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EMPLOYMENT and UNEMPLOYMENT
An Occasional Paper
Occasional Paper No. 43
Employment and Unemployment
A layman’s view of some of the principles on which employment and prosperity rest.
Why is it that, while so many people in Britain are without the conveniences, and even the necessities, of modern life, there are at the same time so many people whose potential for work is untapped? The needs are there, the workforce is there, and, whatever difficulties there may be, there are no fundamental and insuperable impediments to enterprise. Why do unemployment and need continue to coexist?
What is employment?
At its simplest and most basic, employment is when two people, each of whom has the ability to make or provide something that the other wants, can agree on the relative value of each other’s work. If they can thus agree, both are in work. If they are unable to agree, if each thinks that the other is overvaluing his work and his product, both will remain idle. It is the decisions of the two people which determine whether or not they have work. By the relative value that he places on his work, each of them can be instrumental in providing work for himself and for the other, or he can deprive both of a chance to work. In the modern economy the situation is confused by all the intermediaries (employers, Government and others) that come between one worker and another, but this does not alter the fundamental truth that we are producing goods and services for each other and each of us decides how he values his own work in relation to the products of other people’s work. It is these simple decisions, freely made by millions of people, which determine the level of unemployment. It is therefore possible to state the root cause of unemployment in a single sentence: too many of us place too high a value on our own work and too low a value on the work of others. It is generally not possible to say who is overvaluing his work and who is not. Most of us, particularly those employed in the public sector and in large companies, are too far separated from our ultimate customers. The fact that the parties to pay negotiations are employees versus employers tends to obscure the underlying realities: the reality that a pay increase may have to be met not from the employer’s surplus profits but from the customer, as purchaser or taxpayer; or the reality that a claim is based not on the ability of an employer to pay, or any other factor under the control of management, but on what other people are receiving for similar or different work. It is these realities, how we value our work in relation to our customers and other workers, that determines the level of unemployment, the health of the economy, and the prosperity of the nation.
Too much emphasis is placed on the confrontation between employer and employee. The only real conflict of interest between them is over how much each should benefit personally from the success of their enterprise. On the crucial matter of making the enterprise successful in the first place, their interests are the same, and the potential for conflict lies with the customer, who decides whether or not to buy the products, and with other producers, who may be offering the same goods more cheaply. Yet here again it needs to be remembered that customers and workers do not, represent two opposing classes. Every worker is also a customer for the other people’s work and most of our customers are also workers. Ultimately, the purpose of work (viewed from an economic standpoint) is to provide goods and services for each other, and we each have to decide how we value our own labour in relation to the products of other people’s work. The terms must be seen as fair by both parties.
In the simplest example of two people considering whether to exchange the products of their labour on agreed terms, the only factor to be taken into account is the relative remuneration of the two parties. In practice, in larger organizations, many factors will contribute to the total cost of each product: (1) cost of raw materials and outside services, (2) cost of borrowing capital, (3) taxation, (4) labour costs, (5) profits, and (6) the efficiency and operating methods of the enterprise. Changes in any one of these can tip the balance between a viable and a non-viable enterprise, between satisfied customers and lack of sales, between employment and unemployment. Factors 4 to 6 in this list are under the control of those involved in the business; of these, labour costs are generally the largest and most significant. Factors 1, 2 and 3 are beyond the control of those in the organization, but Government controls 3 and can have a strong influence on 2.
In a dictatorship, rulers can compel their subjects to work and can impose prices and rates of pay. There need then to be no unemployment. In a free society we can decide for ourselves whether it is worth working for the reward offered and whether it is worth buying goods and services at the prices asked. The responsibility for high unemployment thus rests primarily with ourselves, the public. The various scapegoats that have been blamed – monetary policies, inflation, world recession, oil prices, trade unions, imports, foreign competition, automation, high levels of taxation, Government spending and Government borrowing, and others – may or may not be partly responsible. The effect of each must be assessed from an examination of its influence on the values of our jobs as seen through the eyes of workers and customers.
The rising standard of living
During the years after the second world war, we became accustomed to an almost ever-rising standard of living. This was not because we worked harder : working hours declined. It was because, for many people, each job made a greater contribution to the collective standard of living, and it was achieved principally through the application of scientific discovery and technological invention. As each job was enabled to produce more and better goods and services, adding to the overall standard of living, it became able to command better pay and working conditions. The operation of market forces ensured that those in jobs for which improvement in productivity was not possible also benefited from the general increase in living standards, if their jobs still met a need. As part of this process of change, new jobs appeared and old jobs disappeared. The loss of some jobs through automation was of little concern, because there were always new opportunities for work. Automation did not lead to high unemployment; it led to higher living standards.
What has happened in more recent years, however, is that, as a nation, our demand for an ever-rising standard of living has, for various reasons, outstripped our capacity, or our willingness, to provide for it, and a gap has developed between what each of us thinks his job is worth and what his potential customers think it is worth. The result is unemployment. People in work are still experiencing, on average, higher real rates of pay and therefore higher living standards each year, even when the rise in output, in overall wealth creation, is not keeping pace. Thus those in work expect and are receiving unearned benefits, and the cost is met by the growing numbers of unemployed.
Remedies for unemployment
To reduce unemployment this value gap must be closed. Unemployment could be reduced if we all, employed and unemployed, revised our values. For many of those who are now unemployed there are opportunities for work, but this is often only low-paid casual work which would earn them little more than they are currently receiving in benefit. They therefore, very reasonably, decide to remain unemployed, but if they lowered their expectations some of them would obtain work.
Similarly, new opportunities would be created for the unemployed if those who are now employed lowered their expectations by doing more work for the same pay. To see how this can come about, let us imagine a community of people in work, supplying each other’s needs and also trading with others. If those people all produce more goods and services, while pay and profits remain the same, unit costs will go down and so will prices. Because prices are lower, people in the community will have more spare money to spend: opportunities for the unemployed. The community will need to buy more raw materials: opportunities for the unemployed. It will have more goods to sell outside the community, at lower prices than before: the lower prices might persuade some of the unemployed to accept opportunities for low-paid work which before were not attractive to them.
The lowering of our expectations is likely to be a painful process, and we should much prefer the gap to be closed by making our jobs worth more. One of the greatest opportunities for this is through technological innovation: robots, microelectronics, biotechnology etc. On the small scale, of course, individual jobs will be lost as new technologies are introduced, just as others will be created in the new industries, but counting these jobs does not help us to understand the full effects of new technologies on employment levels. By enabling jobs to achieve more, they reduce the inbalance of values, they raise the standard of living, and they offer more opportunities for the unemployed through lower prices and increases in spending money.
Technological innovation and automation will create unemployment only when all the needs of society that could be satisfied by human effort are being met – a state of affairs far beyond the foreseeable future. We have high unemployment now not because there is no more work to be done but because, as a society, we have failed to devise ways of meeting our requirements on terms which we, as workers and consumers, find acceptable.
New technologies therefore improve the prospects for employment, provided that we keep our expectations down, enabling the worth of our jobs as seen by the customer to catch up with the valuation as seen by the worker. If all the increased wealth created by technological innovation is absorbed by those who remain in work, the value gap will remain and unemployment will remain high.
If we want to preserve the jobs of the past we must be content with the living standards of the past. If we want to raise our living standards we must accept and welcome changing patterns of employment.
In very much the same way we should seek and welcome changing patterns of trade. Import controls may help to preserve the jobs and living standards of the past, but freer trade can help to promote rising living standards world-wide.
In some respects foreign competition is irrelevant to our unemployment, partly because, as we have seen, the cause and potential remedies for unemployment lie essentially at home, and partly because, in the long term, other countries will only sell us their products if we can export in return. On a wider view, however, our economy is part of the international economy and recessions are often world-wide. Therefore the development anywhere in the world of products at prices which are attractive to customers is a step towards correcting the imbalance of values, and the availability of such products in other countries can provide a stimulus to employment. Import controls may help to create unemployment in other countries (and nobody gains from that) while doing nothing to provide real, customer-oriented jobs or higher living standards in Britain.
In order to keep our trade approximately in balance, we shall expect that rising exports and failing imports in one sector, taking advantage of current opportunities, will be offset by falling exports or rising imports in another. Thus, when the balance of trade in oil has moved so strongly in our favour, it should occasion no surprise or shame that the balance in manufactured goods has moved against us. Nor need there be any cause for concern that the balance with some countries, such as Japan, is in deficit, so long as this is matched by a surplus with other countries.
What can Government do?
The scope for direct Government action to provide more people with work in both the short term and the long term is limited. Measures which alleviate the present hardship (e.g. raising benefits and low wages, controlling imports, increasing Government spending and borrowing) encourage us to persist in our false values and perpetuate the underlying cause of employment, whereas measures which put pressure on us to review our values and lower our expectations (e.g. lowering benefits) improve the long-term prospects for employment but in the short term increase the hardship of the low paid and unemployed.
However there are some steps that Government can take to bridge that gap – to help us to raise the true worth of our jobs or to introduce realism into our estimation of their worth. It can encourage enterprise, innovation and automation. It can increase the skills and productive capacity of the workforce by introducing training schemes. It can encourage small businesses, worker-owned cooperatives, profit-sharing schemes and realism in industrial relations. It can restrain Government borrowing and reduce the burden of taxation where it is a disincentive to work and enterprise. It can control inflation and interest rates. The creation of new jobs requires resourceful and enterprising employers. Government cannot create such people, but it can encourage them, and Government and public alike can show that they recognize the value to the nation of the job-creator and the wealth-creator.
Above all, it needs to be recognized that Government does not determine the levels of unemployment and prosperity. These factors are determined by the personal decisions made by countless individuals. What Government can do is to influence the way people think about issues, and promote a political and economic climate in which people will be more likely to make decisions that increase employment prospects.
People are bound to make their decisions in accordance with where they perceive their own interests to lie. Government can do its best to create an environment in which, as far as possible, the pursuit of one’s own interests also benefits the community or the nation. An obvious example is that those with higher incomes should pay more in taxes than the low paid. Another example is that those who wish to save and invest money for the future should find it more profitable to invest in wealth-creating and job-creating businesses than in other forms of investment that do nothing to benefit society at large. Through fiscal and other measures Government can do a great deal to encourage the provision of capital on attractive terms for new businesses and new employment.
The benefits of enterprise ought to be more obvious, especially in small businesses. It should be seen that increased prosperity, for the individual as for the nation, lies in well-directed work, innovation and enterprise. People will revise their values if they see this to be in their own interests. For employees in the public sector and in large companies, it is difficult to see how wage restraint or increased productivity can be in their own interests, but this can be very clear to the self-employed and those working in small businesses.
When people seek to further their own interests by getting the better of their customers or of those who participate (as workers, managers or owners in the organization in which they work, employment and prosperity will fall. They will rise when, instead, people find that to further their own interests they need to satisfy their customers and cooperate with those in their own organization; when the people they try to get the better of are those who are selling the same product as themselves, but more cheaply.
In those areas public attitudes are important, and so are the incentives built into the fiscal and economic structure. Government has a role in both these areas.
The need for understanding
Very many people today regard unemployment as one of the most important political and social issues. Because of this widespread public concern, because there remains widespread misunderstanding about the causes and cures for unemployment, and because it is the public, not political leaders, who have it in their power to reduce the levels of unemployment, there is an obligation on all those who are in a position to influence public opinion (politicians, the media etc.) to explain to the public more convincingly why the level of unemployment is so high and how it can come down. Those who advocate import controls and higher Government spending and borrowing; those who oppose the introduction of new technologies; those who maintain that in the post-industrial age high unemployment is unavoidable; those who urge people to claim higher pay for their work when the cost can only be met by unwilling customers; those who claim that a strong trade union movement acts in the interests of the low paid and the unemployed; those who attribute unemployment to Government policies, the world recession or other factors beyond the control of ordinary people; all these are helping to promote unemployment and poverty. So long as those ideas retain such widespread credibility the outlook for employment is bleak.
A large number of employment disputes involve wider issues than simply the distribution of profits. They concern, for example, provision of a monopoly service to the public, or the spending of public money. Public opinion has a part to play in the settlement of such disputes, and both public opinion and the attitudes of the parties to the dispute will be influenced by public understanding of the issues. In such circumstances public understanding of the principles on which employment and prosperity rest is so important.
Much of the public sympathy for the trade union movement in the past has sprung from a sense that it represents the underdog and is acting in the interests of the disadvantaged. This sympathy can be seen to be misplaced when it is understood that the stronger trade unions represent relatively affluent people and that, in representing the interests of their members, who are people in work, they act against the interests of a large number of disadvantaged people – the unemployed.
There is nothing any Government can do to bring down unemployment if too many of us continue to overvalue our work. But if enough of us lower our expectations sufficiently there can be work opportunities for all, regardless of Government policies. Government has its part to play in promoting a favourable environment, and there is a great need for a fuller and more widespread understanding of the factors that affect employment. Full employment and growing prosperity can be achieved if each of us will learn to value more highly the work of his fellow citizen and if we will grasp the opportunities that exist for enterprise, the application of new technologies, and satisfying and productive work to the benefit of worker and customer alike.