Wednesday, May 28, 2014

A Return to Full Employment? (2014)

From the May 2014 issue of the Socialist Standard

In a speech on 31 March George Osborne  pledged ‘today I'm making a new commitment – a commitment to fight for full employment in Britain’ ( He was, however, careful not to define what he meant by ‘full employment’.

Beveridge, of the war-time Beveridge Report, argued that it was possible to achieve and maintain the unemployment rate at 3 percent of the active labour force. Keynes and the Keynesians taught that this could be achieved by appropriate ‘demand management’ by the government. And in fact, for most of the twenty years after the war the rate was around 2 percent. This is what most people will regard as full employment, taking into account workers temporarily unemployed as they move from one job to another or from a declining industry to an expanding one.

The Keynesians – and everybody was a Keynesian then, Tories as well as Labourites – claimed that this was a result of their policies. Others offered an explanation in terms of reconstruction and an expanding world market. That they were right was shown when the post-war boom came to an end in the mid-70s and Keynesian policies proved unable to do anything about it, except by adding inflation to the  stagnation and creating a new economic phenomenon dubbed ‘stagflation’.

Reserve army
Marx pointed out that the unemployed made up what he called ‘the reserve army of labour’, a pool from which employers could draw in periods of expansion. Without it, since of course it is workers who produce everything, the expansion would be compromised by a labour shortage. In a slump, on the other hand, members of the regular army of labour find themselves unemployed too. So, unemployment is high or low depending on which phase of its business cycle capitalism is in.

Full employment was achieved for most of  the period 1945 to 1965 because this was the time of the post-war boom, caused first by reconstruction and then by an expanding world market.  When this boom began to falter in the late 60s and burst in the mid-70s unemployment began to rise, fairly dramatically. The official rate rose from the 2 percent average in the mid-60s, passing the million mark (4.6 percent) in 1975 and reaching a peak of over 3 million (11.3 percent) in 1985. Since then it has never fallen below a million, the lowest being 1.4 million or 4.7 percent in 2005, i.e. its 1975 level. In the current slump that began in 2008 it reached a peak of 8.1 percent (2.6 million) in 2011. It is now about 7.2 percent. ‘Natural rate’

With Beveridge and Keynes discredited, economists looked for another explanation for this permanently higher level of unemployment and came up with the theory of ‘the natural rate of unemployment’. This was the rate below which there would be a rise in the general price level. Which is why they also called it in their academic works ‘the non-accelerating inflation rate of unemployment” (NAIRU). It has also been called ‘the full employment rate of unemployment’.

Although it is based on the mistaken assumption that higher wages lead to a rise in the general price level (whereas wages are a price which rises in line with all other prices), this is not entirely an irrational or ideological concept. In a boom falling unemployment puts workers in a stronger bargaining position allowing them to extract higher real wages, which employers can afford because they are making quicker and higher profits. In fact a boom is a period of rising prices as demand, and not just for labour, comes to exceed supply.

In this context the economists’ ’natural rate of unemployment’ is the rate which would exist when capitalism is neither in a boom nor a slump. They estimated that it would be between 5 and 6 percent, at least twice as much as during the post-war boom.

Empty promises
So, what rate of unemployment has Osborne promised to target? Is it the ‘natural rate’? Or is he promising to engineer a boom in which it will fall below this? Most probably the former, as in the same speech he showed that he had learned from the mistake made by his predecessors Nigel Lawson and Gordon Brown of promising a permanent boom, when he said:

‘You can’t abolish boom and bust. There are always going to be ups and downs to the economic cycle.’

The 5-6 percent rate of unemployment Osborne seems to be promising is not full employment. In which case he will be envisaging a permanent pool of over one million unemployed workers, which exposes the hypocrisy of the government’s claim to be forcing people off disability and incapacity benefit as a prelude to finding them a job. They know most of them never will. But unemployment ‘benefit’ is cheaper.

In any event, permanent full employment is not possible under capitalism because a permanent boom isn’t either.
Adam Buick