Race to the top: a pro-growth guide to achieving full employment

George Osborne has rightly argued for using the employment rate as the appropriate measure, rather than the proportion of the workforce that is unemployed and seeking work (to illustrate why, you need only think of the situation in Northern Ireland, which in 2007 had a 4% unemployment rate but a 27% inactivity rate). He then set the target of achieving the highest employment rate in the G7.

Chris Glies at the FT thinks that is ambitious. I disagree. Here is the current (Q4 2013) league table from the OECD:

Germany: 73.5%
Canada: 72.4%
Japan: 72.2%
UK: 71.2%
US: 67.4%
France: 64.1%
Italy: 55.5%

Given Canada and Japan have had less of a cyclical unemployment problem that the UK in the recent past, we could overhaul them by eliminating our cyclical unemployment. That would leave the admittedly tougher task of catching Germany – but to do so would not require a much higher employment in the UK than we had from 2003 to 2007. To match the best in Europe (Iceland and Switzerland are around 80% and Norway and Sweden are at 75%) would be a much better target.

How could we get there? My colleagues Tony Dolpin and Graeme Cooke set out the key policies needed in a recent essay for Juncture.

1. Entrenching pro-employment monetary policy

The government should instruct the MPC to give equal weight to employment and inflation, as does the federal reserve in the United States. It should strive to keep unemployment as close as possible to its natural rate at the same time as keeping inflation close to its target rate. Minimising the risk of an increase in cyclical unemployment is crucial because it reduces the possibility of people who are unable to find work becoming discouraged and quitting the labour market. Monetary policy should be the main tool for achieving this aim.

2. Driving up job-creating business and capital investment

The job creation needed to achieve full employment will largely be a task for private sector firms, but government policies can support them. For example, obtaining finance is a significant longstanding constraint on private investment and expansion. Establishing a British investment bank and increasing competition in banking would help to tackle this problem. Government also needs to ensure that the infrastructure firms need to expand is in place and that people entering the workforce have the right skills. The government should also look at the composition of its spending. For example, our failure in recent years to build sufficient houses to meet demand is pushing up prices and rents and adding to the housing benefit bill. More money should be spent building houses, thereby creating jobs, which will eventually lead to a lower benefit bill.

3. Prioritising social investment in public spending

A key test for the next spending review should be the impact of different elements of public expenditure on employment. This would mean prioritising social investment spending in two areas. The first is childcare and social care services which enable those with caring responsibilities (often women) to stay connected to the labour market while also generating jobs. A key means by which the Nordic countries achieve high employment rates is public investment in universal childcare. The second area to prioritise is back to work support, to improve the efficiency of the labour market and bring those who are currently inactive closer to employment. In the UK, the school-to-work transition should be a particular focus, given the large number of young people without decent qualifications or work experience.

4. Mobilising cities to lead jobs growth and labour market institutions

In some parts of the country, the private sector has not been able to adapt quickly enough to the effects of rapid technological change and globalisation, which have caused job losses in some industries and occupations, and the closing down of production capacity, and more job losses, in others. Often, this is because there are barriers to growth or insufficient incentives to invest. To overcome these problems, the UK should devolve power and resources to our cities and counties, for example in the areas of transport, skills and welfare to work provision and funding, so that they can deal with local barriers to growth and stimulate their economies by supporting innovation, investment and upgrades to infrastructure.

5. Bolstering the chance of work for those facing disadvantages

For some people who face significant labour market disadvantages, large scale and standardised back to work support is ineffective at helping them to access employment. Even when such programmes are able to improve their 'employability', those with a pre-existing disability or health condition look relatively less attractive to prospective employers. Experiments should be undertaken on the use of 'demand-side' strategies to more actively promote employment for those who are likely to face labour market disadvantage. Such 'incentives to hire' could include a structurally lower rate of NICs or the state taking on liability for sickness absence (for temporary periods). Similarly, for those who have been looking for work for a long period, society should provide paid work for them carrying out tasks of social value. Entrenching such an intermediate labour market programme as a 'backstop' to back to work support would place an upper limit on the duration of unemployment.

This agenda contrasts with Osborne's supply-side approach of cutting taxes and social security, investing in science and improving schooling. Tactically, the chancellor's political goal was to attack Labour's planned jobs guarantees for the long-term unemployed; ideologically, it was more ambitious: to colonise and redefine the traditional territory of the left. He criticised those – including his post-war Conservative predecessors – who believe governments should manage the economy to achieve full employment, arguing that such approaches always fail. But the fact that he advocated for a goal of policy abandoned by the Conservatives in the 1980s is significant enough. In so doing, he has opened up space which people on the centre-left should welcome, not abjure.