Labor Markets Are in Reasonable Shape. So Why Do Left Wing Parties Demand Radical Change?

This article appeared in The Telegraph on April 27, 2018.
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When President Obama’s former chief of staff Rahm Emanuel mused that “you should never let a crisis go to waste”, commentators feigned outrage over what was, really, received political wisdom.

The economist Milton Friedman had discussed how “only a crisis — actual or perceived — produces real change”. The Great Depression brought the New Deal. The Second World War facilitated the “cradle to grave” UK welfare state. The Winter of Discontent readied Britain for Thatcher’s revolution. The idea that calamitous events bring “an opportunity to do things you thought you could not do before” was hardly controversial.

Yet this “crisis breeds change” framework makes current political machinations on the Left all the more baffling. The financial crisis came and went, bringing plenty of after-the-horse-has-bolted regulation and a less amenable climate for open markets. But the radicalism of Leftist parties in the US and UK grows the longer the recovery endures.

Momentum here and the Bernie Sanders-inspired takeover of the Democratic Party in America has occurred alongside sustained growth and low unemployment. Far from not letting a crisis go to waste, our progressive friends seem intent on tearing up labor market policy, in particular, during the good times.

The official UK unemployment rate is just 4.2pc, its lowest level since 1975, and the employment rate at 75.4pc is the highest since it was recorded. Inactivity too is lower than ever before. For all the wailing about people wanting to work more and suffering on zero hours contracts, Office for National Statistics figures show an “underemployment” rate — which adds to the unemployed those willing and able to work more than they are — of 7.8pc. This is somewhat elevated since the crash, but falling towards its pre-crisis average of around 7pc.

The US has experienced similar trends. At 4.1pc, the civilian unemployment rate is at its lowest level since 2000. The employment rate has been slower to bounce-back, but a large chunk of this is due to demographics. The employment rate for a narrower sample of 25 to 54-year-olds stands at 79.2pc, pretty close to its pre-crisis peak. In both countries, macro­economists have moved seamlessly from worrying about the crash causing sustained mass unemployment to suggesting the natural rate of unemployment is now significantly lower than before the recession.

True, there are major challenges in both countries. Productivity and hence wage growth is subdued. There are major regulatory issues to resolve for new forms of employment. Technological change is altering employment patterns and roles, as ever. But look at the bigger picture and things really aren’t so bad.

Yet if you were ignorant of these facts and listened to the policy ideas of Left-wing thinkers and politicians, one would think we faced mass unemployment and the extreme poverty seen in the US Great Depression. This week, Left-wing firebrand Sanders joined other more mainstream Democrats advocating a US federal government “jobs guarantee”. Taxpayers would be committed to finance a job for anyone who wants one, paying $15 per hour with generous benefits for doing care work, environmental cleanups or working on infrastructure projects.

At a roughly $40,000 (£29,000) direct cost per full-time job, this would be expensive even if just taken up by the un- and under-employed. But over 70 million Americans have an annual income of less than this full-time salary equivalent. Many more above that might decide they prefer a government role with less pressure and more security too.

To say that the consequences for the private sector of this de facto wage floor would be large would be an understatement. Then there’s the openness to corruption and damaging effects on productivity of moving people from meeting wants and needs in markets to repainting government buildings and clearing litter.

But if you do not like that radical idea, there are plenty of others to choose from. Progressives and socialists in both countries push for the introduction of a universal basic income. Though the unemployment effects of this are ambiguous, it would still be a huge leap into the unknown. Large and significant minimum wage hikes are likewise a staple of the Labour and Democrat manifestos and platforms, despite recent evidence from Seattle suggesting caution about large hikes from already very high levels. Jeremy Corbyn even wants a reversal of the trade union reforms seen under Margaret Thatcher and a return to widespread collective bargaining.

In Greece, where the country truly faces a lost generation, one might expect all these calls for a completely fresh approach. But we aren’t Greece. Yes, we can debate the costs and benefits of raising the minimum wage, or how far unionisation might increase wages for insiders. To do so, though, we need to acknowledge where we are. Progressives and socialists should countenance that liberal and open labor markets have a big upside. The success of so many people being in work should not be taken for granted. All these grand proposals they suggest come with huge risks for people’s livelihoods, with most putting the dignity of meaningful and productive work in jeopardy.

Perhaps Left-wing politicians see the coming years as the last chance to ride the coattails of the financial crisis for major change. Maybe they foresee technology pushing up structural unemployment in the future, a phenomenon so far seen in many a mind but not the data. I’ve no doubt some think the Brexit and Trump victories themselves are evidence of political crises necessitating a shift to a radical alternative, while others believe economics can be suspended in support of their intentions.

Whatever the underlying cause of their jobs market focus, there is currently a major disconnect between the dimensions of the problems we do see and the extreme nature of the solutions offered. Perhaps the real crisis is their failure to accept the realities that confront them.

Ryan Bourne

Ryan Bourne holds the R Evan Scharf chair for the public understanding of economics at the Cato Institute.