We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.


23 May 2012 By Edward Hadas

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. The policymakers often invoke the name of John Maynard Keynes. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

Keynes’s own preferred solution was for governments to organise projects with a high “elasticity of employment”. “There are things to be done; there are men to do them,” he said. “Why not put the two together? Why not put the men to work?” The best way for governments to create jobs quickly is still to hire people directly. A look at the dilapidated infrastructure of the United States suggests that Keynes’ prescription is still relevant.

Enthusiasts for small government might want to privatise such programmes, but they should still agree with the true Keynesian principle: it is better to pay people to work than to pay them not to. Programmes which protect the unemployed and disabled serve a valuable social purpose and payments for early retirement may be defensible, but programmes which create jobs are far preferable to either.

This Keynesian message has largely been lost in the current official policy mix, which aims at growth and hopes for jobs. Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.

Employment asymmetry should be attacked more directly. Governments are even better placed to lead the charge than in Keynes’s day because their economic role has expanded so much. An eight-year experiment in Germany shows the power of relatively minor tweaks to the rules on jobs and benefits. Little more than tougher conditions for unemployment benefits and more helpful employment agencies have cut the number of people unemployed for more than a year from 1.7 million, about 4 percent of the potential workforce, to 800,000.

The precise German recipe is not applicable everywhere, but the principle is. The prime goal of government economic policy should be to fight the natural employment asymmetry of industrial economies. Lower taxes on workers’ income would make new jobs cheaper for employers and more lucrative for employees. In many countries, more stringent limitations on benefits would also help. Almost everywhere, the desire to establish and expand enterprises should be encouraged. In the United States, it would be helpful to find a way to give the rich a smaller share of the nation’s income. The money they don’t receive could be paid out to workers in newly created jobs.

The employment problems of the Lesser Depression are not grave enough to require a major reconsideration of the economy’s goals. A combination of short-term programmes and more gradual shifts in regulation and taxation should do the trick. But as the economy becomes more efficient, the surplus of labour is likely to become a more pressing social challenge. Keynes wondered “how to organise material abundance to yield up the fruits of a good life.” The answer is certainly not found in frequent periods of wastefully high unemployment.


Email a friend

Please complete the form below.

Required fields *


(Separate multiple email addresses with commas)