Fortunately, as I am in Iceland at the moment, I managed to miss yet another appearance on Newsnight by Paul Krugman. However, I gather that he said: ‘The British economy is somehow employing more people. That's a puzzle, but it's not a good thing.’
I have no idea of the context so I will not criticise Krugman for saying this. However, the statement, if it was meant to be taken at face value, is certainly very odd. I have to admit that, back in 2008-09, I thought that there would be a jobless recovery whereas, in fact, we have had a recoveryless job explosion. Though it is not what I expected, five years on it does not take a Nobel Prize winner to puzzle out the reasons.
Firstly, is it a bad thing that we are employing more people? Certainly if more people are being employed because they are being pushed out to work when they would rather not work, then it is not a good thing. For example, if childcare subsidies combined with high taxes for single-earner couples create income and substitution effects to push more mothers (or fathers) into the labour market, then the decision to work is not reflecting the underlying preferences of those involved. It is true that employment is very high in the UK and employment of second adults in households that have only one adult in work is especially high. Let us, however, leave that special case aside.
New Keynesians argue – and it is one of their stronger arguments – that labour market skills deteriorate when people are outside the labour market. Therefore employment – any employment – can be beneficial in getting the economy back on track in the long term. Yes, job creation schemes might distort the economy, but they also might prevent people from becoming detached for life from the labour market. I prefer radical supply-side and welfare reform to ensure that people remain attached to the labour market, but the New Keynesians at least make a point worthy of consideration. As such, Krugman’s concern about job creation in the UK is somewhat puzzling given his general disposition.
But the main point is that, if one looks at the condition of the economy and the main features of our labour markets, tax and welfare systems, the recoveryless job explosion is pretty easy to figure out.
Amongst other reasons, recovery has probably stalled because:
1. There is huge policy uncertainty in the euro zone.
2. Fewer companies at the margins of profitability are going bust because interest rates are very low and because of forbearance.
3. The government is spending ten percentage points more of national income than ten years ago.
4. The regulation of bank capital, other regulation of the financial and energy sectors and the running down of North Sea oil are damaging what were previously our most productive sectors.
At the same time, very high marginal tax and benefit withdrawal rates (70 per cent or more for most families with children) mean that training, longer hours and job advancement are penalised but that the impact of real wage cuts is considerably softened. This means that the labour market has adapted surprisingly quickly to a productivity shock by reducing real wages. Furthermore, basic benefit levels are very low in the UK relative to the earnings of those who are relatively well qualified so that not working at all is an unattractive option.
Indeed, if one digs deeper, you can find reasons for the more detailed pattern of labour market trends. Theory would predict that those who suffer from a minimum wage would be the long-term unemployed (whose skills deteriorate once they have lost a job) and youths (who are relatively unproductive or have difficulty demonstrating their productivity). And, sure enough, long-term unemployment is very high. Sadly, youth unemployment overtook French levels in 2011 having been half French levels when the minimum wage was brought in. Again, this is not a puzzle.
So, assuming that there was no special context to Krugman’s remark, I am puzzled as to why he is puzzled. I am even more puzzled as to why the BBC repeatedly has somebody on Newsnight so regularly when they are puzzled by what should be quite obvious.
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