Letter: We need creative thinking, not wage cuts

Sir: The importance of the problem of unemployment is highlighted by the attention you have devoted to it in leading articles on two successive days (22 and 23 June) as has Hamish McRae (22 June).

Unemployment in the European Community has its cyclical as well as its structural roots. The cyclical component is due to the recession which has arrived in Germany just as the UK seems to be escaping it. This cyclical unemployment is amenable to national reflationary policies only to a small extent, especially if the policy is pursued only at a national level. Even a policy of reflation pursued at a Community level will have only limited success. A recent publication edited by Ken Coates MEP on that question has shown how a combination of high growth and substantially enhanced cohesion fund would only halve European unemployment by 2000 AD. This still leaves 10 million unemployed all over the Community.

The structural unemployment in the Community is not, however, solely a matter of high wage costs. A number of lines of manufacturers at a mature stage in their product life cycle have moved to the newly industrialising economies of Asia and Latin America. This is a normal historical process. The correct response to such a move is neither to have protection nor to try and cut wages at home. The correct response is to seek out, via research and innovation, new product lines in which the mature industrial economies of Europe have a dynamic comparative advantage.

Such a policy is not easy to devise and requires substantial long-run investment. In the previous decade the emphasis in economic policy has been on disinflation and cuts in direct taxation. These policies have not generated the extra investment from the private sector that was hoped for. The need is for better strategic thinking in this area. However, we also need to rethink the old sectoral boundaries of manufacturing and services.

The product that is sold in the shop combines manufacturing, marketing, transport and retailing. It was probably financed by banking. Modern markets demand a high level of design and/or other inputs which are provided by colleges and universities.

Although wage levels are the object of attention, they are not of central importance. A pair of trainers carrying a label known world-wide and manufactured in East Asia which retails in our high streets has wage costs in manufacture that represent less than 10 per cent of their price. The original designer, perhaps of European origin, commands a comparative proportion of the price. The product is made in East Asia but is created in Europe and it is creativity which is the activity where Europe has the advantage.

Wages of course matter relative to productivity. The United States has created more jobs than Europe because it had a negligible rate of growth of labour productivity compared with that in the Community. This is why the US jobs are low-wage, low-productivity jobs and this is also why the growth of US real wages has been so sluggish. What is needed is high wages and high productivity.

Yours faithfully,

MEGHNAD DESAI

Director, The Centre for the Study of Global Governance

London, WC2

24 June