ONS Productivity Figures Suggest a Different Labour Market Policy is Needed

Data released by the ONS this week show that the UK economy has fallen behind on productivity when compared to competitors like the US, Germany and France.  To those well versed in these statistics, it is old news – they always show that the UK has a productivity gap with these economies. What is new, is that during the 2000s some of that gap narrowed, but since the onset of the current economic crisis in 2008, that gap has again been growing.  The big problem for the UK is that employers in this country have held onto labour in the context of falling output.  Ofcourse, in may ways this is good.  It has helped keep the labour market – employment and unemployment – in a better shape than it would otherwise have been.  The downside of this is that workers have accepted stalled wages and falling standards of living to square that circle.

The implications of this in the longer term, pose significant challenges for labour market policy.  At the Work Employment and Society Conference a week or so ago I gave a paper which argued that the implementation of Active Labour Market Policy across Europe, and particularly in  the UK, was stuck in the early 1990s.  My paper suggested that the way that Public Employment Services manage their activities is excessively focused on discipline and ‘activation’ – forcing the unemployed to apply for any job.  I suggested that instead they should reorient themselves to focusing on the European Commission’s Public Employment Services Strategy which emphasizes the importance of ‘Transitional Labour Markets’.  This approach, following the ideas of Gunter Schmid, suggests that governments should use labour market policy to encourage those who can to apply for work now, while seeking to upskill others and even recognizing that there are points in the lifecycle when employment is not the best option, or that it should be combined with other responsibilities such as caring for children and other relatives.

Such an approach would though need to break with the idea of pushing competitiveness down to the individual level – something I have blogged against here before.  The lessons from my paper and yesterday’s ONS data is that labour market policy needs to change.  This is particularly so in the UK, where the current emphasis on discipline and activation simply provides employers with a ready supply of cheap, sometimes free and state subsidised labour, that they have little or no incentive to retain, train or value.  In that context, if a recovery of output were to emerge, employers could simply employ more cheap labour and avoid the costs of capital and productivity enhancements. The result would be that the UK economy would retain its comparative low skill equilibrium.

In place of this, labour market policy needs to shift away from disciplining the poor and toward a holistic view of what is good for households and good for the economy and society at large.  That will mean working to increase skill levels, combatting poverty (as a right and not an uncertain potential reward for competing for low quality employment), and that economic problems are to be found not just on the supply side of the labour market – but on the demand side too. I’ll be making some of these points at the Public Employment Services Dialogue conference in Brussels in two weeks time.  I hope those assembled will listen.

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