The Government is in a state of apparent, leaderless paralysis, the economy is weakening, and Brexit is stalling. Yet after another disastrous week for Britain’s beleaguered Prime Minister, there is at least one thing from which she can draw comfort, and not a little pride; Britain’s remarkable job-creating machine is still firing away on all cylinders regardless, with very few signs of slowing down.
At 4.5pc, the unemployment rate is close to an all-time low; better still, labour participation – that is the percentage of 16- to 64-year-olds in work – is at a record high. Job vacancies, as a proportion of the unemployed, have never been higher.
Whether it be the flexibility of the UK labour market, welfare reform (including a freeze in working-age benefits), generous maternity leave or the advent of free childcare, something is plainly working – unlike the Government. Contrast the situation in the UK with that of the United States, where labour participation has inexplicably been falling for a decade or more, and you’d think it a cause for major celebration.
The fly in the ointment, however, is that though more UK citizens are in work today than ever before, they are not getting richer. In real terms, average earnings remain significantly below their pre-crisis peak.
The trouble is that full employment is not of itself sufficient to make a happy country. The missing ingredient is a sense of improvement and progress, sadly lacking for many years now. If explanation were needed for the Corbyn surge, stagnation in living standards provides it in spades.
Britain is one of the world’s richest nations, yet to its great shame too many of its citizens are stuck in low-wage employment. Our low-wage economy has created a double problem; first it has reduced the incentives to invest and automate, and second it has, by making people reliant on welfare for top-up payments, acted as a state subsidy to corporate profits. Too many live out a miserable, hand-to-mouth existence, unable to save either for a house or the future. Theresa May touched on some of these discontents in her party conference speech – when you could hear it – but though she was good on the diagnosis, she was woefully short on solutions.
To date, the only answer Western governments have managed is the statutory minimum wage. This has proved a success in some respects; it doesn’t seem to have damaged employment much, but it has raised earnings at the bottom of the scale. Yet the policy also suffers from a major drawback which has compounded the low-wage problem. It’s the same with all price controls; if a floor or ceiling is set, prices will gravitate to those levels.
The minimum wage has become the going rate for all manner of employment, and thereby undoubtedly acted to depress wages for what ought to be relatively skilled forms of work such as care for the elderly. I don’t pretend to have solutions either; I’m hoping the labour market is at last tight enough to reignite the “Phillips Curve” – flattened by globalisation – and will start raising wages of its own accord.
Whatever the answer, we had better come up with something better than minimum wages, and fast, or last week’s Tory party travails will look like just the warm-up act.
Trump’s market delirium
Make your mind up, Donald. Ahead of his election as US president, Donald Trump would routinely accuse Janet Yellen, chairman of the Federal Reserve, of being in the pay of the Democrats, of being “more political than secretary Clinton”, and of ramping up the stock market for the benefit of his opponents. “She should be ashamed of herself,” he said, adding that he would most likely replace her if elected. But that was then, and as with so much else, he’s now completely flip-flopped. He loves her, so much so that he’s actively considering rehiring her for a second term. Those very same low interest rates he once condemned he now rather likes, and he just adores the soar-away stock market, which he regards as not so much the result of central bank juicing any longer but as validation of his own presidency.
It is therefore quite odd to read that he has also been courting the hawkish former Fed governor, Kevin Warsh, for the job. Warsh thinks interest rates are too low, and he worries about the effects of ultra loose monetary policy on asset prices. He is in a sense the very reverse of Yellen. There are others in the frame too, but there’s no point trying to double guess Trump; much depends on his mood on the day.
Good luck to whoever gets the job, for it’s going to be something of a poisoned chalice. It’s not just batting away Trump, who threatens to “do a Nixon” in the run-up to the next election, and pressurise whoever he chooses to keep rates as low as possible.
There’s also in the meantime the delicate business to navigate of returning monetary conditions to a semblance of normality.
The buoyant stock markets that Trump so much loves are in large measure the result of years of central bank money printing. Removing this without upsetting the apple cart will take judgment and skill. In the 10 years since the financial crisis, the combined balance sheet value of the major central banks – the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, has risen from less than $7 trillion (£5.4 trillion) to more than $20 trillion.
The Bank of England looks almost cowardly compared with the others, having expanded its balance sheet to “just” 20pc of GDP. The Bank of Japan is approaching 100pc, and the ECB 40pc. In any case, markets have been doped to the point of delirium. When the drug is withdrawn, what then?