Economics: Labour still has to climb a mountain

THE Liberal Democrats and Labour are jubilant about Thursday's election results. The anti-Tory swings were large, but perhaps the most significant feature of the poll is that opposition voters are moving ahead of their party leaders in constructing an anti-Tory coalition.

The table shows that the Liberal Democrats managed to turn the local electoral system in their favour: for the first time in many moons, they won a larger share of the county council seats than their share of the vote. Despite a lower national vote share than in many of the elections of the 1980s, the Liberal Democrats made sharp gains.

This paradox of more seats for fewer votes arises because opposition voters are learning that only one candidate stands a good chance of ejecting a sitting Tory, and that person is generally Liberal Democrat in the South and Labour in the North. This is not so much tactical as regional voting: two different two- party systems are growing up.

This learning process is one of the few things the left-of-centre parties have going for them. Almost all the economic, demographic and social factors are working in favour of the Conservatives, which is why the markets took the results with such insouciance. The City still believes that the Conservatives are heading for Japanese-style one-party hegemony.

In Britain, the Liberal Democrats are still a chrysalis party, yet to develop a core following that is regionally concentrated enough to make a breakthrough in parliamentary seats. And Labour's traditional constituencies are in terminal decline with no clear evidence that it is able to forge new ones.

The economy is gradually becoming deproletarianised. Manual workers - the traditional 'working class' that was Labour's raison d'etre - were more than half of the electorate only 20 years ago, but they now form barely a third, and the proportion is still shrinking.

The numbers of manual workers employed in large, traditional plants most associated with collective labour organisation are shrinking even more rapidly. By 1991, only 37 per cent of employees were union members, such a sharp fall that union density had retraced its steps back to the level of 1960. The unions lost 3.3 million members between 1979 and 1990 (1).

This trend is unlikely to change. Manufacturing output may grow rapidly, but manufacturing employment will continue to fall because of rapid gains in output per person. Other trends within employment are also antipathetic to traditional collectivist values. The amount of time that people can expect to spend in full-time employment is plummeting, eaten away at the start of working life by longer education and at the end by early retirement. Around the remaining 'core' workers is a growing periphery of service workers, the self-employed and contractors much more responsive to the market place than to union officials.

Other social trends are also working against Labour. The growth of owner occupation means that barely a fifth of households are now council tenants. The population is ageing, and there is a continuing shift from Labour-voting to Conservative and Liberal Democrat-voting areas: from North to South, and from inner cities to suburbs. That is why the next boundary review, which will be operational before the next election, is likely to shift 15 seats straight from Labour to the Conservatives.

There are also more nebulous factors that represent a serious threat to the welfare state and its proponents. In the last decade, for the first time in the history of modern capitalism, the established trend towards greater equality of income and wealth has come to a halt. Over the Thatcher cycle from 1979 to the peak in 1988, the real increase in income for those in the bottom 10 per cent of the income distribution was 12 per cent, while the increase for someone in the top 10 per cent was 38 per cent. For someone in the top 1 per cent, the rise was 60 per cent. After tax, the discrepancy became even more marked.

One of the reasons for the depressed growth in the pre-tax pay of the lower paid is that they suffered most from unemployment, which was in turn the result of the pattern and ferocity of the policies used to combat inflation. Macro-economic policy fundamentally altered the supply and demand balance of the low-skills labour market.

But this merely accelerated a longer-term trend towards lack of demand for the unskilled and the uneducated. Britain, like the United States, has been growing an underclass less able to keep up with the earnings growth of its more successful and established compatriots. Those poor people are a left-of-centre constituency, but they are also demoralised and tend to vote less than others.

The growth of the underclass will be accelerated by the collapse of communism in the east, welcome in every other respect though it is. The Iron Curtain was the most effective immigration policy that rich western European industrial countries could have devised along a frontier as porous as that between Mexico and the United States.

The impact of eastern and central European migrants will now be very similar to the impact of Mexican 'wetbacks' on the US labour market. They will compete even more fiercely with the low paid and unskilled, and will thus widen still further the pay differentials in western European economies. Because many immigrants will be illegal, they will also be difficult to absorb into western European welfare states even if the political will to do so existed. The poor will increasingly fall outside the net, as they do in southern US conurbations such as Houston and New Orleans.

This inevitable immigration from eastern Europe is, incidentally, a strong argument for taking a much more generous attitude towards free trade. It is surely better to import eastern European goods, thereby helping to raise eastern Europe's standard of living, than to drive people west by means of enforced poverty. A recent study (2) shows that free trade need not be disruptive. A doubling of farm exports could lead to gains for EC consumers and taxpayers that could be used to compensate some of the losses for EC farmers, and the implied cut in farm gate prices of up to 8 per cent would be less than the cut of 14 per cent between 1985 and 1991.

Apart from the economic impact of immigration, the freedom of eastern Europe presents another challenge to the European left, because it will be more difficult to muster support for the welfare state. It was, after all, fear of communism that was the chief spur to the establishment of many social benefits and health insurance after the war. The threat of revolution - or of peaceful electoral gains by communists in France and Italy - persuaded the western European middle class to take a more enlightened view of its own self-interest than in any previous period.

With the threat of communism removed, the impetus behind the Rhine model of capitalism - a high social safety net and generous social provision of services, whether put in place by wet Tories, Christian Democrats or Socialists - is bound to falter.

The European left, by comparison with its counterparts in the United States and Japan, has been historically successful. The question is whether it can now rebuild its support and maintain its societies' commitment to social solidarity.

(1)David Metcalf: Transformation of British industrial relations? Institutions, processes and outcomes 1980- 1990, LSE (mimeo).

(2) Jim Rollo and Alasdair Smith: The political economy of eastern Europe's trade with the European Community: why so sensitive? Economic Policy 15 April 1993.