The Carrot, the Stick, and the £100 Billion Donkey
The economic problems have faded somewhat from the front pages in recent weeks, but they have succeeded in giving the economists and policy makers of the world a good shake. While the more exotic areas such as finance regulation have caught most of the attention, examinations of the effects on social security have been conspicuously absent, especially on the left.
Social security has been central to the New Labour project, and, like most things New Labour, it can be summed up in a catchy three word sound bite: welfare to work. The key premise is that if you are physically capable of working, you should be, and welfare is simply a means of getting you towards this end. The result is a catalogue of programs that provide training, advice, and support (from setting up interviews to provision of child care). But New Labour’s programs are not all carrot, and come with a considerable stick; namely, that if the government does not consider you to be actively pursuing employment, your benefits can be cut back or stopped all together.
This has led to an odd situation. These policies are in place partly in the hope that pushing more people into the labour market will help to suppress wages and thus attract more businesses to open up more jobs. In addition to harassing the unemployed into work, New Labour make them more attractive to businesses by paying part of their wages. And in an attempt to alleviate the growing problem of in-work poverty that is caused by the low wages they are hoping to perpetuate, they are having to top-up pay packets through the tax credit system. Effectively this means that the government are paying employers to employ people, and then having to pay the employee because the employer still doesn’t pay them enough, all the while going to lengths to try and keep wages low and extend the problem.
Of course, all of this is a lot more expensive than simply handing over subsistence cheques, but the theory is that by getting people into work – paying taxes, and off of benefits – it becomes cheaper for the treasury in the long run.
A noble cause, at least on the surface, and initially this strategy had some success, with significant numbers moving into employment (though the type of employment is questionable, and this initial success seems to have stagnated in recent years).
The problem arises in the central premise of New Labour’s strategy: that there are jobs for the unemployed to go to. Already there are far more unemployed than there are jobs, with almost 800,000 on Jobseekers’ Allowance and 7.87 million of working age classed as ‘economically inactive’ (1.5 million of whom have stated a desire to get paid work), and only 680,000 vacancies available – not taking into consideration that the jobs are not always appropriate for those seeking them (either by location or skill).
The seriousness of this problem becomes clear when we consider that we have, for the past decade, been in a period of relatively strong economic growth – consider that unemployment (which does not include the economically inactive) is today less than half what it was in 1984. So we are confronted with the question of how the system would cope if a serious economic downturn were to occur. With a contracting job market and expanding labour market, the number of jobs per worker would lower considerably.
How New Labour’s social security system would cope would ultimately depend on the speed, severity and duration of the downturn, but there can be little doubt that New Labour’s strategy stands incredibly vulnerable. Costs would rise much faster than in previous downturns thanks to the expense of ‘welfare to work’, and it would become increasingly obvious that there are too many workers and too few jobs. For how long would the government be able to continue training and threatening millions of workers into jobs that don’t exist?
The long-term economic and political sustainability of Labour’s social security strategy is in serious doubt. Its focus on managing the supply of workers while turning a blind eye to the supply of jobs could prove fatal if the private sector finds cause for a retreat.
How much more expensive, per person, is welfare to work, Gordon? I knew of the change in New Labour’s strategy but I didn’t know the New Deal and other such programmes were more expensive than simply paying unemployment benefits straight up.
That’s the elephant in the room, and a question I devoted no small amount of time to, both while writing the article and after you asked it. Unfortunately it doesn’t look like there is an easy answer. It’s incredibly complex, since it depends on the exact circumstances of who you’re looking at and when you’re looking at them. Various politicians have made various claims, none of which look very credible.
However, there is a general agreement among politicians and academics that it is substantially more expensive to have someone on one of the New Deals than it is to have then receiving an unemployment benefit. This much is self-evident. The government’s argument is that it is cheaper in the long run since gets people off of benefits and returns them to the labour market. A claim which is wobbly as it is, especially over the past few years.
I’ll continue looking for concrete figures and let you know if I can find them. But I’ll leave you with the answer I received from one Professor Emeritus at Edinburgh University: “good question.”
Hehe, thank you for that one, that gave me a chuckle. Again I say, interesting.