Is job insecurity necessary for good economic performance? Since the 1980s, governments across the world have been advised to make labour markets more ‘flexible’. Hiring and firing have been made easier; legislation (along with deindustrialisation) has weakened trade unions’ influence on wages and working conditions; privatisation and the contracting-out of employment have strengthened the hand of employers, to the detriment of the lowest earners; the scope of the welfare state has been reduced, although the extent of this has varied between countries.
This mixture of government policies, and structural change driven by advancing technology, have arguably increased job insecurity for millions of workers in rich and poor countries over the last three decades. This is a big change from the world of the post-war period, when the economist William Beveridge helped to create the welfare state and the conditions for full employment in the UK. He argued that government policies for full employment would remove the threat of the sack as a disciplining device for the workforce, and strengthen workers’ bargaining power in the labour market. This represented a fundamental change, but Beveridge was optimistic that it would not be a problem.
70 years later, we live in a very different world, where the hopes of Beveridge have not been fulfilled, at least in the long run. While the 1950s and 60s saw full employment and job security realised across the developed world, since the 1970s unemployment rates have fluctuated around much higher levels, and the ‘labour market of fear’ has become a reality for many.
Governments have been convinced by free-market economists that flexible labour markets, as free as possible from regulation, and minimal social welfare, are necessary for low unemployment. If wages are allowed to fall in a recession, goes the argument, this will encourage employers to maintain employment levels despite lower sales. The impact of the 2008 Great Recession did not in general confirm this theory. In the US, an economy with relatively flexible labour markets, unemployment rose to around 10%, and although it has come down in recent years, labour force participation has also fallen dramatically. In the UK employment growth has been stronger, while wages have stagnated, providing some support for the flexible labour markets thesis. But this has been the exception among the world’s major economies.
Some economists have explored the theory that some labour market inflexibilities actually promote economic efficiency. Wage cuts and job insecurity can be bad for worker morale and motivation and reduce workplace cooperation, so even if flexible labour markets have some positive effect on employment, this can be offset by such negative outcomes.
Mainstream economics today holds that, despite the sort of mixed evidence cited above, flexible labour markets and less generous welfare states improve economic dynamism. Contrary to this, in ‘Thing 21’ of his book, Ha-Joon Chang suggests that big government can actually make people more open to change.
Chang cites the case of his native South Korea, which has one of the smallest welfare states in the world. It has for many years had a high proportion of temporary employment, and the consequent job insecurity has had some perverse effects.
According to a survey done in 2003, four out of five of the ‘top-scoring university applicants’ in the science stream wanted to study medicine. The profession has become so popular despite a fall in doctors’ wages, because of the decline of job security for the lucky workers with permanent contracts. Students have realised that becoming a doctor offers protection from these forces, and the prospect of a lifetime with well-remunerated work. The decline of lifetime employment among those with permanent contracts means that losing your job may mean a drastic fall in income, especially with such weak welfare protection. In sum, flexible labour markets and job insecurity are producing a misallocation of labour.
Similar effects can be observed in the US, which also has weak welfare protection and flexible labour markets. Losing your job may mean losing everything, and this may be a reason why there is more demand for trade protection in the US than in many European countries which in general have stronger welfare states. In Europe, job loss will lead to much less of a fall in income, and government subsidies for retraining and reallocation in some countries mean that workers have less to fear from unemployment which can result from industrial restructuring stimulated by increased international trade.
In the Nordic countries, which have relatively large welfare states and strong unions, labour markets have become somewhat more flexible in recent decades, but these economies have maintained their dynamism for the same reason described above. From 1990 to 2008, Finland and Norway were the fastest growing economies in the ‘core’ (rich country) OECD group. Their GDP per capita growth rates over the period were 2.6% and 2.5%, compared with 1.8% in the US. This period includes the late 1990s ‘new economy’ boom in the US. Of course, correlation does not prove causation, but it does show that a certain level of social welfare protection need not reduce growth. Would they have grown even faster with minimal welfare? It is possible, but difficult to substantiate, and the social and political costs of this would surely have been high, rendering such an outcome unlikely.
As Chang notes, unemployment insurance and state-subsidised retraining and job search act as a kind of bankruptcy law for the labour force. Bankruptcy law and limited liability can reduce the debts due to creditors by failed businesses. They mean that business owners will not lose everything even when their firm goes bust. Such laws arguably encourage greater risk-taking by businessman, as they know that even if their enterprise fails, they will have a second chance (or third or fourth) to be a success. In countries with stronger welfare protection and labour market policies such as the Nordics, the same is true for workers. Unemployment need not destroy livelihoods as it can in South Korea or the US and workers are more likely to have another chance at earning a decent living. This can make them more open to change.
The welfare state is not all good. It can discourage people from taking jobs with low pay and leave them unemployed instead. Which of these two situations is worse is not clear and might depend on the individual concerned than a universal economic law. Unemployment for a worker costs the state more than a rise in low wage employment, unless it pays the worker some form of tax credits, which are a wage top-up for the working poor. In the absence of a reasonable level of tax credits or minimum wages, both unemployment and low wage work can increase poverty, leading in some cases to worsened mental and physical health, or crime. These can be a further cost to government if they are to be reduced or prevented.
The above discussion shows that job insecurity can be a drag on economic dynamism if it makes workers less open to change. All capitalist economies go through a continuous restructuring as old industries decline and new ones develop. This will involve periodic and unevenly distributed unemployment, which an intelligently designed welfare state and labour market policies for retraining can mitigate. If workers stand to lose everything when they become unemployed they may resist the inevitable economic change that capitalism produces. Such an outcome can also lead to labour misallocation and economic inefficiency as more secure jobs (such as medicine in Korea) become more popular than more risky but potentially more productive careers in sunrise industries.