A Labour Market That Works
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A labour market that works Warwick Lightfoot and Jan Zeber Foreword by Rt Hon Sajid Javid MP Preface by Lord Young of Graffham A labour market that works Warwick Lightfoot and Jan Zeber Foreword by Rt Hon Sajid Javid MP Preface by Lord Young of Graffham Policy Exchange is the UK’s leading think tank. We are an independent, non-partisan educational charity whose mission is to develop and promote new policy ideas that will deliver better public services, a stronger society and a more dynamic economy. Policy Exchange is committed to an evidence-based approach to policy development and retains copyright and full editorial control over all its written research. We work in partnership with academics and other experts and commission major studies involving thorough empirical research of alternative policy outcomes. We believe that the policy experience of other countries offers important lessons for government in the UK. We also believe that government has much to learn from business and the voluntary sector. Registered charity no: 1096300. Trustees Diana Berry, Alexander Downer, Pamela Dow, Andrew Feldman, David Harding, Patricia Hodgson, Greta Jones, Edward Lee, Charlotte Metcalf, David Ord, Roger Orf, Andrew Roberts, George Robinson, Robert Rosenkranz, William Salomon, Peter Wall, Simon Wolfson, Nigel Wright. A labour market that works About the Author Warwick Lightfoot is Head of Economics and Social Policy at Policy Exchange. He is an economist, with specialist interests in monetary economics, labour markets, and public finance. He has served as Special Adviser to three Chancellors of the Exchequer, and a Secretary of State for Employment. Warwick was a treasury economist at the Royal Bank of Scotland, and has also been Economics Editor of The European. His many articles on economics and public policy have appeared in the Wall Street Journal, the Financial Times, The Times, The Sunday Times, the Daily Telegraph, the Sunday Telegraph, and in specialist journals ranging from the Times Literary Supplement and The Spectator, to the Investors Chronicle and Financial World. His books include Sorry We Have No Money — Britain’s Economic Problem. Jan Zeber is Deputy Head for Economics and Prosperity at Policy Exchange, where he primarily works on the Prosperity programme, helping to lead on a range of topics including corporate governance, competition and regulation. Prior to his current role he was a Policy Analyst at the TaxPayers’ Alliance. He has worked for a number of other think-tanks as well as the private sector, producing legal and economic analysis in fields as diverse as the regulation of sharing economy in the UK and administrative justice reform in Kenya 2 | policyexchange.org.uk Acknowledgements Acknowledgements The authors would like to thank Lord Young of Graffham, Bill Wells, Rt Hon Sajid Javid MP, Lord Baker of Dorking, Pam Meadows, Clive Tucker, David Stanton and Prof Ken Mayhew for their invaluable input to the paper. © Policy Exchange 2020 Published by Policy Exchange, 8 – 10 Great George Street, Westminster, London SW1P 3AE www.policyexchange.org.uk ISBN:978-1-913459-40-6 policyexchange.org.uk | 3 A labour market that works Contents About the Author 2 Acknowledgements 3 Foreword 5 Preface 7 Executive Summary 9 Introduction 14 Covid-19 active labour market measures to date 15 Background: the story of the UK labour market 17 Lesson 1: The role of unemployment benefit policy 25 Lesson 2: What role for training? 33 Lesson 3: A careers and labour market intelligence service for everyone 36 Lesson 4: Learning from the success of Enterprise Allowance 38 Lesson 5: Maintaining the lessons already learned 41 Concluding thoughts 44 Appendix A: Structural problems of the post-war UK economy 47 Appendix B: Hysteresis: in-depth explanations of persistent unemployment in the 1980s 49 4 | policyexchange.org.uk Contents Foreword Rt Hon Sajid Javid MP We face a series of serious economic challenges. Even before the UK was hit by the biggest economic shock since the Second World War the government was contending with sluggish productivity growth, technological disruption and a training deficit that had left 63 per cent of UK organisations without the skills they needed. The effects of the pandemic itself have been devastating for businesses and jobs. For the second time in a decade, economic policy must start again from scratch. Despite the scale of the economic challenge the Chancellor has risen to the occasion, designing a host of innovative economic measures at great speed. Policies such as the Coronavirus Job Retention Scheme, Self-Employment Income Support and the Winter Economy Plan have so far held back the tide of mass redundancies and minimised long term economic scarring. In spite of these efforts, economists believe that we’re in for a jobs crisis unlike anything seen since the 1980s. Disaster and opportunity, however, often come hand in hand. Job losses are likely to be concentrated in low-productivity, high-turnover industries such as the food services sector and the wholesale and retail sectors. If this is met with a solid training and skills offer we could begin to reorient our economy and usher those affected into more highly-skilled, highly-paid jobs. The problem is as much sectoral as it is geographical. Regional inequalities in economic performance reflect an asymmetric distribution of skills. Analysis I commissioned in government demonstrated that if the skills mix in the North was same as London, wages would be at least 10% higher. Education and skills must therefore be a key tenet of the Treasury’s levelling up agenda. More broadly, the pandemic has accelerated significant structural changes in the global economy and adjustments in the labour market. It has destroyed old patterns of consumption while creating new ones, including a shift to e-commerce and online services. The government’s plan for skills – however impressive – will not be enough on its own. We must also maximise the opportunities for people to exercise what they’ve learned, particularly for young people who are likely to bear the brunt of this crisis. That’s why new entrepreneurship initiatives like the 2020 Enterprise Allowance detailed in this Policy Exchange report are so critical. The scheme would give a weekly allowance to anyone who doesn’t have a job but does have a viable business idea. It would provide access to the same policyexchange.org.uk | 5 A labour market that works mentoring, start-up workshops and assistance available under the New Enterprise Allowance. It has excellent potential for harnessing the entrepreneurial spirit of those who know how to take advantage of new sectors and changing markets. Young people, for whom the internet and social media is second nature, may well be one of the demographics best placed to do that. As important as active labour market policies are during a downturn, it is equally crucial to get the basics right. Faced with the spectre of unemployment last seen in the 1980s, it may be tempting to look to countries such as France, which have always had stronger employment protections. This would be a mistake. If you can’t fire you won’t hire, which is why many continental economies have permanently higher unemployment. And we must remember that it was precisely through making the UK labour market more flexible – for example, through reform of trade union laws – that Margaret Thatcher finally turned the tide of rising unemployment at the very end of the 1980s. I was proud to carry on that legacy as Business Secretary with the 2016 Trade Union Act, which ended the possibility of bullying of the majority by a vocal minority in the workplace. The virus has changed many things, but it has not changed how an economy generates jobs. Free enterprise, competition, low taxes, smart regulation and free trade are still the recipe for a thriving economy and the best guarantors of prosperity. This is a timely and insightful Policy Exchange report that builds on those principles. 6 | policyexchange.org.uk Contents Preface Lord Young of Graffham I believe that the devastating effect of the pandemic upon business life in this country will open up whole new opportunities, for many of the changes that have taken place over the last few months will be permanent. No longer will a future Napoleon be able to describe Britain as “a nation of shopkeepers”. There will be new opportunities in our town centres, in our schools, and even in the way we work. Let 2020 be marked, not by the year of the Pandemic, but as the year of the rebirth of our economy. Only those who lived and worked throughout the seventies in the UK know how bad it was, strikes, financial crises, visits of the IMF, overburdened by regulation and confiscatory taxation, we were the Sick Man of Europe. I volunteered my services to Keith Joseph and started as his Special Adviser in the Department of Industry. I had hardly arrived when officials came to talk to me about Small Firms and told me that for years there had been more closures than starts ups so that under three quarters of a million firms left. I started the first of the schemes that help small firms and later, when I went to the Manpower Services Commission the first of the self-employment program. I learnt the hard way what programmes worked and what didn’t. The perennial trouble with government is that it is filled with highly intelligent civil servants who cannot resist over complicating everything. One of my guiding principles during my business years was Kiss, keep it simple, and invariably our most successful programs were the simplest. Even that was not enough. You cannot sell tins of baked beans without marketing them and government programs were rather less attractive.