Full employment in a market economy

Pub. Date
05 July, 1994
Pub. Type

The post-war commitment to full employment rested on the belief that no-one should be deprived of the opportunity to serve the community and to work for their living. This was achieved by creating a 'seller's market' for labour, in the words of William Beveridge. Inflation was suppressed by the regulations inherited from wartime and by restraint in the use of market power. The upward trend in unemployment since the 1970s can be explained by hysteresis (the permanent effects of recessionary shocks), by sclerosis (the lack of flexibility in labour markets) or by skedasticity (by dispersion of skills and other sources of earning power).

The underlying social case for full employment is as strong as ever, but in a market economy, it cannot be achieved by creating persistent excess demand. Structural unemployment can be reduced by mitigating the effects of the cycle, by better industrial policies and (to a limited extent) by special labour market policies. Training and education reforms can certainly help, but take a long time to achieve their full effects. In a market economy the main incentives to create employment must come from reform of the tax and benefit systems.

There is a good case for targetting employment generally by reducing National Insurance contributions for lower paid jobs or by direct subsidies. Benefits which involve a means test can divide society and 'marginalise' those dependent on them. The costs of creating extra jobs so as to restore full employment would have to be met from other forms of taxation. It is not clear whether there is sufficient political support, but there is no insuperable economic obstacle to the achievement of full employment.

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