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The rise of the inactive man
/Samuel Brittan: Financial Times 21/06/01
/
*Close inspection of the UK labour market suggests that there is a good
deal less to celebrate than meets the eye*
In many parts of the world the unemployment statistics have proved a
misleading guide to labour market performance and nowhere more so than
in Britain. Between the bottom of the 1992 recession and the first
quarter of this year the UK unemployment percentage, based on the count
for those claiming benefit, fell from 9.9 per cent to 3.3 per cent. On
the basis of the Labour Force Survey, the fall was slightly less - from
10.8 per cent to 5.2 per cent - but impressive all the same.
This improvement cannot be written off as just an aspect of the movement
of the economy from recession to boom. For the remarkable thing is that
the fall in unemployment has not so far been accompanied by any notable
acceleration in wages or inflation. Something more than the upturn in
the business cycle has been involved.
Conservatives may be inclined to attribute the improvement to the
delayed-action effect of their own earlier measures to curb union power
and other labour market reforms. Labour will naturally attribute the
structural improvement to its New Deal for the jobless and to the
maintenance of stable overall economic conditions.
But before anyone seeks to judge between these claims, it is worth
looking at other indicators suggesting that there is less to celebrate
than meets the eye. People of working age are not only divided into
those with jobs and the unemployed. There is a third large section who
are not classified as unemployed but do not have jobs either. The
official statisticians call them "economically inactive". Here the
picture looks very different. The economically inactive proportion of
the working age population was 21 per cent in 1992 and is still 21 per
cent today, despite the economic upturn. So if we are looking at the
success rate in placing people in jobs, there has been no improvement -
there is even a deterioration if allowance is made for the business cycle.
Even more remarkable have been the different experiences of the two
sexes. The overall behaviour of inactivity rates shows an actual
improvement for women, where the ratio has dropped from 29 per cent in
1992 to 27 per cent today. The other side of the coin is of course an
even greater deterioration for men. Here the inactivity rate has risen
from 13 to 16 per cent - and this in a boom period.
Excluding students and those on training schemes, there are now 2.3m men
of working age who are economically inactive compared with 400,000 20
years ago. As might be expected, the rate is highest among men over 50,
of whom 28 per cent are outside the labour force.
But the problem cannot be dismissed as confined to older workers who
have retired prematurely. About 1m men under 50, or 8 per cent of the
total, are now inactive compared with fewer than 1 per cent in the
mid-1970s, according to more detailed data unearthed in an article by
three economists at the Centre for Economic Performance ("Non-Working
Classes", Dickens, Gregg and Wadsworth, CentrePiece, Summer 2001).
Early retirement has been highlighted by policymakers in view of the
expected ageing of the population in most western countries over the
next 30 years. An article by Philip Taylor in the April issue of the
official Labour Market Trends lists policy shifts away from early
retirement, as a supposed means of reducing youth unemployment, and
towards policies aimed at the participation of older workers in the
labour force.
The British government has published a code of practice on age diversity
for employers; and the New Deal has been extended to the 50-plus group.
The government is now committed to implementing legislation proscribing
age discrimination in employment. Other European countries have
experimented with gradual retirement, so that older workers are not lost
from the workforce altogether. In France and Germany there are wage
subsidies for older employees. These may be early days yet; but so far
there is little sign of a reversal of the trend towards lower
participation.
One should be clear about what is a policy problem and what is not.
There is no merit in paid work for its own sake. If older workers prefer
to live on pensions that they have in some sense "paid for" in their
working lives, that is their right. Policy problems emerge if they have
left the labour force because they believe that employers discriminate
against people in their age group; or if their pension scheme or early
retirement is publicly subsidised.
The CEP authors are sceptical of the idea that declining labour force
participation is largely voluntary. If that were so we would see the
highest withdrawal rate among groups with fallback incomes such as
savings or private pensions. In fact male participation rates have
fallen most among "older, less skilled workers in depressed labour
market areas". Moreover the main reason given for inactivity by men
under 60 is sickness rather than retirement.
It is however possible that low-skilled workers are discouraged from
looking for jobs by the low wages on offer for those re-entering
employment. Re-entry wages for those coming back into employment have
always been well below average but have fallen considerably in the last
couple of decades. The CEP authors make much of widening pay
differentials - which they call "increasing inequality".
But whatever one calls the phenomenon, it cannot encourage workers back
into the labour force. There is indeed a probable connection between the
low levels of pay for the unskilled and those re-entering employment and
the large number of households where neither parent has a job. While UK
unemployment rates compare favourably with other European Union
countries the position is very different for the percentage of
households without a wage-earner. This is nearly 20 per cent in Britain
compared with 6 per cent in Germany and 9 to 10 per cent in France. The
rise in female employment has not helped here because it has generally
taken place where the male partner is already in work. On the other
hand, men are more likely to have ceased employment if they are the only
wage-earner.
The conclusion of the CEP authors is, predictably, that more official
intervention is required and on a bigger scale than anything seen so far
in the New Deal projects and other policies. How far one believes this
is a matter of general political stance. But a reasonable
middle-of-the-road conclusion is that, before embarking on massive new
projects, government advisers need to trawl existing policies to
ascertain how far they encourage early retirement or discourage
participation in the labour force. This would be a big task for a single
parliament, but one that should be completed before thinking of trying
to improve the workings of an unimpeded labour market.
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