenues. The U.K. Government has pursued a monetary policy leading to high interest rates which have, in turn, encouraged an inflow of capital. It has always been open to the Government to neutralise the effect of the capital inflow by purchases of foreign exchange for sterling¹], and the fact that it has chosen not to do so suggests that it has welcomed the high exchange rate as a factor assisting its deflationary policy. Without the oil, and with the same interest rates, the capital inflow might indeed have been smaller and the exchange rate lower. But then in order to achieve the same amount of deflation, the Government would have had to raise interest rates even further. So unemployment might have been much the same.

In conclusion, therefore, it seems that one cannot attribute much, if any, of the increase in unemployment in the U.K. to the North Sea oil and gas discoveries. As the next section shows, there are indeed some who would argue that unemployment has been reduced rather than increased as a result of them.

The Balance of Payments Constraint

The Cambridge Economic Policy Group (CEPG) have for some years, in their Reviews (1975-1980), put forward the view that it is the U.K.’s balance of payments which prevents successive Governments from pursuing more expansionary policies which would have led to faster growth in output and employment, to lower unemployment, and even to lower inflation as well. The crucial elements in their argument seem to have been as follows. The rate of growth of output for some years has been below the rate of growth of productive potential, because aggregate demand has not been allowed to increase fast enough. Had demand increased faster, output would have increased faster too, but this would have sucked in more imports and the balance of payments would have worsened. Since this worsening could not be tolerated, demand had to be restrained and unemployment allowed to grow. The slow growth of output has tended to aggravate inflation since fewer resources have become available to satisfy workers’ aspirations. They have therefore pushed up money wage rates faster in an attempt to achieve certain real, post-tax wage targets which they have set themselves. The result has been to accentuate inflation, which growing unemployment has done little or nothing to prevent, since it has virtually no effect on either wage demands or customary profit margins.

If this view is accepted, it is clear that North Sea oil and gas, far from increasing unemployment, must have reduced it. By increasing the availability of foreign exchange they must have permitted a faster expansion of demand.

It might, at first blush, seem that the obvious remedy for this state of affairs would be to reflate demand and let the exchange rate depreciate. In fact, in 1972-3 this is precisely what was done, and output did expand and unemployment did fall - for a time. Unfortunately, inflation also accelerated, and so the policy was reversed. Inflation was brought down, but output fell and unemployment rose well above the levels of 1972.

The CEPG do not advocate reflation plus depreciation alone, precisely because they think it would lead to unacceptable rates of inflation, and require unacceptable rates of depreciation of the pound. Instead, they advocate reflation plus some depreciation, plus import restrictions through higher tariffs. They think this would not be inflationary rather the reverse. They claim that import restrictions would make more resources available to satisfy wage demands than would exchange rate depreciation, essentially for three reasons : (a) because the terms of trade would improve instead of worsening; (b) because profit margins would not be increased, whereas they would increase for exports with depreciation; and (c) because it would be possible to expand demand more quickly with import restrictions because the balance of payments would improve more quickly. They recognise that there would be a danger of retaliation against U.K. exports if U.K. tariffs on imports were increased, but they believe that this could be avoided if other countries could be brought to realise that the restrictions were benefitting the U.K. without harming them, since total imports would not be reduced.

Arguments against the CEPG’s framework of thought and against their policy recommendations have been set out elsewhere (see Scott, Little and Corden, 1980, and Allsopp and Joshi, 1980). The main points are as follows. First, and most importantly, it is not fear of worsening the balance of payments but fear of inflation which has prevented successive Governments from expanding demand faster. The CEPG’s own analysis of the arguments against reflation plus exchange rate depreciation point to this conclusion, and the experience of 1972-3 has provided a lesson which has not yet been forgotten. Secondly, there is no good reason to believe that import restrictions would be less inflationary than exchange rate depreciation. Neither points (b) nor (c) in the preceding paragraph carry weight, and while point (a) seems valid, it also provides a valid reason why foreign countries should retaliate against U.K. exports, in addition to other reasons. The U.K. would, if it increased its tariffs substantially and by increasing amounts over a period of at least a decade (and this is what is envisaged), not only be in breach of its international agreements, but also be injuring particular exporters from particular countries, who would regard the possible benefits to other exporters elsewhere as irrelevant. Furthermore, the CEPC ignore the adverse effects on efficiency of high and increasing tariffs, as well as the effects on wages push of a strenghtening of monopolistic elements in the U.K.

Labour-Using versus Labour-Saving Investment

In the immediate post-war years, profits were high, but since then their share in industrial and commercial, but excluding oil, companies’ value-added (i.e. the sum of gross trading profits and incomes from employment earned and paid by companies) has steadily fallen. This fall could normally have been expected to reduce the ratio of investment to companies’ value-added. However, for a variety of reasons, including more preferential tax treatment, companies have increased the ratio of investment to gross trading profits quite substantially. As a result, the ratio of investment to value-added actually rose until about 1966, and did not fall appreciably until after 1973. However, the falling share of profits in value-added may have changed the character of the investment undertaken so that it became less labour-using and more labour-saving. This would then have resulted in a relatively slower growth of employment opportunities, and would help to explain the slowing down in the growth of employment shown in Tables 2 and 3.

Some reasons for thinking that a fall in the share of profits would have this kind of effect are given in ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Foreword
• 1. The Unemployment Policy Discussion in the UK in the 1970s
• 2. The Unemployment Policy Discussion in Germany in the 1970s
• 3. The Dutch Employment Problem in Comparative Perspective
• 4. Do Keynesian Diagnoses and Remedies Need Revision?
• 5. Models or Markets: Two Approaches to Employment Policy
• 6. The Structuralist Diagnosis and Policy Menu
• 7. The Profits Squeeze, Unemployment and Policy: A Marxist Approach