Full Employment. But by which means?

Labour’s Liam Byrne recently claimed to provide a new plan for welfare reform. Byrne proposed a renewed focus on the contributory principle and a return to the goal of full employment.

What’s really interesting about Byrne’s proposal is that he has apparently committed Labour to the goal of full employment. This might be a great idea. If full employment can be achieved, then we will no longer have hundreds of thousands of people who want work but cannot find it because there are so few jobs. And perhaps there will once again be confidence in the benefit system, since confidence in benefits only began to decline after full employment was lost in the late 70s.

But without answering two very important questions Byrne’s commitment to full employment is completely uninteresting. Byrne, Labour, and anyone who wants to propose the goal of full employment, need to answer two very important questions:

• Can full employment be achieved without disastrous economic consequences?
• How will full employment be achieved?

Some economists think that full employment leads to disastrous economic consequences because full employment leads to high rates of inflation. And high rates of inflation led UK governments to abandon the goal of full employment in the 70s. High inflation can occur with full employment because workers have increased bargaining power for wage increases. But employers are unwilling to take a cut in their profits. So, when they give their employees a pay rise, they pass the cost onto their customers by increasing the price of their product. Played out on a society-wide level, prices in everything rise. And we get inflation. And in response to higher prices employees ask for higher wages, the cost of which employers pass onto their customers creating another price rise. So the circle of wage rises and price rises goes on and high inflation is the result. And high inflation could make the UK less competitive relative to other countries and is bad for people with savings including pensioners.

But other economists don’t think that full employment would necessarily lead to high inflation. These people point to Scandivanian and other European examples in which full employment was maintained but inflation largely controlled because of good relationships between the government and the unions and between employers and employees.

So, if Byrne and Labour want to propose full employment, they need to show that they can reach full employment without any perilous inflationary consequences. That they have a set of policies and instruments that they plan to use and put in place to ensure that full employment doesn’t produce these bad consequences.

But perhaps more importantly we need to know how Byrne and Labour plan to achieve full employment. Full employment was only mentioned by Byrne in the subheading of his piece. And no distinct policies for reaching full employment seemed to be mentioned. This leads to the worry that Byrne and Labour don’t plan to use any new policies to get us back to full employment.

In a Policy Network pamphlet of 2000, Achieving Full Employment, Geoff Mulgan and Richard Layard suggested that New Labour’s blend of training, work experience and sanctions for people on out-of-work benefits had led to a significant drop in unemployment and would eventually lead to full employment. And the only policies that Byrne mentioned in his article were training and conditionality policies. So the fear is that Labour and Byrne still endorse the thinking of the earlier New Labour years. They want to reinstate the goal of full employment but want to try to get there via the means of the same old sanctions and training policies. Policies similar to those that have been used by the Coalition government and have failed to get people back to work. Until Byrne makes it clear that it’s new ways towards sustainable full employment that he and Labour are interested in we have no reason to support his proposal or be excited by it.