Full employment should be the central aim of economic and social policy. In an era of limited public budgets, striving for full employment will be vital for raising family living standards and generating the resources needed to fund a sustainable welfare state. For the last three decades, macroeconomic policy in the UK has focused on controlling the budget deficit (except during recessions), while using monetary policy to keep inflation low. It was believed this would deliver stable growth and consequently full employment. This report argues that full employment should not be a consequence of macroeconomic policy; rather that it should be its central focus.
But what is full employment?
One definition would be an unemployment rate that is as low as it could be without triggering increasing inflation. At present, this might mean an unemployment rate of around 5 per cent (or 1.5 million people). This is broadly what the last Labour government achieved from 2001 to 2006. But throughout this period, and despite strong improvements in employment among some groups traditionally described as ‘inactive’, such as lone parents, over 4 million people continued to claim out-of-work benefits. It is an odd definition of full employment where more than one in 10 of the working-age population claim such benefits.
Full employment should, therefore, be defined with respect to the employment rate, rather than the unemployment rate. From 2001 to 2006, this hovered around 73 per cent – the same level at which it peaked (much more briefly) in the two previous economic cycles. Cutting unemployment to 5 per cent would be consistent with getting back to an employment rate of 73 per cent; but this should only be a start. The employment rate should then be pushed to new highs, in line with the highest levels seen in the OECD – that is, much closer to 80 per cent. Achieving this level would, necessarily, mean progress in reducing many of the unequal outcomes in the current labour market, including regional differences in employment rates and differences between the employment rates of various groups.
In particular, policy will need to concentrate on increasing the employment rate of three groups of potential workers not just by making them more employable – as Labour sought to do in the 2000s – but also by increasing demand for their services:
- women – in particular mothers, older women and women from certain ethnic backgrounds
- ‘disadvantaged’ groups – people with work-limiting disabilities, young people, older people and those with few or no skills
- victims of rapid technological change and globalisation – those previously employed in declining industries and found disproportionately in the north of England and the west Midlands.
Full employment and a renewed focus on job creation would also bring more general benefits. The recent recession and its effect on tax revenues, together with demographic changes, have made it more difficult to sustain spending on welfare and public services: welfare spending has been cut in previously unimaginable ways, and more cuts are mooted. The underlying constraint on the postwar settlement – that full employment was a necessary condition for a high level of public service provision and welfare support – has reasserted itself. One way to limit the need for higher taxes or even deeper public spending cuts is to increase the employment rate.
The inflation risk from a higher employment rate would be very small. Over the last two decades there has been no observable trade-off between inflation and unemployment in the UK.
Achieving an employment rate well above 73 per cent cannot be achieved by macroeconomic policy alone. Increasing employment among those with no skills is best done by improving their skill levels, so education and vocational training has a vital role to play in increasing the overall employment rate. Mothers will only go back to work if it pays them to do so, so either childcare has to be made more affordable, or the real wages that they earn – often in part-time jobs – need to increase (or both). Mothers also need more flexibility, in particular over working hours, because they typically still bear the prime responsibility for caring, even if they are in work. A sustainable increase in employment rates in the north of England and the west Midlands to closer to the levels in the south of England can only be achieved by the creation of more private sector jobs, but there is a role for government to play in enabling this to happen. Sick and disabled people might not be able to work eight hours a day, five days a week, so the labour market needs to be made more flexible for them, not just for the firms that might employ them.
The policy action required ranges across many government departments, not just HM Treasury and the Department for Work and Pensions. Increasing the employment rate to closer to 80 per cent requires the government make it the central aim of all its economic policies. It should present a vision of what full employment would look like – in terms of higher employment rates for certain groups, more sustainable public services and welfare provision, and a greater focus on job creation – and then it should make clear how its policies will help to fulfil this vision.
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