Millions are ready to vote with their hearts on unemployment

ECONOMIC VIEW

There are two entirely separate debates on economic policy in Britain. One, the high-profile business of targeting inflation by changing interest rates, reaches its monthly climax at today's monetary meeting between the Chancellor and the Governor of the Bank of England.

The other, about how to reduce unemployment, is closer to the hearts of most voters but far less prominent, partly because the present Government tries to keep it off the political agenda. After all, it is tricky to discuss solutions to stubbornly high unemployment at the same time as boasting of successful labour market policies that have reduced the jobless count for 29 months in a row.

But as economist Andrew Britton, of the Churches Inquiry into Unemployment, told a seminar organised by the Employment Policy Institute this week, in talking about reducing unemployment, we are talking not only about the unemployed but also about the life chances of those who have work.

The fact that at least 2.2 million people are currently out of a job is one of the causes of insecurity and anxiety for many of the 28 million people in the workforce.

Unemployment will be discussed by ministers from the leading industrial countries at the G7's special summit in France a month from now. The Continental economies are suffering much more stubborn high unemployment than the Anglo-Saxon ones.

Yesterday the Bundesbank announced that German unemployment had set a new post-war record of 3.97 million last month. But there is little consensus about solutions to this intractable problem because economists have wildly different views about how the labour market works.

One was put forward at the seminar by Patrick Minford, a Liverpool University professor and former adviser to Mrs Thatcher. Professor Minford agrees that Conservative policies have been extremely successful in one sense. They have reduced the rate of unemployment below which further falls in joblessness would trigger higher inflation, known to economists as the natural rate or non-accelerating inflation rate of unemployment (Nairu).

Two factors in particular - linking benefits to prices rather than faster- growing wages, and de-unionisation - have been ``the single most important elements in British policy,'' he argues. The labour market now works better and can deliver lower equilibrium unemployment.

The trouble is, Professor Minford says, that there has been too little investment and too little demand in the economy since 1990. He is all in favour of some good, old-fashioned reflation alongside a minimally- regulated labour market and less generous benefits.

However, many economists are far more sceptical about the ability of basic macroeconomic policy changes to affect the unemployment level. Mr Britton, joint winner of The Independent's Golden Guru award for the best economic forecast of 1995, suspects that the jobless total cannot fall much below 2 million without triggering accelerating inflation and balance of payments problems. In effect he, and others, do not accept Professor Minford's estimate of how far the Nairu might have fallen.

So one important difference concerns how much of the unemployment total is cyclical - and would be reduced by higher growth - and how much is structural. That leaves the related questions of what has caused the structural kind and how to tackle it.

There is a long shopping list of what are variously described as structural or supply-side policies. These are motivated by a variety of intellectual frameworks. The Government, for example, stresses deregulation of the labour market because of its commitment to free-market economics. It sees the post-war spread of rules restricting employers' freedom to hire and fire and extension of union influence on wage bargaining as obvious culprits for the upward trend in unemployment.

Those who disagree with this diagnosis have to explain why deregulation and deunionisation seem to have helped unemployment to fall in Britain and the US since the recession when it has not fallen in the more heavily- regulated labour markets on the Continent. Many economists accept that it has some force but are unwilling to sign up to other implications of accepting free market theories.

A third leading expert on the subject, Labour Party adviser Professor Richard Layard at the London School of Economics, implicitly accepts that there has been at least some success in the free market approach by focusing on those it has left behind - the long-term unemployed. People who have been out of a job for more than a year face much worse prospects of finding work because employers are relucant to take on people whose skills and work habits have had so long to deteriorate. At present there are nearly a million long-term unemployed, about 40 per cent of the total.

Professor Layard argues that taking action to get these people back into work would not have an adverse effect on inflation because they are for all practical purposes out of the labour market. Their presence on the benefit count does nothing to keep inflation lower.

His proposal is that anybody who has been without work for a year should be guaranteed a job. These would be proper jobs mainly in the private sector. The employer gets the benefit as a subsidy for six months. It costs the government no more than before, and saves money if any of the people concerned keep their job after six months. Professor Layard adds that Sweden's experience with a similar scheme shows that a remarkable proportion of those approaching the 12-month threshold find jobs themselves.

The main counter-argument is that those re-entering the workforce would simply displace people who already have jobs, so the jobless total would not fall ultimately. The thinking is that if the jobs are not there, it ends up as a nasty game of musical chairs.

Professor Layard says these critics must be assuming that the labour market does not adjust - that real wages do not fall to accommodate an extra supply of workers. He thinks it does. Anyone who disagrees, he argues, must accept the case for subsidising employers to keep on people they would otherwise make redundant, in order to bring the unemployment total down.

There are many theorists who believe the labour market is indeed not a classical market where price adjusts to bring demand and supply into balance. They see unemployment as the result of a variety of market failures such as flaws in the benefit system, tax effects, inadequate information about work, the costs of finding work and so on. Each failure has its own adherents and its own policy proposals and there is no clear evidence about which is right.

The final conundrum, raised by Mr Britton, is whether we even know what "full employment" means any more. In the immediate post-war years it was pretty clear: full time jobs paying enough to support a family for all the men who wanted them, with minimal unemployment reflecting people in between jobs. The definition would certainly be different now that a majority of women are in the workforce and some people prefer options such as self-employment and part-time work. When there is more choice in the labour market, as economies grow richer, we care much more about the quality of work opportunities.

The forthcoming G7 summit will give Chancellor Kenneth Clarke another platform for his analysis of the unemployment problem, close to Professor Minford's. But if a Labour government is elected, it will crack the policy debate in Britain open again.