Friday 22 July 2016

Pseudo Say's law and the secret of George Osborne's jobs record

All political careers, it's often said, end in failure. But this never stops departing politicians from putting a gloss on their own professional obituaries.

When earlier this week the Office for National Statistics (ONS) published strong headline figures for the UK employment rate (which in the March-May quarter reached yet another record high of 74.4%), the unemployment rate (down to an 11 year low of 4.9%) and the economically inactive rate (now at a record low of 21.6% for people of working age) former Chancellor of the Exchequer George Osborne was quick to draw attention to the 2.5 million net jobs created during his six year stint at HM Treasury. Yet while Mr Osborne is fully entitled to highlight why many economists, myself included, underestimated the speed and strength of private sector job growth since 2010, I'm not sure he can, or maybe even should, take much credit for this.

The so-called 'jobs miracle' of recent years is attributable to the cumulative effect of a combination of supply side measures introduced over three decades by successive Conservative and Labour Governments, which Mr Osborne inherited. These range from employment deregulation to active welfare to work measures and a largely open door attitude to immigration. UK employment policy has over time succeeded in pushing an ever greater supply of labour into the market and ensured that that supply is translated into employment. This occurs either through workers pricing themselves into jobs or becoming self-employed, or by employers creating jobs to make use of the abundance of labour available.

The UK labour market mechanism thus operates on the basis of a kind of pseudo Say's Law whereby labour supply serves to create its own labour demand. However, while this will always tend to propel the economy toward full employment, in the absence of sufficient aggregate demand for goods and services it does so by making the economy more labour intensive, thereby depressing growth in productivity and real wages. The result is full-employment but of a kind far different from that we once aspired to.

What does this mean for how we should view Mr Osborne's jobs record? It's not entirely clear what if any supply side policy changes Mr Osborne, or indeed the governments in which he served, made to improving the functioning of the labour market. My conclusion is that the jobs growth we have seen is entirely due to policy measures which pre-dated his tenure in office. What Mr Osborne did of course preside over was 6 years of steady, albeit slower than expected, fiscal consolidation - the policy his critics call 'the economics of austerity'. How successful the former Chancellor was at that is for historians to determine but one can say that in dampening aggregate demand in the economy he served to take us on a low-productivity, low real wage growth, path to full-employment.  We could, and should, have done better.

No comments:

Post a Comment