Full Employment Abandoned Shifting Sands and Policy Failures William Mitchell Professor of Economics, Centre of Full Employment and Equity, University of Newcastle, NSW, Australia and Joan Muysken Professor of Economics, CofFEE-Europe, University of Maastricht, The Netherlands Edward Elgar Cheltenham, UK • Northampton, MA, USA Contents Abbreviations List of figures vi AMI augmented misery index List of tables vii AR autoregressive process List of abbreviations viii BER buffer employment ratio Acknowledgements x BRW bargained real wage BSE buffer stock employment PART I FULL EMPLOYMENT: CHANGING VIEWS CLMI CofFEE labour market indicators AND POLICIES CofFEE Centre of Full Employment and Equity CPI consumer price index 1 The full employment framework and its demise 3 EC European Commission 2 Early views on unemployment and the Phillips curve 23 ECB European Central Bank 3 The Phillips curve and shifting views on unemployment 49 EES European Employment Strategy 4 The troublesome NAIRU: the hoax that undermined full ELR employment of last resort employment 81 EMU European Monetary Union EPWP Expanded Public Works Programme PART II FULL EMPLOYMENT ABANDONED: SHIFTING EU European Union SANDS AND POLICY FAILURES FOMC Federal Open Market Committee GBC government budget constraint 5 The shift to full employability 123 GDP gross domestic product 6Inflation first: the new mantra of macroeconomics 146 HP Hodrick–Prescott Filter 7 The neglected role of aggregate demand 163 HPM high powered money ICLS International Conference of Labour Statisticians PART III THE URGENCY OF FULL EMPLOYMENT: ILO International Labour Organisation FOUNDATIONS FOR AN ACTIVE POLICY IMF International Monetary Fund IS–LM investment–savings, liquidity–money supply 8 A monetary framework for fiscal policy activism 205 JG job guarantee 9Buffer stocks and price stability 224 LNJ Layard, Nickell and Jackman 10 Conclusion: the urgency of full employment 260 MI misery index NAIBER non-accelerating inflation rate buffer employment ratio References 267 NBER National Bureau of Economic Research Index 289 NAIRLU non-accelerating inflation rate of labour underutilisation NAIRU non-accelerating inflation rate of unemployment NGO non-governmental organisation NK new Keynesian NKPC new Keynesian Phillips curve NREGS National Rural Employment Guarantee Act v viii Abbreviations ix NRU natural rate of unemployment OECD Organisation for Economic Cooperation and Development OPEC Organisation of the Petroleum Exporting Countries PRW price-determined real wage PSE public service employment SGP Stability and Growth Pact 1. The full employment framework and UK United Kingdom its demise US United States UV unemployment to vacancies curve (Beveridge curve) 1.1 INTRODUCTION When we were young and later in our formative years, when we studied economics, everybody who wanted to earn an income was able to find employment. Maintaining full employment was an overriding goal of eco- nomic policy which governments of all political persuasions took seriously. Unemployment rates below 2 per cent were considered normal and when unemployment threatened to increase, government intervened by stimulat- ing aggregate demand. Even conservative governments acted in this way, if only because they feared the electoral backlash that was associated with unemployment in excess of 2 per cent. More fundamentally, employment is a basic human right and this prin- ciple was enshrined in the immediate post-Second World War period by the United Nations. In 1945, the Charter of the United Nations was signed and ratified by 50 member nations. Article 55 defines full employment as a necessary condition for stability and well-being among people, while Article 56 requires that all members commit themselves to using their policy powers to ensure that full employment, among other socio-economic goals, is achieved. Employment transcends its income-generating role to become a funda- mental human need and right. This intent was reinforced by the United Nations in the unanimous adoption of the 1948 Universal Declaration of Human Rights. Article 23 of that treaty outlines, among other things, the essential link between full employment and the maintenance of human rights. (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. (2) Everyone, without discrimination, has the right to equal pay for equal work. (3) Everyone who works has the right to just and favourable remuneration, ensuring for himself and his family an existence worthy of human dignity and supplemented, if necessary, by other means of social protection. (4) Everyone has the right to form and to join trade unions for the protection of his interests. 3 4 Full employment The full employment framework and its demise 5 While unemployment was seen as a waste of resources and a loss of main message (OECD, 1994: vii) accurately summarises the current state of national income which together restrained the growth of living standards, the art in policy thinking: it was also constructed in terms of social and philosophical objectives per- taining to dignity, well-being and the quest for sophistication. It was also [I]t is an inability of OECD economies and societies to adapt rapidly and inno- clearly understood that the maintenance of full employment was the vatively to a world of rapid structural change that is the principal cause of high collective responsibility of society, expressed through the macroeconomic and persistent unemployment. Consequently, the main thrust of the study was directed towards identifying the institutions, rules and regulations, and policy settings. Governments had to ensure that there were jobs available practices and policies which have weakened the capacity of OECD countries to that were accessible to the most disadvantaged workers in the economy. We adapt and to innovate, and to search for appropriate policy responses in all these call this collective enterprise the ‘full employment’ framework. areas. This framework has been systematically abandoned in most OECD countries over the last 30 years. The overriding priority of macroeconomic Action is required in all areas simultaneously for several reasons. First, the roots fl of structural unemployment have penetrated many if not all areas of the socio- policy has shifted towards keeping in ation low and suppressing the sta- ffi fi economic fabric; second, the political di culties of implementing several of bilisation functions of scal policy. Concerted political campaigns by neo- these policies call for a comprehensive strategy . third, there are synergies to liberal governments aided and abetted by a capitalist class intent on exploit if various microeconomic polices are pursued in a co-ordinated way, regaining total control of workplaces, have hectored communities into both with regard to each other and the macroeconomic policy stance. accepting that mass unemployment and rising underemployment is no longer the responsibility of government. As a consequence, the insights The Jobs Study (p. 74) also ratified the growing macroeconomic conser- gained from the writings of J.M. Keynes, Karl Marx and Michal Kalecki vatism by articulating that the major task for macroeconomic policy was to into how deficient demand in macroeconomic systems constrains employ- allow governments to ‘work towards creating a healthy, stable and pre- ment opportunities and forces some individuals into involuntary unem- dictable environment allowing sustained growth of investment, output and ployment have been discarded. The concept of systemic failure has been employment. This implies a reduction in structural budget deficits and replaced by placing the responsibility for economic outcomes onto the public sector debt over the medium term [together with] low inflation’. individual. Accordingly, anyone who is unemployed has chosen to be The OECD has claimed that its policy recommendations have delivered in that state because they did not invest in appropriate skills; have not successes in countries that have implemented them (see OECD, 2001). searched for available opportunities with sufficient effort or rigour; or have Unfortunately, the reality is strikingly at odds with this political hubris. become either ‘work shy’ or too selective in the jobs that they would accept. Some 13 years have passed since the OECD policy agenda was declared, Governments are seen to have bolstered this individual lethargy through and yet most countries are still languishing in high states of labour under- providing excessively generous income support payments and restrictive utilisation and low to moderate economic growth. Underemployment is hiring and firing regulations. The prevailing view held by economists and becoming an increasingly significant source of wastage. Youth unemploy- policy makers is that individuals should be willing to adapt to changing ment remains high. Income inequalities are increasing. The only achieve- circumstances and individuals should not be prevented from doing so by ment is that inflation is now under control, although it was the severity of outdated regulations and institutions. The role of government is then pre- the 1991 recession that expunged inflationary expectations from the OECD scribed as one of ensuring that individuals reach states where they are bloc. Since that time, labour costs have been kept down by harsh industrial employable. This involves reducing the ease of access to income support relations deregulation and a concerted attack