Full employment may no longer be working for the economy
It seems like common sense to say that more is better. As such, the main function of any economy has been to produce the most output from the resources available. One of these resources is labour, but rather than make as little use of it as possible, the objective seems to be to use as much of it as is available. Enough work needs to be created so that at least everyone that wants a job is gainfully employed. Yet the need to have everyone toiling away comes from a time when there was not enough to go around. Amid growing material abundance but limited employment options, it may be time that we gave ourselves more of a break.
Outside the garden of Eden, labouring has been a part of human existence. The primary objective of such efforts has been to provide enough for everyone to live off. Organizing the economy to produce as much as possible is a relatively recent phenomenon that developed in the West and spread elsewhere. The extra production was first put to use for nation building at a time when warfare between states in Europe was common, thus giving motivation for rulers to free up market forces so that more wealth could be created.
Greater output helped facilitate higher tax payments as well as giving funds for trade with other countries, which enabled increases in the amount and variety of goods on offer. In this way, both nation states and their citizens benefitted from a higher output. Such a mentality continues to linger within economic theory such as with the concept of GDP which is a measure of national wealth (that reflects the wealth of the whole rather than the parts). But this is not the only organizing principle for the economy – as well as maximizing output, everyone who is able must be employed in work.
The need to have all hands on deck to work would seem common sense – the more workers, the greater the output. Yet, having everyone on the job is not always compatible with generating the highest level of production. The requirement for a certain amount of labour to be employed could potentially limit the extent to which capital can be put to use. When invested in businesses such as in the form of machinery, capital is typically most productive when brought together in just a few places as larger scale operations tend to result in greater productivity. Yet, such a setup would not only require less labour but also concentrate highly-productive businesses in a small number of locations to the detriment of other places.
Such developments within the economy are beneficial to the overall output but also result in economic hardship. As such, governments often need to manage these trade-offs so as to ensure that wealth is spread out and any pockets of poverty are not left to fester. Yet, aiming for both a growing economy and jobs for everyone has proven to be a difficult challenge for most countries in the West in the face of globalization. The greater scale enabled through the global economy has unleashed market forces that can generate bigger shifts in economic activity with both positive and negative outcomes.
Along with global shifts in production, another popular target of ire is immigration. Fears of missing out on a job in the West limits the movement of people around the global economy despite the fact that shifting workers from poorer to richer countries would boost output. More of such flows of people had been permitted in the past but only came about with the prospering economies in the West (which no longer seems to be the case). As well as globalization increasing access to workers around the world, the amount of labour to be used has also increased as women have entered the workforce.
Workers not only have to compete with each other but also need to be more productive or cheaper than capital. The impact of globalization seems to have increased the supply of capital with funds flowing from around the world into the finance sectors in rich countries. The ability to be able to invest money in a growing range of ventures has also helped to keep capital mounting up. Yet, the need for business funding has tended to diminish as gains in productivity and online operations means that companies have become less capital intensive.
Greater supply along with falling demand has seen the price of capital drop off (as can be seen in persistently lower interest rates) which in turn makes it harder to maintain full employment. The economy as a whole will suffer if governments need to take policies to keep people in jobs which also reduce the use of capital (such as measures to lower trade). Workers will also struggle if wages are kept low so as to make employment of labour viable in the face of low prices for capital. Both of the trends of cheap capital and growing labour supply look set to continue, so the challenges with maintaining everyone in jobs may become more difficult.
Whether or not full employment will be possible is one issue but whether it is desirable is something else that should be thought through. While putting all pairs of hands to good use was needed in the past, output has reached levels that have allowed many people to live in relative comfort. The problem seems to have shifted from producing as much as possible to ensuring that everyone has enough. If the focus is to move away from maximizing output, the main sticking point could be how to organize the economy if not on the basis of everyone working.
One possible solution would obviously be for less people to work if they could get by without a job or with only working part-time. This option would only be available for people who have sufficient financial resources or who earn enough from limited working hours. Yet, the normal setup for well-paid office jobs does not permit workers to have much choice in terms of their own work schedule as it benefits employers to limit their options of their employees. Our economy could cope with more flexibility in terms of working arrangements as shown by the way in which most essential goods and services were still available during the Covid lockdowns.
Without much scope for even individual workers on high incomes to choose between work or leisure, changes may need to be made across the whole economy (especially since it is those on low incomes that might be working more while getting less). Currently, we receive wages relative to our contribution to the economy (well, that is the theory anyway). Without us each getting paid for doing our bit, there would be no way of gauging who should get how much, but also there would be no guarantee that enough work would be done for everyone to have enough.
One way to look at this is that even with the current economy, production is not as high as it could be. Society allows for exceptions for some people (such as students, the elderly or disabled, and parents with young children) to not work. From this point of view, greater scope for people to not work could be a potential way for the economy to operate on less labour. For example, further reductions in working hours (a long weekend or more national holidays), more funding for adult education, or earlier retirement would allow for less to be produced. Less availability of workers would mean that the use of capital could expand to make up the shortfall. Applying such measures on a country level may put their businesses at a disadvantage relative to foreign rivals, but changes within one set of borders could expand elsewhere if popular.
Cutting back on more marginal uses of labour would help to make those left in employment to be more productive. The reasoning behind this is that the remaining workers will pick up the slack left by the labour that has left the economy. The same effect happens after job cuts during recessions – productivity rises as less useful workers are dismissed. Output per worker would increase even more if more capital is used to replace any labour that is no longer used. And instead of making space for everyone to work, more resources (such as capital or training) could go towards getting more from the remaining workforce. This approach is how we deal with agricultural land – investing heavily in fertile regions while not taking a harvest from less arable areas.
What is different to our use of land and labour is that people who do not work are seen as not contributing. It was important that everyone played their part during times of scarcity which accounts for most of human history. While helpful when hunger and disease were a genuine threat, the prosperity in the West means that the bulk of people have been freed of these hardships. Rather than genuine need, the toil of many continues due to a cultural aversion to allow people to stay idle. As such, the challenge could be to find a way in which both work and not-working can be shared out fairly and in a way that the economy can still provide all that is needed. Otherwise, we will continue to labour away even though it will be more pain than gain.
Free Range Economist 