Chris Harman


Second-hand model

(July 1997)

From Socialist Review, No.210, July/August 1997.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

‘Neither the US nor the UK experience suggests that a deregulated, more “flexible” labour market means lower unemployment.’

‘The British job creation drive emphasises deregulation, labour market flexibility, education and employability.’

The first quote is from an article written back in September 1993 by Ed Balls, then a Financial Times journalist and now generally regarded as the main economic adviser to Gordon Brown. The second, whose message clearly contradicts the first, was issued by Downing Street on the weekend of 7-8 June, as Tony Blair and Gordon Brown preached their message of ‘job creation’ across Europe.

It repeats an argument heard to the point of nausea from Tory ministers over the past decade. But when they made it, it was often challenged by people like Balls as well as by socialists. Today the media often presents it as if there can be no disagreeing with it.

Yet the argument Balls deployed four years ago remains perfectly valid. If ‘deregulation’ and ‘flexibility’ by themselves create jobs, then through the Reagan and Thatcher years unemployment in the US and Britain should have been considerably less than in France, and the growth in the number of jobs much greater.

In reality between 1979 and 1992 French employment grew by 3 percent while UK employment grew by only 0.4 percent.

This same point has been hammered home by Gerald Holtham of the Institute of Public Policy Research writing in the Observer business section:

‘Throughout the 1980s when the Thatcher reforms were in full swing, French unemployment was below that of the UK. Unemployment figures dipped below those of France in the Lawson boom – and then rose again, relatively, in the 1990s recession. In 1992, on the eve of the ERM breakdown, the relative unemployment rates were France 10.3, UK 10.1. After 13 years of UK labour market reforms, there was scarcely a difference.

‘Of course, since then there has been a big divergence. UK unemployment has dropped to under 7 percent; on the same definition, the French rate has climbed to over 12 percent. But this is not due to additional French rigidities. There have not been any.’

There was, it is true, a higher rate of employment growth in the US than in either France or Britain. But it was of particular sorts of jobs – the lower paid jobs usually taken by women. So, as Ed Balls noted in 1993, the number of men who were either officially categorised as out of work or who had dropped out of the statistics altogether was much higher than in France. ‘On average in the 1980s 12 percent of US males aged 25-54, and 14.9 percent of UK prime age males were out of work compared to only 9.1 percent in France.’

One in five households of people of working age still contained no one with a job in 1994. This was still a higher figure than in France (16.5 percent) and Germany (15.5 percent). The European Union Labour Force Survey in spring 1995 showed that 15.1 percent of the labour force in Britain ‘wanted’ work without getting it, as against 13 percent in France and 10.1 percent in Germany.

Have recent economic changes faulted these findings? There has been continued economic growth in the US and Britain, which stands in sharp contrast to the continued recession in France and Germany. But none of this proves that ‘labour market flexibility’ provides an answer to unemployment.

The growth in jobs has typically been in low paid, usually part time, jobs in the service sector. So, as Labour often pointed out while still in opposition, there has been little creation of permanent full time jobs in Britain since the depths of the recession. It is was not until this year that the government’s Labour Force Survey reported the first real growth in full time employment for men, rising in the three months to February by 77,000 (compared with a male unemployment total of 1,300,000).

The European Labour Force figures for winter 1996-97, show that despite ‘recovery’ 14.6 percent of the workforce still ‘want work’ here – more than twice the official unemployment figure touted by those urging the spread of ‘deregulation’ across Europe. In the US a report by the Economic Policy Institute last year pointed out that ‘10.1 percent of the workforce (13.74 million people) are ‘underemployed’, twice the registered jobless total. That includes 4.5 million part time workers who want to work full time.

The growth in employment in the US has also been accompanied by a fall in real wages. Average real wages fell by a sixth between 1973 and 1993, while the average working year grew by the equivalent of a month. A study in 1994 showed that 18 percent of full time workers in the US earned less than a poverty level wage of $13,091 a year (about £160 a week). In effect, the average working family could only protect its living standards if two people worked where one had previously.

Even Clinton’s then secretary of labour, Robert Reich, could complain that, if the choice was between the American and the European model, then it was ‘between, on the one hand, more jobs which pay less and less, or good jobs but high levels of unemployment accompanying those jobs.’

The employment record of Britain and the US in the last two or three years reflects the temporary upswing of economies which have swung down into recession three times in the last quarter of a century. Both were able to grow for a period while the European economies were slump bound because shifts in their currencies cut the price of their goods on foreign markets. In both cases the devaluation made it easier to export, which in turn encouraged a mood of optimism within the capitalist class, encouraging a certain expansion of production, especially in service sectors. By contrast, in France especially economic recovery has been held back by the high value of its currency, tied as it has been to the deutschmark by the ‘strong franc’ policy.

Even so, the US and British economic ‘recoveries’ have not been that rapid. Michael Prowse of the Financial Times has pointed out that for the US economy:

‘In the expansion of the 1960s annual growth was 6 percent or more in three separate years and averaged 4.5 percent. In 1984, growth surged to 6.8 percent. Between 1982 and 1989 growth averaged 3.75 percent and slipped below 3 percent in only one year. By contrast, in the present expansion, growth has exceeded 3 percent on only one occasion – 1994 – and then only by half a percent.’

In Britain the picture of the last 18 months has been very much that of ‘two economies’ – of a booming service sector and of a manufacturing sector which has been stagnating and even slipping into technical recession. This is leading the new government, apparently, to conclude that ‘long term sustainable growth’ in Britain can only be 2.25 percent, not the 2.5 percent assumed by the Tories.

Yet already there are signs that the exchange rate advantages could be disappearing. The pound has risen to its pre-Black Wednesday level – and is likely to rise further, now the government has given the Bank of England freedom to raise interest rates. One side effect of the crisis over the European single currency could be to force up the value of the dollar, as speculators increasingly come to the opinion that the euro will be a ‘softer’ currency than the deutschmark. In any case, there are factors at work which are likely to precipitate recession in the next couple of years in both countries. If this happens, the much boasted ‘flexibility’ of labour markets will accelerate the speed at which unemployment grows. As Robert Bischof, of the German firm Jungheinrich, has pointed out, flexibility ‘must be every accountant’s and production manager’s dream’ in ‘the upward phase of the business cycle’. ‘Companies hire more quickly, unrestricted by concerns over possible later redundancy costs and time consuming sacking procedures. But the nightmare comes with the downward part of the business cycle: redundancies will happen just as fast and on an increasing scale, leading to macroeconomic instability and an even crazier rollercoaster ride.’

Gordon Brown claims that ‘macroeconomic stability’ will follow if labour flexibility is combined with giving the Bank of England freedom to move interest rates without fear of ‘political interference’. But if this was true, capitalism should have experienced no recessions until governments turned to massive intervention in the economy in the second third of the present century. Before then there was little in the way of welfare benefits or employment legislation to impede the hiring and firing of workers at ‘market rates’, and the central bankers were, by and large, free from direct political control. Yet slumps occurred with almost clockwork regularity, culminating in the great slump of the 1930s – the event which converted even many capitalists to see the virtue of regulation.

Real macroeconomic stability depends on the constancy of what economists call ‘effective demand’ – that is, on all the income which firms received from the sales of goods being spent on the goods of other firms. But the very organisation of a competitive capitalist system means this can never be guaranteed, as Marx saw when writing Capital and as the pro-capitalist economist Keynes rediscovered in the 1930s. Most of the income from sales that firms pay out in wages will be spent, since workers and their families have to keep themselves alive. But what of that income that goes into profit?

How much of this is spent depends on the decisions taken by firms and rich shareholders. If the profits are spent on luxury goods, then this provides a market for other firms. If the profits go straight into new investment and plant and machinery, this too provides a market. But if rich individuals or firms decide to hoard their income in the form of cash or bank balances, or to use it to speculate in commodity or property markets, then direct expenditure will not be enough to buy all the goods produced by other firms. There will be a crisis of ‘overproduction’, firms that cannot sell goods will sack workers and cancel investment projects, and slump will spread from one sector of the economy to another.

In practice, so long as firms maintain a high level of spending on investment, then there will be a boom. But the moment something happens to make them stop such spending, then the economy will slump. And when that happens, the more ‘flexible’ the labour force and the lower the level of welfare benefits, the more rapidly the slump will spread – since firms will be able to sack workers more quickly and the unemployed will more rapidly find themselves unable to pay for the necessities of life.

It is possible that, by increasing profit levels and encouraging luxury spending and even investment, low wages and increased flexibility may give an added short term boost to the boom. But in the long term they increase the instability of the economy by making it more dependent than previously on the vagaries of the uncoordinated investment decisions of rival firms. The whole economy becomes increasingly like a pyramid stood on its point, with a very little disturbance in one direction or another serving to topple it over.

This is precisely what happened in the ‘roaring twenties’ in the US, when the boom seemed unstoppable until the Wall Street Crash took virtually all commentators by surprise. It was what happened again in the 1980s. Keynes learnt from the experience of the 1920s that holding wages back is not an answer to instability, but could not point to any other real remedy.

In a similar way there are still a few Keynesians who have not succumbed to the charms of Blairism today and, like William Keegan of the Observer, make the obvious point that, ‘most of [New Labour’s] initiatives focus on increasing the supply of labour, there is simply not enough attention being devoted to the need to ensure that the demand for labour is adequate. That is the macroeconomic challenge facing Britain and the rest of Europe.’

Last updated on 22 December 2009