How to start a revolution in the jobs market

WHAT are we to make of the flurry of political interest in the plight of the unemployed? It's not just that the candidates for the Labour leadership are trying to define themselves in terms of different approaches to achieving full employment - although John Prescott deserves credit for forcing the issue. Much more surprising is that government ministers, hesitatingly, nervously, are beginning to use similar language.

Remarkably, the debate about employment policy no longer appears to be conducted from opposite sides of an unbridgeable ideological divide. In the past, all we would hear from Labour was a ritual insistence that demand in the economy was too low and the Tories were deliberately using the unemployed to hold down inflation. In recent years, as Labour became less confident that old-style demand management could deliver the goods, the incantation switched to 'education 'n' training, education 'n' training'.

From the Government we were used to the equally ritualised assertion that it was impossible to have a specific objective for employment but that, given low inflation and a flexible labour market, the economy would create the necessary jobs. The most the Government could do was remove the obstacles to employment, the market had to do the rest. The political achievement of the Conservatives in escaping blame for very high levels of unemployment has been down more to the incompetence of Labour than to its own cleverness.

It would be an exaggeration to say that what has changed is that Labour has got its act together. What is actually happening is more interesting and more complicated. There is no doubt that the prospect of a Blair leadership is concentrating Tory minds in a way they have not had to be concentrated hitherto. For the first time in living memory, the Tories actually want to find out what Labour is going to do. They sense that Mr Blair is a ruthless buyer in the market for ideas.

There is also another factor. During the Eighties, that prosperous 'middle third' of society who are the natural supporters of the Conservative party reckoned that unemployment was something which happened to other people. The recession in services and in the South-east, combined with the fashionable corporate culling of middle management, has made unemployment a Tory issue. Galbraith's 'culture of contentment' has been replaced by a 'culture of anxiety'.

Both the Government, through Peter Lilley's review of social security, and Labour, with its Social Justice Commission, are looking at reform of the benefit system. But while much can be done to create a more 'job friendly' system, anyone who thinks that the so-called unemployment and poverty traps can be easily sprung is either a genius or new to the problem.

Far more promising is the route offered by more active labour market policies. The range of programmes offered by the Department of Employment is a labyrinth which is nearly as incomprehensible to the employment service as it is to the unemployed and potential employers. The new Jobseeker's Allowance, to come into operation in 1996, is a step in the right direction in its stress on reciprocal rights and obligations, but it is hardly revolutionary. And a revolution is what is required.

Everybody agrees that the heart of the problem is not unemployment as such, but long-term unemployment. Some unemployment is necessary to avoid the inflationary pressure which comes from an over-tight labour market. But long-term unemployment serves no useful purpose because the longer people are out of work, the more their skills erode and the more discouraged and stigmatised they become. In the end they drop out of the labour market entirely and play no role in moderating wages or inflation.

Almost everybody also agrees that while unemployment and accompanying benefits are meant to protect people from the misfortune of losing their job, they also operate as a subsidy to idleness. Once someone joins the ranks of the long-term unemployed it is very difficult and expensive to help them. The key to the problem is obvious: stop people from becoming long-term unemployed.

Easier said than done, I hear you say. Well, I too distrust the economic equivalent of the free lunch. But I have been increasingly convinced in the two years since I came across it that the Benefit Transfer Programme (BTP), devised by Dennis Snower, the head of economics at Birkbeck, is a compellingly brilliant solution.

Very crudely, under Snower's BTP, the long-term unemployed would be given the chance to use part of their unemployment benefits to provide vouchers to the firms that might hire them. The vouchers would amount to employment subsidies for the unemployed. The programme would extend the range of choices to both the unemployed and their potential employers. The unemployed would join only if the wage offers they received were sufficiently high, while the employers would join only if the resulting labour costs were sufficiently low. The difference between what the employees get and the companies pay would be the benefits that are converted into subsidies.

The terrible twins of deadweight (paying people to do something they would have done anyway) and displacement (there are a limited number of jobs, so if we subsidise Mr X to get one, some other person without a subsidy may go without work) cannot be entirely eradicated. However, by starting the subsidy quite low, and then raising it in stages the longer a person is out of work, the deadweight effect can be minimised. Equally, by giving higher-value vouchers to firms which train, the Snower scheme would encourage the creation of long-term jobs.

The question which Snower poses is stark. We waste about pounds 24bn a year on unemployment-related benefits. Why not use that money to price people into jobs and train them to keep them in jobs? It would be working with the grain of the labour market - a phrase often used by David Hunt - it would tend to reduce inflation (by lowering wage costs) and the product created by those who would not otherwise have been employed will make us all better off. It would cost the taxpayer no more and, as unemployment fell, the money spent on vouchers would fall with it.

Snower calculates that the BTP would, over time, cut unemployment by 50 per cent. As it happens, the Department of Employment is currently operating four small pilot schemes, called Workstart, inspired by Snower, but so misapplied and diluted as to be almost useless. If we are about to see a real contest between the parties over jobs, my money will go on the first one to pick up Snower's ideas and turn them into a full-scale national programme.