Corbyn’s Labour needs to reject orthodoxy on unemployment

corboI’m excited, of course, about the possibility of Labour taking a new direction in the UK. But I can’t be too excited until it challenges the worst economic policy of recent history, one that hasn’t been challenged within official circles since the 1970s.

The policy is very simple and repellent. Most people I’ve spoken to didn’t know it was a policy and find it hard to believe that it is. The policy is: Keep unemployment at around 5% at all times. Yes, actually. Let’s have that again. Make sure that one out of every twenty people looking for an honest way to earn a modest living is unable to find one. That is the policy.

Think about what it means. On one hand, you have governments that complain endlessly about the number of people on unemployment benefits and the cost this imposes on the nation. You have them spouting rhetoric about making work pay and crowing about their job-creation achievements. Yet the same governments deliberately implement policies to ensure that the unemployment rate stays at 5% all the time.

Why do governments do this? Economists calculate something they call the NAIRU – the ‘non accelerating inflation rate of unemployment’. If you maintain unemployment at the NAIRU, which in recent years is calculated at around 5.25%, then you supposedly protect the economy against a growing rate of inflation. Keeping unemployment high keeps wages on the bottom end low – far below productivity: if you won’t accept a wage-cut, there are plenty of unemployed people, who will likely work for even less, to replace you.

In practice, this means that governments can spend as much as they like on wars, on giving tax breaks to the rich, and on funding banks to lend out ever-larger mortgages to push up house prices, effectively providing a state pension to those amateur asset managers we know as the aspirational middle classes. Governments can do all this without worrying about inflation, since high unemployment creates so much drag on wages. The poor live in a permanent recession so that the upper middle classes can enjoy a permanent boom. Yes, that is really the policy.

The NAIRU lies at the heart of all the modelling that guides policy in Treasuries and central banks. Nobody can question the government’s effectiveness in maintaining it. In the UK unemployment hasn’t been below 5% since 1975, barring one slight dip between 2003 and 2005. The latter was a small policy accident resulting in unemployment being a little beneath the targeted NAIRU; it was quickly corrected.

It wasn’t always like this. Beveridge’s 1944 report recommended that the government seek to ensure that unemployment never rises above 3%, and it should only be allowed to get that high on occasion, ‘to cover seasonal slackness, change of jobs and fluctuations of international trade’. He advocated full employment, defined as unemployment below 3% – usually well below, as the minimum target at which any government’s economic policy should aim. It was achieved by the British government, which for the most part kept unemployment well below 3% from the time of Beveridge’s report until the 1970s.

Inflation was a known threat, but the idea of fighting it by deliberately generating unemployment was regarded as just not an option. Joan Robinson’s Economics: An Awkward Corner, published in 1966, reads as follows:

Supporters of [a certain] view maintain that a ‘moderate’ amount of unemployment, say between two and three per cent over all, would be sufficient to keep wages in check and secure stable prices. The evidence for this view is very sketchy. It might need much more. But, in any case, deliberately to adopt such a cold-blooded policy is out of the question.

What was then an unthinkably cold-blooded policy is now ingrained so deep into standard procedure that we hardly even notice it. Yet maintaining the NAIRU is far from being the only effective means of controlling inflation. For most sorts of inflation it isn’t even the most efficient. It is simply a means of placing the whole cost of controlling inflation upon the very poorest.

Why is this standard policy? Why is it not a horrible joke? And how can any government be allowed to complain about the size of the welfare bill when it pursues a deliberate policy of depriving millions of people of any opportunity to earn income through work? Obviously those people are going to claim benefits – what else can they do?

Sometimes governments claim to pursue full employment, but they intend for the NAIRU not to count. The NAIRU is handily defined as ‘structural unemployment’ (which is nonsense – unemployment is always a policy choice). The ‘unemployment gap’ is then defined as the difference between the NAIRU and the unemployment rate. When unemployment is at the NAIRU, the gap is zero, and a zero gap sounds like success; it sounds, in fact, a bit like full employment. But would you like to celebrate it with the 1.8 million people looking for work and unable to find any, meanwhile demonised for daring to claim benefits? Or with the low earners who haven’t seen their real wages move since the 1970s?

We need to stop being desensitised and remember how cold-blooded an idea the NAIRU really is. Corbyn’s Labour needs to embrace real full employment as a core policy. And it needs to show up the cruelty, the hypocrisy, and the blindness of any government that refuses to support it.


17 thoughts on “Corbyn’s Labour needs to reject orthodoxy on unemployment

  1. NeilW

    The main trick, of course, is to use percentages.

    Never mention the actual number of real people involved or the number of working hours that represents.

    Because small numbers are easier to ignore.

  2. Sanjay Mittal

    The above article is nonsense.

    The brute reality is that there is a relationship between inflation and unemployment: when demand gets high enough and unemployment low enough, inflation kicks in a serious way. That point at which it kicks in has been given various names over the years e.g. NAIRU and the “natural level” of unemployment. Bill Mitchell refers to the “inflation barrier”.

    Simply making believe that an unfortunate fact of life is not there is nonsense.

    1. industriaditat

      Okay, I’ll play along with what you say Sanjay. Given that this ‘fact of life’ is ‘unfortunate’, how do you propose we treat the unfortunates? I vote for vilifying them and treating them like shit for their unfortunateness. What say you?
      Maybe if they smarten up their CVs they could become a ‘fortunate’ and push somebody else into unfortunateness (seeing as apparently a certain level of unfortunateness is a fact of life). Maybe we could all take turns at being unfortunates. When’s yours?

      1. Sanjay Mittal

        It is a bit puerile to suggest that because someone points to an unfortunate fact of life that causes harm to some group of people, e.g. those suffering from cancer, that therefor that person advocates treating relevant sufferers as “shit”.

        As to what my ideas are for reducing unemployment, I fully back the widespread criticisms of the idea that government budgets be equated with household budgets. I.e. Osborne’s idea (more or less backed by Labour) that we need surplus is complete nonsense. I also think that the Job Guarantee idea has definite possibilities.

    2. axdouglas Post author

      If you want to know Bill Mitchell’s views on the NAIRU, you could start with this:

      If you want to engage with his arguments, or James Galbraith’s, or Pavlina Tcherneva’s (I linked articles by them in my post), or mine, then I’m happy to have a discussion.

      But if you want to ignore all these arguments, keep restating the orthodox view, and merely assert that anything else is nonsense, then I’d rather you did it somewhere else. Debate I welcome; mere reassertion of the conventional wisdom I can do without.

      1. Sanjay Mittal

        Thankyou for referring me to Bill Mitchell’s views on NAIRU. However that’s an odd thing to do given that it should be obvious from above first comment that I’m already acquainted with Mitchell’s material. And as regards the specific article by Mitchell on NAIRU you refer me to, I read that shortly after it was first published, and thought it was nonsense for two reasons.

        First, while he knocks the idea that there is a relationship between inflation and unemployment (sometimes called NAIRU), he himself has his own phrase for that relationship, namely “inflation barrier”. I.e. all he seems to be saying is that he doesn’t like the acronym NAIRU and prefers a different phrase.

        Second, he argues that various right of centre people have misused the NAIRU idea and tried to use it to impose a higher level of unemployment than necessary. Well he may be right there, but that’s not a fault in the basic idea behind NAIRU, i.e. that there is a relationship between inflation and unemployment. It’s a fault in those who have done the “misusing”.

      2. axdouglas Post author

        I referred you to Mitchell’s material so you could understand his position properly and stop making the mistake you’re still making.

        Believing in an inflation barrier in Bill’s sense is not the same as believing in the NAIRU. The inflation barrier is a level of *spending* above which you lose price stability. The NAIRU is a level of *unemployment*, below which you lose price stability.

        Bill believes in the former but not the latter. He thinks you can keep spending within the inflation barrier without having ANY unemployment, by implementing a full job guarantee. Then there’s no (involuntary) unemployment, since anyone who wants work at the JG wage can get it, and there’s no inflation, since wages are anchored to the JG wage, which keeps spending within the inflation barrier. I think that too. So I don’t believe in the NAIRU and neither does Bill. We both believe that there’s an inflation barrier, but we believe you can stay within it while maintaining zero unemployment, by implementing a job guarantee.

        In brief: there is, of course, an inflation barrier, but there’s no reason to think that maintaining unemployment is the only way to stay on the right side of it.

    3. Bob

      Only if you suck at lateral thinking.
      Of course you can end unemployment. The government offers a job at the living wage open to everyone. There. Done. Unemployment ended. Forever. By decree.
      This then replaces the “unemployed” and BECOMES the buffer stock. And you get more priv sector unemployment for the same inflation due to lower hiring costs.

      1. Neil Wilson

        “The government offers a job at the living wage open to everyone”

        It’s slightly more exciting than that. You don’t just offer a job at a living wage (which infers that you have a stock of pre-prepared jobs ready and waiting to go), you *create* a job at the living wage for the individual.

        It’s the difference between an off the peg suit, and made to measure. The reason that the unemployed remain unemployed and you get a NAIRU effect is that about 1/20th of the population can’t get into an off the peg suit.

    4. Martin Odoni

      Why is it nonsense? The writer isn’t arguing that NAIRU doesn’t exist, or that unemployment can’t put a brake on inflation, just that it shouldn’t dominate the country’s unemployment policies anymore.

  3. Martin Odoni

    Reblogged this on TheCritique Archives and commented:
    The great hypocrisy of neoliberals is that they actually *want* people to be unemployed, as they think that a standing army of jobless people acts as a brake on inflation, and yet they keep attacking people for being jobless.
    c/o Origin Of Specious.

    1. axdouglas Post author

      Thanks for pointing me towards this. What a joke.

      ‘The basic liberal narrative is that there’s no connection between the individual qualities of unemployed people and their unemployment.’

      Oh we recognise the *connection* alright, we just get the causation the right way around.


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