Some policy implications of today’s labour market statistics
I’ve got a post up at Left Foot Forward today reacting to today’s labour market statistics. The full thing is available here but to summarise, my conclusions are:
The combination of weak productivity, employment growth and falling real wages suggests that this trend continued into 2012. This is deeply concerning for the future – a lower wage, lower productivity economy means lower living standards in the medium to longer term.
By failing to expand demand now the government is further pushing the UK down this path.
In effect tight fiscal policy now means not only a weaker economy in the short term but potentially a weaker economy in the future. Long-term damage is being done to the UK’s growth prospects and living standards.
Whilst the headline figures (unemployment down, employment up) are obviously good news, the recent trend is actually rather worrying. Whilst rising employment is preferable to falling employment, we shouldn’t kid ourselves that all is well in the jobs market. As John Philpott has written today:
This is unlike anything seen in this country since the Second World War, with the economy using more and more people at falling real rates of pay to produce a static level of output. For the time being this looks like a decent trade-off if the alternative is even higher unemployment. But a low productivity/low wage economy is very much a second best outcome and is just as much a sign of economic malaise as a longer dole queue.
The picture that is emerging ties in with the notion that the UK is becoming a ‘lower wage, demand constrained economy’ as outlined in both the TUC’s most recent Economic Report and our Budget Submission. As I’ve argued in a recent blog, we can draw 5 policy lessons from this state:
- There is a strong case for a stimulus to demand. Many of the suppose supply constraints the UK economy currently faces are actually related to problems on the demand side of the economy. Boosting demand now would boost productivity.
- The output gap is almost certainly larger than the government currently estimate. Fiscal policy is tighter than is far too tight. This raises questions about the choice of the structural deficit as the target for policy.
- The Government’s current supply-side polices will not address the real supply-side issues we face.
- The UK does however require supply-side reforms – but the reforms we need are reform of the banking system, corporate governance reform to encourage long-termism, a better skills policy and a modern industrial policy to support the sectors of the future.
- Most worrying of the Government continues with its current policies of extreme fiscal consolidation and the wrong supply-side reforms the UK risks going further down the path of a being a ‘demand-constrained, cheaper labour’ economy.
In effect the Government is getting both its supply side and its demand side policy wrong. The real concern is that this risks doing longer term damage to the economy with serious implications for living standards in the future.