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Saturday 20 September 2014

Brendan Keenan: Solving our unemployment riddle a work in progress

But Europe could revisit the thorny issue of the link between wages and productivity

Published 06/05/2012 | 05:00

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I used to get regular correspondence -- as did many others -- from a man who believed we were all missing the point about unemployment: to wit that technology meant there was just less demand for labour.

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I think he may have given up; and it is true his theory failed to get a good airing. The reason was probably that it looked suspiciously like what is called the "lump of work fallacy".

It was applied to shoot down those who objected to giving equal opportunity to women, or raising the retirement age, or anything else which appeared to increase job demand.

It is regarded as a fallacy by most economists, who say that work can expand to fill the demand if the right conditions are in place.

At a basic level, it is clearly true that there is no fixed lump of work. The population of most EU countries soared during the 20th Century, and the labour force grew even faster with the increase in female participation, but unemployment did not rise in tandem.

But neither is it low. Figures last week showed unemployment in the eurozone approaching 11 per cent -- the highest since 1997.

That date of 1997 is significant. EU economies grew strongly from then until 2007, and some entered bubble territory. A decade-long boom is a very rare occurrence, and was probably one of the warning signs, which raises the troubling question: why did it take a bubble to get the kind of unemployment rates which most of us think should be the rule rather than the exception?

The recent annual report from the International Labour Organisation gives a striking picture of the impact of that boom. The ILO is a United Nations body which analyses global unemployment and labour policy. Numbers get very big when you deal in global terms.

From the late Nineties to 2007 the numbers classified as unemployed fell from 220m to 98m. More than 120m -- mostly very poor people, -- found jobs.

It is little wonder that globalisation and the new financial systems seemed to most observers to bring great benefits, and perhaps to be worth the risks which might be involved. Those risks came to pass in as bad a way as almost anyone imagined, but the fact is that not all the gains have been lost -- especially not in poorer economies.

It is easier to deal in percentages than millions. Global unemployment fell from 6.5per cent to 5.4 per cent in 2007 before hurtling back to 6.2 per cent in the first two years of the crash.

The striking thing is that the increase was fastest in the rich world; rising to 8.3 per cent and continuing to climb. The ILO reckons it was 8.5 per cent last year and will peak at 9.4 per cent next year. The eurozone figures tend to bear out its gloomy forecasts.

The uncomfortable conclusion is that Europe in particular needs excessive demand to bring unemployment down to acceptable levels. There is some argument about what "acceptable" means, but evidence suggests that an unemployment rate of around 5 per cent represents a stable situation. Yet it also suggests that a stable economic situation will not deliver that level of unemployment.

The Irish case is instructive. Unemployment reached a low of 3.5 per cent in 2000, as the factors which drove the Celtic Tiger years -- especially the IT boom -- came to an end.

It is now pretty clear that, had the economy been managed properly in the following years, unemployment would have risen -- probably to 6-7 per cent, even with extra emigration.

I suspect that the Fianna Fail-led governments knew that, or at least suspected it, and knew that the increase would be most pronounced outside the big urban areas and Leinster in general. If so, their attitude to construction bubbles begins to make sense.

Now the jobless rate is 14 per cent, alongside significant emigration. Even those who expect the economy to recover also expect modest growth rates which would take years to make a significant dent in the figure.

Nor would the investment programmes advocated by the ILO and the trade union movement make that much difference -- although they would help; especially if they were done at a "federal" EU level.

To really make a difference, Europe has to re-visit the thorny questions of the relationship between productivity and incomes, and try harder to make sure the latter does not exceed the former.

That is not just wage income. Where my correspondent may be right is that the gains from technology, where fewer workers produce more, appear first as higher profits. They may have to be recycled into more job-rich forms of income.

The issue baffled even the great Maynard Keynes, who predicted we would deal with it in the 2000s by working a lot less. That did not happen, and answers remain elusive. We could start, though, with the obvious conclusion that, when it comes to work, the present tax and wage systems are not working.

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