The case for full employment: why Liam Byrne is talking sense

Liam Byrne today spoke today at a Fabian event at Conference about the case for full employment, after he also published a pamphlet making the case. As Ian Lavery MP, chair of the Parliamentary Trade Union Group, writes in his introduction: “Full employment, though a term many economists may argue, simply means providing a decent job for everyone”. That emphasis on the word decent, at a time of not just high unemployment but also of an unprecedented wage squeeze, high underemployment and rising insecurity at work is crucial.

Full employment was a guiding principle of governments from the 1940s to the 1970s and the case for full employment is one the TUC has continued to make.

Unemployment, despite the recent signs of some ‘green shoots’ in the UK economy remains at 2.5 million, almost 10% of those in work say they want to work more hours and real wages have been falling since the beginning of 2010.

National output might have picked up in 2013 but so far that has not fed through into rising living standards for the majority. For most people talk of GDP, growth and other measures such as the deficit can seem, and feel, quite abstract – the real measure of an economic recovery will be felt through labour market change and in particular through rising employment and rising real wages.

Bryne’s case for full employment rests on two complementary foundations – the impact on living standards and the, hard headed argument that full employment is good for the public finances.

Taking living standards first, there is little chance of ending the squeeze on people’s real incomes without a stronger jobs market. All things being equal, fuller employment means a higher stand of living not just for those who gain employment but also for those currently in work. A tighter labour market would mean a higher price for labour and hence higher real wages.

The public finance case is equally robust. Indeed one can go as far back as Keynes’ insight in the 1930s that a Chancellor should ‘look after employment and the budget will look after itself’. Higher employment means lower social security spending and higher tax revenues.  Byrne fleshes out the impact, arguing that raising the employment rate to 74.6% would bring in £5bn a year in direct taxes. Of course the overall impact could be larger still once indirect taxes and the impact of fuller employment on wages (and hence income tax) across the labour market are considered.

Perhaps the most important point of the pamphlet though is the implicit acknowledge that ‘full employment’ is not simply just a case of getting macroeconomic policy right. Bryne’s ambitions stretch beyond simply returning the employment rate to its 2008 level – a big task in and of itself – and to raising it above its pre-crisis peak.

The agenda to get there is the meat of the publication – it covers programmes to tackle youth unemployment, expanding access to childcare, skills reform, infrastructure, the role of banking and trade policy (amongst others).  There is much to welcome in this programme even if questions can be raised by exact the important of small businesses as driver of fuller employment (as Jonathan Portes has recently argued the high growth firms that drive job creation are not necessarily ‘small’ or new). In particular, Byrne is strong when arguing that many previous historical conceptions of ‘full employment’ were actually about ‘male full employment’.  He argues that investment in childcare pays for itself for through higher employment rates, GDP growth and tax receipts. He notes, for example, that in Quebec, where the government moved to cap childcare costs, for every $1.00 invested the state recouped $1.05.

One issue that would have to addressed, if full employment was to genuinely become a macroeconomic goal for the government, is how this fits with the UK’s current monetary policy regime. The Bank of England is currently charged with targeting a 2.0% CPI rate first and foremost, and supporting the ‘general economic objectives of the government’ secondly. If there is to be a focus on full employment from HMT and the DWP, then a case could also be made for giving the Bank of England a ‘dual mandate’ for inflation and employment as is the case with the US Federal Reserve.

Policy specifics, as ever, can be debated. Today’s pamphlet though is an important, and ambitious, contribution to the debate..