Thursday, February 03, 2011

All About Industrial Policy:,Part 3 - Notes on Unemployment

The inspiration for this post all began with an argument I had with Tim Worstall over at Duncan's place over unemployment. I suggested that there was a relationship between trade policy and unemployment, Tim's rather scathing response was:
Eh? Trade causes unemployment does it? Well, that puts the kibosh on Keynesian economics then, doesn’t it: what with the insistence that employment is determined by aggregate demand.
Which to be honest, I thought rather missed the point. As a general rule, an increase in aggregate demand leads to a drop in unemployment, it is clear though that this rule doesn't describe the whole picture, that dealing with unemployment is more than just a case of fiddling with the right macroeconomic variables. To drive home this point, in 2007 at the height of an economic boom with demand by the bucketload, youth unemployment was 14.4%, it's clear that we need to look deeper to find the cause of unemployment.

At a basic level we can say that unemployment occurs when there is no demand for the available supply of Labour. This might be because there is no demand at all for labour, although it is often more likely that that the supply and demand are not compatible. Although there is a demand for labour, it is likely to be a demand for labour with specific skills not possesed by the available labour.

An obvious question at this point is: Why are jobs not being created that can make use of the available labour supply? To do this, we need to look at the process of job creation. One of the best descriptions of this process is the idea of Creative Destruction from the Austrian Economist, Joseph Schumpeter. Essentially, entepreneurs within a market economy will constantly be looking to put resources to their best use and even when jobs are lost, entepreneurs will find new uses for this newly available labour. I believe that this process as a whole goes on, but I think it's far from perfect.

Where we see unemployment, I believe that largely it is because the creative/destructive process within the economy has been unable to find a use for the available labour. It's at this point that we can bring the issue of trade. The starting point here is to imagine a world where wages are roughly equal, in this situation entrepreneurs have a huge range of options open to them. Once we start to add in competitor nations with lower wages to this world, many of the potential avenues of opportunity in the higher waged countries will dry up since as they will be unable to compete with lower priced competitors.

The point here is that the rise of foreign competition means that domestic entepreneurs have a harder time of things (they also have some advantages, but I'll cover these in a later post), making the process of job creation becomes more difficult. In a market economy, we have to accept the fact that jobs will be destroyed, what's important is that we look after those who lose their jobs, ideally by creating an environment where it's easy for them to find new jobs.

One reason I'm a fan of industrial policy is that it is clear that there are areas of the country and segments of the population for whom the job creation process as it stands is not working particularly well, jobs have been destroyed but not enough new jobs have been created. I'd like to see the government take a more active role in improving the situation.

1 comment:

james said...

"In a market economy, we have to accept the fact that jobs will be destroyed, what's important is that we look after those who lose their jobs, ideally by creating an environment where it's easy for them to find new jobs."

In office, Labour was moving towards a job guarantee system - which would have meant an effective combining of welfare and industrial policy. Since labour now lacks representation in government at a UK level - and this will continue for at least five years - perhaps we need to think about industrial policy outside of the state?

For example, the Mondragon Corporation guarantees a job to members of its industrial co-operatives. If jobs are destroyed through competition or a labour-saving innovation, effort is made to redeploy surplus labour.