Not Working: Where Have All the Good Jobs Gone?

by David G. Blanchflower

In the UK, real wages in September 2018, more than a decade from the start of the Great Recession, are still 5.7 percent lower than they were in February 2008. Workers have been shaken to their very core. In 1931 John Maynard Keynes warned of the long, dragging conditions of what he called a “semi-slump,” a period of subnormal prosperity.

So long as chronic mass unemployment seems possible, each man appears as the enemy of his fellows in a scramble for jobs. So long as there is a scramble for jobs it is idle to deplore the inevitable growth of jealous restrictions, of demarcations, of organized or voluntary limitations of output, of resistance to technical advance. By this scramble are fostered many still uglier growths—hatred of foreigners, hatred of Jews, enmity between the sexes. Failure to use our productive power is the source of an interminable succession of evils. (para. 364)

The United Nations Special Rapporteur on extreme poverty and human rights to the UK, Philip Alston, reported at the end of a twelve-day visit to the UK in 2018 that “the government’s policies and drastic cuts to social support are entrenching high levels of poverty and inflicting unnecessary misery. . . . In the fifth richest country in the world, this is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.” He continued: “Government policies have inflicted great misery unnecessarily, especially on the working poor, on single mothers struggling against mighty odds, on people with disabilities who are already marginalised, and on millions of children who are locked into a cycle of poverty from which many will have great difficulty escaping.”

The onset of austerity has made matters worse. A recent paper by Thiemo Fetzer (2018) concluded that the onset of austerity in the UK in 2010 directly contributed to the Brexit vote. His findings suggest that the EU referendum could well have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms, Fetzer suggests, “activated existing economic grievances” (2018, 1). Further, he finds that the rise of popular support for the UK Independence Party (UKIP) is the single most important correlate of the subsequent Leave vote in the 2016 EU referendum; this along with broader measures of political dissatisfaction are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010.

During a long period of unemployment, workers can lose their skills, causing a loss of human capital. So that’s a double whammy—instantaneous loss of output but also a permanent loss of output due to skill depreciation.

Declines in unemployment rates reduce the crime rate, which seems to be highly responsive to employment opportunities for low-skilled men.45 Wage rises significantly lower the crime rate. Higher wages for low-skilled workers reduce both property and violent crime, as well as crime among adolescents.46 The impact of wages on crime is substantial; one study estimates that a 10 percent increase in wages for non-college-educated men results in approximately a 10 to 20 percent reduction in crime rates.

There is evidence that this rise in economic insecurity has had negative consequences on people’s well-being in diverse ways.45 Increased obesity,46 rising suicide rates,47 a deterioration of mental health,48 and long-lasting serious deficits in child and youth development49 have all been attributed, at least in part, to the devastating impact of increased economic insecurity.

The proportion of youngsters living with their parents and not striking out on their own to form households increased sharply around the world including in the United States after the Great Recession.

Economics Nobel Laureate Joe Stiglitz has noted, “Take the central issue of austerity: it has never worked. Herbert Hoover tried it and converted the 1929 stock market into the Great Depression. I saw it tried in East Asia, when I was the World Bank’s chief economist: downturns became recessions, recessions depressions. The austerity medicine weakened aggregate demand, lowering growth; it reduced demand for labour, lowering wages and pushing up inequality; and it damaged public services on which ordinary citizens depend. In the UK, sharp cuts to public investment do not merely weaken the country today, but also ensure it will be weaker in the future.”

Larry Summers, ex–Harvard president and Treasury secretary, summarized it so well: “Good empirical evidence tells its story regardless of the precise way in which it is analyzed. In large part, it is its simplicity that makes it persuasive. Physicists do not compete to find more elaborate ways to observe falling apples. Instead they have made progress because theory has sought inspiration from a wide range of empirical phenomena. Macroeconomics could progress in the same way. But progress is unlikely, as long as macroeconomists require the armor of a stochastic pseudo-world before doing battle with evidence from the real one” (1991, 146).

In a path-breaking book titled Myth and Measurement (1995), David Card and Alan Krueger examined data from a series of recent episodes, including the 1992 increase in New Jersey’s minimum wage, the 1988 rise in California’s minimum wage, and the 1990–91 increases in the federal minimum wage.21 They found evidence showing that increases in the minimum wage led to increases in pay but no loss in jobs. Increases in the minimum wage led to productivity growth as tenure rates rose and quit rates fell.

He found that the executives were averse to cutting wages of either current employees or new hires, even during the economic downturn when demand for their products fell sharply. They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees and in convincing them to internalize the managers’ objectives for the company.

Carillion had been awarded large public-sector contracts of over £2 billion by the UK government and an open question is why, given that it was under investigation by Britain’s financial watchdog.

Dr. Donald Teater of the National Safety Council, founded in 1918 and chartered by Congress, examined the evidence on the effectiveness of opiates and non-opiates in treating pain. He concluded, “Opioids have been used for thousands of years in the treatment of pain and mental illness. Essentially everyone believes that opioids are powerful pain relievers. However, recent studies have shown that taking acetaminophen and ibuprofen together is actually more effective in treating pain.”

Immigration is a prime example of where there is a striking juxtaposition between perception and reality. Crime among immigrants, for example, is lower than among the indigenous populations, but the majority of the public seems to believe the reverse.

It is also possible to determine how many people overstay their visas. In 2015, the Department of Homeland Security (DHS) determined that there were nearly 45 million non-immigrant admissions to the United States for business or pleasure through air or sea ports of entry who were expected to depart in FY2015. Of this number, DHS calculated a total overstay rate of 1.17 percent, or around half a million individuals. The overstay rate was especially high for visitors from Afghanistan (10%), Bhutan (24%), Georgia (12%), Iraq (6%), Sudan (7%), and Yemen (6%). It was 0.4 percent for the UK, 0.7 percent for France, and 1 percent for Germany. For Canada and Mexico, the overstay rate for FY2015 was 1.18 percent and 1.45 percent of the expected departures, respectively, through air and sea ports of entry. A wall would likely increase the number of people overstaying their visas.10

A review of 18 comparable empirical studies found that with a 1-percentage-point increase in the proportion of immigrants in the workforce, local wages fall just 0.12

The OECD notes that since migrants often only constitute a relatively small part of the population, this would imply an almost negligible fall in wages.

The OECD (2016b) notes that once again most studies tend to find no or only a small negative impact on the employment rate: “The majority of empirical studies on the labour market impact of migration look at the aggregate or average local impact, rather than on concrete case studies. Most of these studies find no effect of immigration on local wages nor on employment, while a minority find a small effect, either negative or positive. This is due to a number of reasons. First, migrants’ skills often complement those of the native-born. Second, some native-born residents move up the occupational ladder in response to new foreign-born arrivals. Third, some previous residents move to other areas in reaction to new inflows. ...

There are also significant positive relationships between voting to leave and the smoking rate (not reported), the obesity rate, and the suicide rate. The poorer an area, the greater its overall dependence on welfare benefits. High dependency on welfare benefits in a county, just like a higher unemployment rate, raises the prospect an individual would vote to leave. The poorer the health in an area, the higher the likelihood of a Leave vote. Low-wage areas also voted for Leave.

It doesn’t help that the UK has nine of the ten poorest regions in Europe.26 Inner London is the richest region in Europe.

A populist, Bogdanor suggests, is someone who believes that the traditional governing parties of moderate left and moderate right, which claim to oppose each other, in reality form a consensus, since they agree upon basic issues. In Britain, France, and the United States, for example, the main parties agreed on the benefits of immigration and the advantages of globalization. In Britain, the three major parties favored Britain’s continued membership in the European Union. The people did not. In another of the squibs he argued that the real debate is not between left and right but between the people and the political class, the elite, which has its own interests in common, which are not those of the people. There surely is something in that suggestion.

Müller argues persuasively that a necessary but not sufficient condition of populism is to be critical of elites. In addition, he suggests, populists are always anti-pluralist, claiming they and they alone represent the people. Populist protest parties, he argues, cancel themselves out once they win an election as they can’t protest against themselves in government but they can govern as populists, which he suggests goes against the conventional wisdom. Müller explains that any failures of populist movements can still be blamed on elites acting behind the scenes. Populism distorts the democratic process (2016, 4), but he suggests it may be useful in making clear that parts of the population really are unrepresented.

Friedman also made clear that the natural rate of unemployment is not unchanging: “I do not mean to suggest that it is immutable and unchangeable. On the contrary, many of the market characteristics that determine its level are man-made and policy-made” (1968, 9). Friedman goes on to argue, for example, that the strength of union power and the size of the minimum wage make the natural rate higher; their declines in recent years thus make the natural rate lower. He emphasized that improvements in labor exchanges, in availability of information about job vacancies and labor supply, all of which have been enhanced by the Internet, tend to lower the natural rate. That, I contend, is what has happened. The natural rate of unemployment in advanced countries has fallen sharply since the Great Recession.

The task of measuring the NAIRU is further complicated by the general recognition that, plausibly, the NAIRU has changed over the post-war period, perhaps as a consequence of changes in labor markets” (1997a, 195). They further note that “a wide range of values of the NAIRU are consistent with the empirical evidence” (1997a, 237) and, crucially, that the trigger point—when wages and prices start to rise—is poorly estimated. For example, they estimate a NAIRU for the United States of 6.2 percent in 1990 with a 95 percent confidence interval of 5.1 to 7.7 percent. In a different publication the same authors argue that the tightest of the 95 percent confidence intervals for 1994 in the United States is 4.8 to 6.6 percent. They conclude that “it is difficult to estimate the level of unemployment at which the curve predicts is constant rate of inflation” (1997b, 47). Doug Staiger is in the next office to me and is almost always right.

As background, the Treasury view was that fiscal policy had no effect on the total amount of economic activity and unemployment, even during times of economic recession. This view was most famously advanced in the 1930s by the staff of the British Chancellor of the Exchequer. In 2010 the UK Chancellor George Osborne implemented huge public spending cuts that he argued would result in an expansionary fiscal contraction but resulted in the slowest peacetime recovery in three hundred years since the South Sea Bubble.

recall listening to billionaire John Cauldwell, who is the cofounder of mobile phone UK retailer Phone 4U, being interviewed on BBC HARDtalk on April 2, 2015 (downloadable from iTunes), about his motivations to get rich. He said he was motivated to make enough money to take care of his family; it was about financial security. Then it became about wealth and he wanted to get higher on the Times rich list. That lasted for three or four years. Then he thought about fulfilling the two parts of his childhood mission, which were to be wealthy and to be philanthropic. Phone 4U was worth £1.5 billion when he sold it in 2006 because he worried, rightly, there was a UK recession coming.