I was asked by Professor Lord Megnad Desai to
write a note for the Fabian Society’s newsletter in 1993.
They decided not to publish this note.
Subsequently, Lord Desai referred to me as ‘messianic’.
Headings have been added.
The OECD solution to unemployment
The current economic orthodoxy is ubiquitous. We may be drowning in it. As an example, here is the FT’s precis of the OECD’s latest position:
“The organisation warns that the new and severe deterioration of the employment performance of its 24 member-states since the late 1980s is serious in its own right. It brings individual hardship, economic loss and treat to the social and political fabric …”
So we are screwing up lives, throwing lunches in the bin, creating a criminal society and risking another Hitler(ski?). But what about the OECD’s solutions?
They advocate big reductions in structural budget deficits to allow lower interest rates, which encourage higher consumption and investment. In Europe, the OECD believes, the way forward lies in high productivity jobs filled with workers with high skills and “low productivity jobs warrent the payment of only a low wage”. To achieve high productivity they emphasise two approaches: education and training for the workers and the encouragement of enterprise in high-tech, high-productivity industry at the level of the firm.
Labour Party policy and a reality gap
Apart from the rejection of a minimum wage and possibility a harder line on budgets deficits, OECD thinking sounds similar to current Labour Party Policy. Both are committed to getting high value, high skilled economy with a strong emphasis on publicly funded education and training. And both want the encouragement of new enterprise in modern,high tech areas of the economy to be an aim of government policy. Training for the workforce and support for the enterprising firm are the two most important mechanisms for creating employment.
A polite way of describing both these positions would be to say there is a reality gap. The reality is that unemployment is damaging, wasteful and politically dangerous now. The reality is that even if we had a good quality education and training system,it would take of the order of a decade to have its impact. Government policies to grow new enterprises have a similar time scale.
A worse gap in reality is that there is little probability that training can create jobs in any significant numbers, although in the medium to long term it can improve the efficiency of the workforce. But training more plumbers doesn’t make more plumbing jobs and training for the growth industries of tomorrow requires knowledge of those industries.
The British video games industry
As an example, consider the computer based video games industry. This may not be seen as a typical industry but it is high-tech and it has similarities with (what may be) the next boom industry – multi-media computing.
The video games industry started just over a decade ago with the Commodore 64 computer and the Sinclair Spectrum. British software authors were a major powerhouse in the early phases. They were typically 14 year old boys doing it in their bedrooms. Several of them became very rich. Sometimes school computers were used but, if any teaching occurred, the pupils were teaching the teacher.
As the games software industry matured, specialist software companies grew up. Their method of working was not far removed from the boys bedrooms. Small groups of young men, typically one author and three artists, would be responsible for a particular gme. The companies took on “apprentices” with bedroom experience who would work with existing, but still young, staff to learn the intricacies of the latest hardware.
Though very highly skilled, the young men involved in this industry are not very highly paid for, in Britain, there is a plentiful supply of clever self-taught lads. They also realise too late their market value. Formal training in video games is non-existent. It is probably true to say that there is no-one teaching in a university or college capable of writing a good computer game. I know some of the best games authors, some of whom have ignored higher education and some of them have tried it and dropped out because a university education was just not up to their own standards.
Venture capital or government help has been of little use to the industry. Now that is too late and the Japanese have captured the major share of the market, it is possible to raise capital. But Sega and Nintendo have now defined the industry standards and this gives them great market power. But the industry is still creating jobs in this country, some in significant games software houses but many more in shops selling them. Both are relatively low-paid, except, of course for the owners of the software houses.
Personally I have wasted a lot of effort and lost a significant amount of money on a Video Game now being developed by Sega. But the important lesson is not that the Japanese are exploiting our ideas. (After all, someone has to do it). We have much more serious lessons to learn.
Lessons on education and training
The first lesson is that our education and training system may have much less to offer in creating high-tech employment than many suppose. Or indeed in creating much employment at all. The only really successful courses in the Training and Enterprise Councils, in terms of job creation, are those that correspond to old-fashioned apprenticeships. They are for selected young people who are attached to a particular firm and they give on the job training. Success rates fall for courses if they are for older people or if they are not job-specific or they are not on-the-job. And success rates can become very small. And if retraining is off-the-job forget it.
The second lesson is that we have little track record of British (or European) institutions being able to predict or encourage the growth industries of tomorrow. Even if we assume a correct prediction and some public direction and investment, it is not clear that these industries will provide significant numbers of the “right” kind of jobs.
Or indeed, predict much of the future particularly well. The empty offices in the City and Docklands are not just consequences of the failure to spot an economic downturn but the failure to see changes in computer and communications technology that is changing the nature of office use.
And for those that feel snobbish about computer games (not real jobs & etc.) why not make your own assessment of the mainstream computer software market, which is dominated by Microsoft. Microsoft have captured most of the market with a relatively small workforce, even including associated companies. It would be nice for Britain and Europe to have a bigger slice of the action but in terms of job creation it would be tiny. Also remember that many computer science graduates have little exxposure to Microsoft products. They are still learning to write the compilers that Microsoft and others wrote years ago.
One solution – Large Scale Labour Subsidies
So we have a very serious short-term problem, unemployment, and we have two medium to long term solutions, which are of unproven value. So it is time for some radical rethinking, which brings me on to Large Scale Labour Subsidies.
The use of labour subsidies to reduce unemployment rests on the idea that if the cost of labour can be lowered then the demand for it should increase. To be most effective subsidies would be aimed to have greatest effect for the lower paid. For it is the lower paid that suffer most unemployment. My favourite method for doing this is to raise the nominal rate of VAT but allow each employer a substantial rebate for each worker employed. This combined expenditure tax and labour subsidy mechanism has the effect of subsidising enterprises that use a lot of labour and taxing those that do not.
Using a simple model of the economy, I have made estimates of the jobs created by different levels of tax and subsidy, which show that unemployment can be reduced to near frictional levels. The most labour intensive industries (e.g. local retailers) receive a subsidy on their value added and theleast labour intensive industries (e.g. petrochemicals) must pay extra tax on their value added. Average prices do actually fall because the savings on unemployment are fed into the system.
What are the objections? International trade is clearly one area of difficulty. But in a European context almost any difficulty with external trade is dwarfed by the benefits of full employment. As for the distorting-the-perfect-market objections, when did anyone last see a perfect labour market – one with no unemployment?
Reality gap: Make everybody whizz kids?
There are other possible schemes which have similar effects which need also to be considered. But, cure unemployment with training? Make everybody high-tech whizz kids? These reality gaps are too large to jump. We better start building bridges soon.
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