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Principles for a new Labour economic policy - part 2

A Labour party not concerned with jobs would not be worthy of the name. Thousands of people working in the public sector will lose their jobs over the next few years. Labour must be the party of employment - a sounder approach than simply opposing every redundancy.

Many economists predicted the deep recession would lead to a large rise in unemployment, to perhaps four million people without work. Yet so far that has not happened. It's not clear why. Most sectors of the economy suffered a sharp drop in confidence at the same time, at the end of 2008. The banking sector was clearly to blame. It seems firms reduced hours worked rather than cut jobs, hoarding labour for better times. The Labour government's interventions to support employment also helped. Still, that is small comfort for the extra million people still out of work as a result of the banking crisis; the unemployment rate stands at 7.8 per cent of the working population. It is a disaster for over 700,000 young people out of work.

The Tory-Liberal Democrat government believes that the economy will recover to create jobs to replace those it is cutting. Its independent Office for Budget Responsibility happened to be run by economists with the same worldview and so their forecasts supported George Osborne's approach. They assume investment and exports will pick up rapidly. This is a big assumption. However, we should remember that the economy has recovered sharply from past recessions so we cannot base our entire economic policy on Osborne getting it completely wrong, despite the risks he is taking.

What Osborne is getting wrong is his adherence to the cult of austerity and his ideological commitment to roll back the state. Some departments really may see 40 per cent cuts in spending in some areas. That means a large number of people will lose their livelihoods not out of national economic necessity but due to Tory ideology.

Often the last part of the economy to see recovery is the jobs market. This is because firms increase hours worked as their markets improve. Only when they are convinced that growth is sustainable do they take the risk of employing more people. Growth really kicks in when businesses decide to expand operations, requiring major investment. For that, they need to be confident in the future.

Still, the last quarter's increase in employment (+286,000 in the three months to August) was impressive. It could signal that the economic recovery may surprise on the upside. It will be difficult to get across that this will largely be due to Labour's economic policy which provided needed stimulus (the austerity measures have yet to kick in). The post-election talk of austerity could set this back.

Unemployment has enormous consequences, both for the individuals out of work and for wider society. It has links to physical health and mental wellbeing, as well as poverty. And for all the pro-family rhetoric we hear from the Conservative Party, the divorce rate peaked after unemployment peaked above three million during their administrations.

A new Labour economic policy should focus on keeping unemployment low and on improving the experience of working life. Government should be an ‘employer of last resort' with recession spending focused on providing people with work ahead of propping up struggling businesses (which can be an inefficient way of spending taxpayers' money). Keeping people working is usually more beneficial even if the wage is low - that should help the economy to recover.

There is a longer term issue to consider too. For over a decade, average earnings have been rising around 1.5 per cent above inflation compared to average productivity growth of about 2 per cent pa. If we are to focus on investment to increase UK productivity, we need to find ways to ensure that working people benefit. Of course pay is not always linked to productivity at the higher income scale either...

This article was first published on the Progress website on 7 October 2010.
Progress, 7 October 2010, 08/10/2010

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