Why `McJobs' are so hard to swallow

Economics

THE European job catastrophe continues. Among the large Continental economies, the unemployment rate is rising in France and Germany, still in double figures in Italy and higher still in Spain. In the UK there has been modest success in pulling the rate back, but any triumphalism here should be tempered by the fact that while we are good by European standards, we are bad compared to the rest of the world - in particular the United States and the countries of east Asia.

Expect more anguish this coming weekend, for All Fools' Day sees the opening of an economic summit devoted to the problem of unemployment - the so-called "jobs summit" in Lille, northern France.

Or rather if there isn't anguish, there jolly well should be. The idea that having a summit solves a problem is a pretty crass one at the best of times, but the experience of the last two years since the previous jobs summit in Detroit is particularly discouraging. Out of the seven summit countries, three have higher unemployment rates now than they did two years ago - Japan, Germany, and Italy; three have lower - the US, France and the UK; and one - Canada - has the same. But this is after two years of what was for most countries decent growth, a period which is supposed to have been one of economic recovery. If this is what happens in (fairly) good times, what can we expect in bad?

It is tempting to dismiss the whole summit business as political theatre, nothing more, but I think that is a little too cynical. While the leaders deserve to be reminded of their mixed performance over the last two years, some useful economic work has been done in the meantime. Our understanding of why unemployment should be so persistent is imperfect, but we are learning something.

For example, take two of the arguments frequently used to explain high and persistent unemployment in the West: that many of our workers are being displaced by lower-paid workers in east Asia, in particular China; and that improving our technology and productivity to compete will displace more of our people.

The first argument has been used directly, to support protectionism against low-wage regions by people like Ross Perot and Sir James Goldsmith. But you also hear it used indirectly, behind a criticism of the way in which the US, and to a lesser extent the UK, have cut their unemployment rates in recent years. It is argued that the US economy may indeed be good at generating jobs, but that many of these are what have been dubbed as "McJobs" - low-waged employment in the service sector. So even the countries which have been successful in cutting unemployment have done so at the price of depressing the already low wages of the poor. You sometimes hear this argument being used against the flexible labour market policies here: sure, we have got our unemployment down, but at a cost of increased insecurity and sometimes lower pay.

There is a good reply to this and it comes from Professor Richard Freeman, the renowned specialist on labour markets at Harvard University and the London School of Economics. He asked in an article published in the autumn issue of the Journal of Economic Perspectives: "Are your wages set in Beijing?" His reply, mercifully, was no.

There were two parts to his argument. Obviously competition from low- wage countries will displace some workers, but to blame unemployment solely on this is much too extreme a view. If it were true you would have to argue that there were no domestic influences on wages, something which is clearly absurd. The low-wage economies which have recently joined the international trading scene have affected some industries, but the trade with these countries is still only a small proportion of the total. So they can't have had much effect yet.

But what about the future? The second half of the paper looks at the view that we in the West are going to be overwhelmed by products produced by cheap labour in countries like China and India. This, Professor Freeman argues, is not correct either. Most of our low-skilled jobs are not in manufacturing where we are vulnerable to imports, but in services which are not internationally traded. So while our low-skilled workers in industry may indeed be displaced, we will still be able to create jobs in the public sector and, I suppose, fast-food restaurants. Professor Freeman's long- term solution is to get out of sectors of industry where we do have to compete with China and India.

It is a good response to protectionism, but I would have one reservation. While at the moment the principal challenge to the West comes in visible trade, in future we will face competition in services. As telecommunications costs come down and as an increasing amount of trade is on-screen services, anyone who has computer skills can deliver those anywhere in the world. Of course some services will never be traded internationally - you cannot eat a meal across the airwaves - but a lot of the services which at present are still carried out in the country where they are bought, may come to be carried out abroad in future.

For example, if banking and insurance become largely provided by phone, as with First Direct and Direct Line, there is no need for the administrative back-up in Britain. Indeed it would be logical to provide the night-time stint from somewhere in another time zone; and that could be India, which has already become an important software exporter. Our real job protection must be based on improving our education and skills and competing that way.

That leads to the second point: to what extent might better technology, better education, better training and the higher productivity that these bring be a threat, rather than a boost, to jobs?

This is an issue which the Organisation for Economic Co-operation and Development has been working on for the last two years, as it was asked to do so at that Detroit summit. Its report - Technology, Productivity and Job Creation - will be published later this week and presented to the summit at the weekend. The gist of it is that the benefits of increasing skill levels in terms of job creation are far greater than the costs, for while higher-skilled people increase productivity and so companies may need fewer workers, new and expanding industries have an over-riding demand for highly-skilled people.

Interestingly, other work at the OECD shows that it is not just the high- tech industries that need high-skill workers. Even low-tech industries need them too. So there is a powerful case for up-skilling right across the board.

But that is not enough. Clearly, people who are left behind will need some kind of compensation and that requires government intervention. While the apocalyptic stories about rising mass unemployment are wrong there is no doubt that we are heading into uncharted territory, for the IT revolution will force changes in the way in which we work which at the moment we can only glimpse. At any rate, expect more on this in the future: the OECD is preparing a report on indicators of performance in knowledge-based industries which should be published in the summer.

Meanwhile, though the Lille summit will concentrate on unemployment and it is those figures which hit the headlines, note that there is another indicator which is arguably more important: employment. The graph on the left shows unemployment rates for Europe, a sad familiar story. The graph on the right shows participation rates, the proportion of people who are in the labour force. This is largely driven by social considerations - Scandinavians tend to have high rates while Mediterraneans low - but it is interesting to see that the UK is successful at generating some sort of employment for a workforce which is relatively large in proportion to the population. Not a triumph; but not a disaster either.