On The Left: Employment In A Civilised Society

by Jordan Carter

Ever since the 1944 publication in the United Kingdom of "Full employment in a free society," the famous Beveridge Report, which was to some extent a response to the experience of the Depression in the 1930's, governments around the world have had some notion of the level of employment in their economies. I want to talk about this issue - employment - for two reasons.

The first is that it is a key defining policy point between left and right at this election. The second is that there are a lot of lies coming out of the Tory side when it comes to the issue. I want to go through the theoretical and policy implications, but also talk about the more important question - the social costs of unemployment.

I'll warn you now that those of you looking for specifics in argument can go and look up your own data. If an argument relies on technical detail and precise numbers, it is not going to be discussed here. I am here to talk about general principles and ideas, not whether the inflation rate in Zimbabwe is 12% or 14%.

Employment. National has not seen unemployment fall below approximately140,000 people in its nine years in Government. I regard that as a tragic, unacceptable and inhuman waste of talent - and of people's lives. Both the major parties say they are committed to employment objectives. So how do they stack up?

National's strategy for improving employment has been caught up in the same problem as its wider economic strategy. They have continually argued that microeconomic reform of individual markets would lift productivity and employment, and that the only contribution the macroeconomic or policy environment can make to employment is to keep prices stable and taxes low.

They've been doing it for nine years.

There are still 140,000 lives being destroyed by the scourge of unemployment.

With all due respect to the National Party, they have failed.

There are two predominant theories of unemployment; search theories based on New Classical economic thought, and efficiency wage theories based on New Keynesian theories. This column will look at the former, because it is only fair to judge a policy by the model underlying it. Forgive the jargon - I've tried to keep it to a minimum here.

In simplistic terms, the unemployment rate in a given economy is governed by two factors; the Job Finding rate (JFR) and the Job Separation Rate (JSR). The JFR is the proportion of people who are not employed who find jobs in a given time period, and is governed by the 'reservation wage', or wage that will trigger people into taking a job. The story goes that the lower wages are, the higher the JFR will be, because lower average wages lead to a lower reservation wage. This was the rationale behind the 1991 benefit cuts, and the Employment Contracts Act. If you cut the real wage, more people will find jobs.

The other side of the equation is the Job Separation Rate. This is the percentage of employed individuals who leave their jobs in the time period.
It is different for different groups of workers (for example, higher for young workers moving between jobs when settling on a career; lower for middle aged people raising families).

It is not far to move from these two figures to see how a relationship between them gives the 'natural' rate of unemployment. The rate at any one time (the 'natural' rate) is given by the JSR divided by the sum of the JSR and JFR. Therefore to cut the 'natural' rate of unemployment, one needs to reduce the job separation rate, or improve the job finding rate as outlined above.

Initially it seemed that National's changes in 1991 made a difference. Unemployment fell as the economy recovered, to a low of about 6% in the mid-1990's.

Where Labour departs from National, quite dramatically, is in its view of what can be done to improve the job finding rate. National tried to do this by attacking workers' real wages, and reducing the social wage available to beneficiaries. That is, they hurt the most vulnerable people in society, to try and help the most vulnerable. Unsurprisingly, they are disliked for this policy. Fairly strongly in some quarters, in fact.

What Labour rejects is attacking the conditions of the lowest paid and most vulnerable to benefit those who might become employed. This is important, because once you reject these arguably easy options, you actually have to have a think about how you are going to improve the job finding rate.

Labour's plans are integrated across a wide range of policy areas. While no fundamental reform of the welfare system is planned, there are a number of important policies that in the long run can be expected to improve the JFR. There is the commitment to higher education, starting with the changes to the student loans scheme. There is the commitment to address the absolute disaster that is trades training under most of the ITO model, by building a modern apprenticeships scheme. Other initiatives can probably be expected to come to light should Labour win the election.

Almost more important though is the commitment by Labour to empower Maori and Pacific Islands communities, allowing them to attack their very high unemployment rates. As Helen Clark said so well in her speech at Labour's launch on Sunday, 31 October, mainstreaming has failed Maori - and of those failures, employment has been one of the worst. By allowing for Maori economic development, and by giving Pacific Islands communities control over some aspects of their employment schemes, Labour can reasonably expect that an attack will be made on those peoples' unemployment rates.

Coupled with a commitment to retaining the stable macroeconomic policy settings of the current Government, Labour's policy proposals outline above, combined with its focus on assisting exporters and small and medium enterprises (those will have to wait another day, I'm afraid.) will have a major positive impact on employment creation in New Zealand.

It is important not to get bogged down too much in the theory of this problem though. Unemployment is destructive of people's self worth. When you don't have a job, you don't have access to the normal services and income that people expect to in society. One can become aimless, drifting. It is a blight on too many households in this country, and so on an individual level it's important to deal with it.

More than that though, it is an intrinsically social problem. Every single person who spends a day on the dole is a person who could have been contributing to the huge numbers of things that need doing in New Zealand. The waste of talent, of ideas, skills and enthusiasm generated by the lack of jobs hurts every single one of us in lost wealth, products or information.

One of the building blocks of the opportunity society is employment. Labour has to bury once and for all the crazy idea, too often propagated, that the left is about holding people on benefits. Nothing could be further from the truth. As a Labour movement, we know that work is essential to people's life chances and wellbeing. And as a party committed to opportunity for everyone, we understand that making work available to all is a foundation towards the future we want to build for this country.

It's the right that leaves people to rot on the dole - and it's one of their biggest failings after nine years in power. It's time to take employment back as a key goal of the Labour Party, and the policy we're presenting at this election does exactly that.

All I can say is, good.

Till next week,

Jordan Carter
carters@ihug.co.nz

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