‘Labour’s creative destruction dilemma’

What is Labour’s plan for jobs? With unemployment rising, vacancies drying up, and higher Employer National Insurance Contributions pushing up the cost of hiring, you might be forgiven for thinking it is hard to see one at all.

 Closed Captioning provided by www.microsoft.comBut some might argue this is all part of the plan. 

Creative destruction

Earlier this year the Resolution Foundation celebrated “early and encouraging signs of a mild zombie apocalypse”: closures of low productivity (often called zombie) firms is starting to pick up, ending the jobs of those they employed. Why this is encouraging? They argue that it is perhaps a sign of “creative destruction” taking place in the economy.

Creative destruction is an economic concept describing how innovation drives progress by replacing old, less-efficient firms, products, or processes with new ones. It was first formulated by the Austrian economist Joseph Schumpeter in the 1940s, who argued that this continual cycle of destruction and renewal is essential for long-term productivity growth and economic dynamism.

READ MORE: Paul Nowak column: ‘Labour must focus on the basics’

Other leading figures on the centre-left have suggested Labour are deliberately raising hiring costs to encourage firms to invest in technology and R&D, therefore boosting long-term productivity.

It is certainly true that something must be done. Average annual productivity growth between 2010-2023 was 0.5 per cent, three times lower than the 1997-2010 average of 1.6 per cent. The UK has the lowest business investment in the G7 and ranks 28th among the 31 OECD economies. Job reallocation has been sluggish and has certainly contributed to both our productivity stagnation and lack of investment.

But will increasing the cost of hiring push more workers into better jobs? There are two reasons we should be deeply sceptical.

The first is that how the process of creative destruction takes place seems to be lost. It is not enough simply for low-productivity firms to fail; their closures must be matched by rising demand for workers from high-productivity, dynamic firms eating up more of the market. How sure are we that this demand is there, given that the UK unemployment rate has climbed to 5.2 per cent – with youth unemployment up to 14 per cent – and vacancies dropping to their lowest for five years? I’m not so sure.

The second is that where our future jobs come from are unlikely to be in the same places facing losses right now. This will be felt deepest in the post-industrial, “Red Wall” seats where many of Labour’s new intake are feeling the heat from Reform. Research by the New Economics Foundation (NEF) has found that there are only around 5 vacancies for every 100 people claiming Universal Credit in Rotherham, Pendle and Hartlepool. My own research has found there is no connection between areas with high levels of deprivation or low productivity also being areas that have the skill bases necessary to develop green industries. 

What is clear instead is that if we are pursuing creative destruction through increasing the cost of employment then we have forgotten the creative part, leaving us only with destruction. 

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Still, some might argue this is tough, but necessary, for Labour to bring growth back to the economy, and that over the long-term better jobs will be created. It is true our politicians have been too short-term on the economy.

But I worry that we have got the sequencing of events wrong to make this happen. 

To allow unemployment to rise without a clearer sign that employers are crying out for more workers means workers will lose their jobs and find they have nowhere to turn. We should be throwing our arms out directly to those that have lost their jobs, or are at risk, rather than blindly hoping they will eventually find something better for themselves. Labour must go directly to them and not wait in the hope they will show up at their door.

What would a better approach look like? 

Few would argue against greater investment in skills, public and private. Any way forward should focus relentlessly on expanding provision in areas that have been “left behind” and, crucially, building bridges between employers and these areas with employers reaching out directly to them. We should consider how wage subsidy programmes – like the government is already running through the Youth Guarantee – could work for older workers. A new “Right to Retrain” would give workers a stronger legal basis to look before they are pushed.

These are just some ideas. There are many more out there, and if unemployment continues to rise we should expect many more questions to be asked of what Labour should be doing.

But it cannot be nothing. It would be a grave error to continue in our assumption that those who will experience job loss in the future will simply move into better jobs. To do so would be not only a misunderstanding of economic theory but of our own history. Speak to any deindustrialised community today and they will tell you what happens when you leave these things to fate. The errors we made back then must not be repeated.

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