Dialogue: Full employment not just about everyone in work

By RALPH NORRIS*

To date the Herald's Jobs Challenge series has concentrated on industry development and, by implication, growth in incomes and the economy. While these are important goals, they involve quite different issues from the goal of achieving full employment. Therefore, it is necessary to identify the relationships between employment, industry development, productivity and incomes.

This is easy to demonstrate. An economy can achieve full employment at any level of average (per capita) income. Hong Kong maintained more or less full employment from the 1970s until the Asian crisis, yet its average incomes rose severalfold in that time.

Nor is employment necessarily related to economic growth. The United States and European economies grew at comparable rates after the early-1980s recession but whereas the US created some 18 million new jobs in the 1980s, Europe added no net jobs.

Per capita incomes and growth in incomes are essentially about levels of productivity and productivity growth. Employment, on the other hand, is about matching labour costs to productivity and ensuring there are incentives to work. A well-functioning labour market adjusts the demand for labour to its supply.

Full employment is an eminently feasible goal whether labour supply is growing, static or contracting. The world is not short of work to be done. The basic economic problem facing all societies is one of scarcity: there are too few resources, including labour, to meet unlimited wants. Roads need building, trees need planting, farms need developing, the sick and elderly need to be cared for and children need to be taught.

The feasibility of full employment is apparent around the world. A number of countries are returning to the situation of very low unemployment that characterised the 1950s and 1960s. Among the OECD countries, unemployment rates in the US, Iceland, Ireland, Luxembourg, Mexico, the Netherlands, Norway and Switzerland range between 2 and 4 per cent.

When unemployment prevails, what is lacking is not work but the mechanisms and incentives that connect people with jobs. The causes of modern unemployment are well understood. Labour market inflexibilities and perverse welfare incentives are the main culprits.

Labour market flexibility includes such things as labour costs, conditions of employment (including restrictions on hiring and layoffs), work practices, mobility and education and training.

Full employment is not simply about all those wanting employment having jobs. There must be strong expectations on the part of those seeking jobs to move, to retrain and, if necessary, to accept seemingly inferior jobs in the first instance. Jobs provide training (not the other way round) and entry-level jobs are usually the first rung on the income ladder.

With the passing of the Employment Contracts Act in 1991, New Zealand experienced a dramatic improvement in labour market flexibility. Between 1992 and 1996, unemployment fell from 11 to 6 per cent and some 250,000 jobs were created, the fastest rate of employment growth in the OECD.

Unfortunately, Employment Court rulings undermined many of the gains and unemployment has not fallen below 6 per cent. The Employment Relations Act introduces further obstacles to job creation which will dampen employment growth.

The Prime Minister's goal of achieving a 3 per cent rate of unemployment seems unattainable with a regime that is now even more costly and cumbersome than that of Australia. Indeed, unemployment seems likely to rise unless outward migration accelerates.

Unemployment is not simply about labour market flexibility; it is also about welfare. Benefits that are high relative to wages, high rates of benefit abatement as people move from welfare to work, and weakly applied work tests are associated with persistent unemployment.

American experience illustrates the importance of both labour market flexibility and welfare reform. The American labour market is relatively free and ununionised, with only one in 10 private-sector employees belonging to a union. Our Government's aim of raising union membership to 30 per cent of the workforce runs against international trends.

There are no statutory rules on holidays in the US, and surveys indicate that American workers prefer more money to more leisure. Recent American welfare reforms, including time limits on benefits, have drastically cut welfare rolls.

American firms are now desperate for workers in most skill categories. Wages of low-skilled workers have been rising faster than other wages in recent years.

A flexible labour market is particularly important for dynamic, "new economy" industries. Federal Reserve chairman Alan Greenspan and other commentators have pointed to the unrestrictive hiring and firing practices in the US relative to Europe as a major explanation for its dynamism, particularly in high-tech industries.

Nevertheless, changes are occurring in Europe. The Economist reported that "labour markets across Europe are becoming more flexible, almost by stealth. Governments have loosened the rules on part-time work and short-term contracts, encouraging firms to hire more workers, free of the usual job protection rules and high social security contributions that have deterred them from hiring in the past."

Meanwhile, we have been moving in the opposite direction. To promote job creation and "new economy" firms, we should focus on costly employment law, restrictions on dismissals and such things as holidays and minimum wage legislation.

These factors, together with other regulations stifling businesses, tax rates and the failings of our education system, are far more fundamental to the development of new industries than any number of activist industry policies.

At best, these merely shuffle jobs around the economy from firms and industries that can stand on their own feet to those that are only profitable because of Government assistance and do not add to employment overall. By misallocating resources in this way, they tend to reduce economic and employment growth.

Governments have for too long paid lip-service to unemployment. If they are serious about reducing it, they need to implement employment and tax policies which encourage and reward effort while removing dependency as an option for those able to work.

* Ralph Norris is chairman of the Business Roundtable.

Herald Online feature: The jobs challenge

We invite your responses to a series of questions such as: what key policies would make it easier for unemployed people to move into and generate jobs?