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Employment & exclusion

Employment & exclusion

This section described the features associated with employment levels, the fitness of individuals to be employed and the management techniques that are open to policy makers in respect of dependency. Related issues - funding the state, the impact of demographic change, crime, education - are debated in more depth elsewhere.

We approach these issues from four perspectives. In a brief initial section, we consider the distinction between engagement and exclusion, on the one hand, and engagement and employment on the other. Second, we consider the dynamics of employment, and we look at how this has changed and may well change in response to existing forces. Third, we consider policy options that may increase employment, and well-meaning options which have the opposite effect. Finally, we look at dependency management.

In summary, the lowest skilled will find it hardest to add more value that they cost in a networked, knowledge-based economy. Productivity has a dual affect on this, helping the able to add value, substituting new approaches for skills that cannot adapt to changing times. However, what constitutes a 'skill' is changing, and it is very often the absence of social skills that are the key limiting factor to employability. The role of policy in assisting transitions between jobs, and into work, is discussed.

This said, the battle for competitive success amongst the industrial nations will be fought less through the management of the disengaged, desirable as this may be, than in the renewal of talent in the middle ground, in the efficient workings of labour markets and in the effective use by companies of the human resource that they can access.

Engagement, employment and exclusion.

The majority of the population are engaged but not employed. "Engagement" may entail caring for someone or acting in a voluntary capacity. Economic engagement - working for a wage - is a subset of overall engagement. As disengagement carries with it many social penalties, this balance is of some importance. Figure 1 suggests the various elements that are involved in this segmentation, although there is no attempt made to represent the numbers who are involved. Disengagement is, however, thought to affect around a fifth to a third of the population of many industrial nations.

Figure 1: Engagement, employment and disengagement.

Engagement is often non-economic in its nature and manifestation. It will usually need to be financed, however, and as traditional patterns of family support erode, so alternative patterns of child-rearing, of caring for old age and infirmity come into place with an element of the conventional economy attached to them. Where the source is the public purse, the implications for long-term fiscal balance is huge, as we see elsewhere. Where the issue is met through saving, we can expect a (beneficial) increase in this. Political policy is almost universally inclined to follow this path.

The form of engagement influences many life choices. Figure 2 shows (left) a conceptual plot of the personal choices that open up to us as we personally achieve more within the system in which we live. There is a gradual and then rapid rise at the highest levels of attainment. A bar, inset, shows the likely lifetime achievement of a low-skilled individual, and the red shading shows the consumerist paradise which is everywhere presented to them. That these messages misguide us as little as they do is a tribute to our common sense.

Figure 2: the impact of employment on economic and social liberty.

Inset on the right is the same figure, with two additional curves. In blue, we find the informal consequences of employment: which is to say, our liberties are, at least in the early phases of achievement, significantly curtailed. We have to turn up on time. We have to conform. At high levels of achievement, however, we enter a new social space, in which engagement opens doors and creates options. The curve rises. Averaging these two curves together, we arrive at the green composite curve. This may fall when we first enter into engagement with society. There is then a long plateau, comparable to the life achievement of many, in which one sort of benefit is cancelled by consequent constraints. We are promoted to regional sales manager, gain income but lose time with the family or friends. Finally, the green curve ascends into bourgeois heaven, and the drivers upon the individual become unambiguous.

The point to draw from this is that economic arguments about employment may miss an important issue, and that people who occupy the long, flat plateau of the green line may feel much less motivated by purely economic drivers than might be imagined. The choices that they make, the policy variables to which they respond and the political and brand-related messages which they take may be far more complex than economic analysis would suggest.

Elsewhere, we discuss social segmentation. Figure 3 shows one relatively crude approach which throws an interesting light on these issues.

Figure 3: a social segmentation related to life choices.

The dimensions of the matrix are self-explanatory: horizontally, can the good things in life be bought, or earned-maintained-experienced? Vertically, does the individual take their values and goals from within themselves, or from the norms of their peer group or others whom they admire?

The four cadres are rather important when considering engagement. The perhaps-unkindly entitled "Bossies" dominate the caring professions. They subscribe to group values, but only to those which are transpersonal or group-focused, examples being health, religion, or education. Psychologically, this group rather enjoy instructing others in 'right conduct'.

"Quolies" seek a uniform tempo and quality of life from all aspects of their engagement. They might cede potential earnings in order to live in an attractive place, mingle with the sort of people whom they favour or support causes to which they subscribe. Quolies are most liable to exploit the ambiguities of the green curve in Figure 2, taking low-paid but interesting employment, for example, or running a marginal bookshop in a pretty town. Quoly propaganda may give a much stronger sense of their importance in employment issues than is in fact the case, however: home working, the movement to 'quality and crafts', the organic food enthusiasm may provoke surges of enthusiasm amongst other groups which are then dropped by all but the Quolies. They are a dangerous basis for a brand exercise or a political movement, but lie at the heart of activism, the voluntary sector and a particular kind of social innovation.

One the left of the matrix, we find "Selectors", who are similar to Quolies save that their main aim is to acquire the sources of quality of life to which the aspire (social entré, property in a fine place, a polished mind.) Their intention is usually to drop economic activity to focus on the heartland that they have constructed for themselves. Sometimes, they succeed in this aim.

The fourth group is cursed with perpetual discontent, making them the engine of consumption. "Aspirers" seek to meet other people's expectations of what they should be; or to acquire or experience what others suggest is attractive or entertaining. They are highly responsive to marketing and consumerist in their outlook. The behaviour of Aspirers comes closest to the conventional model of economic rationality. They are, in addition, a significant fraction of the population. They try on other styles - as Quolies, dressing for the country in an urban centre, as Bossies, answering a political poll about public expenditure - but their dominant mode is to see what their peers regard as desirable, and pursue that and the means to acquire it.

These four groups can be reconfigured in many other perspectives. This patterns is, however, useful as a basis on which to think about how aspirations around employment may change. We shall have fewer workers and more dependants in most of the industrial nations. There will be significant inter-generational exchange of wealth, and the children of the rich will also better educated, more confident and better informed than hitherto. There may be 'Aspirer' migrants, but a significant fraction of the population will lie in the three quadrants which seeks an elegant sufficiency.

The dynamics of employment.

Here, we set aside the large fraction of the engaged but not economically employed population, to consider conventional paid work.

In a closed economy, the level of employment is set by four parameters. These are

The balance between productivity and output growth is shown in Figure 4. The output of both services and manufacturing grow at much the same rate. Service productivity develops slowly, that of manufacturing grows rapidly. The net effect is that employment rises in services and remains static in manufacturing.

Figure 4: Employment as the results of productivity and output growth. (Note: log scale)

The dynamics which drive these elements are complex. For example, the efficiency with which 'surplus' people are recycled relates to factors as dissimilar as retraining costs and procedures, geographical mobility, the degree to which organised labour can close entry into areas of employment (such as the professions) and the affect of employment legislation in restricting layoffs (and, not coincidentally, of discouraging new hirings.)

Fundamentally, however, labour is much like any other input to value creation in that it is sought by employers in strict relation to its economic usefulness. This comes down to how much value someone can add in a given hour (a function of their skills and the efficiency with which they are used), the cost of using them per hour on a variable basis and the fixed costs of employment spread over the number of hours that they are legally allowed to work or elect to work. Wages are an important part of this, but so too are labour-related taxes. These may, in European countries in particular, amount to as much as the direct costs of employment. In Portugal, the entire tax burden on labour means that the average person works 'for the state' for over 30 weeks in the year.

A key concern on the part of employers is the risk of over- or under-capacity: that they may have failed to line up the resource that they need, or that they will be left with too much of it. Rigidities in the labour market - including some aspects of employment protection - increase these risks. Figure 5 shows the relationship between labour participation in Europe and the cost of termination of a job.

Figure 5: High termination costs appear to deter employment.

Similar figures can be developed which relate the level and duration of state assistance of unemployment with the rate of unemployment. It is clear which of these is the chicken and which the egg.

Figure 6: Concealed widespread disengagement.

Figure 6 shows Dutch formal unemployment rates and the development over time of categories of welfare support which keep a third of work-capable people from engagement. Similar estimates for France and Germany suggest equivalent or higher values

Policy options towards employment.

Considerations of this sort have led most commentators to see relatively open systems of employment as those best able to guarantee full employment and resilience to shocks. The role of the state is to create or encourage a supply of trained people, to prevent market failure by restrictive practice by employer or unions, and to create legislation which provides a framework of law in which disputes can be resolved.

There is something of a natural test-bed that has developed between the USA and the European Union. The period 1974-94 saw the US create 45 million jobs, Europe one million. Patterns of economic growth were similar, however. The difference was how labour priced itself, as Figure 7 shows. The substitution of capital for labour is pervasive, but strongest in Europe, where workers are both costly and relatively unproductive.

Figure 7: Contrasts between job creation in the EU and USA.

These are, then, the sketched elements of the dynamics that drive this complex system. Individual sectors of the economy vary considerably in their exposure to wage inflation, skill shortages and the competitive forces that drive fast adjustment. Some sectors will be growing more rapidly than productivity and will absorb labour, whilst others will do the opposite. Trade will generate wealth - and thus jobs - and exports will create jobs directly. Imports may or may not destroy net numbers of jobs, but coupling to the external sector will drive industry, in particular, to best practice and this cannot but increase the speed with which labour must renew itself.

Figure 8: Foreign and local wage competition.

The figure relates the unit wage that is paid to the scarcity of a skill in relation to the demand for it. The relationship tends to be acutely sensitive in developing nations, such that highly skilled people command many multiples of the wages of an agricultural worker. This is shown as the light blue curve. In the industrial world, there are more complex skills on show, and the growth in remuneration with skill level is slower, as shown by the dark blue schematic. Where the 'light blue' curve is competitive, jobs are either lost to low wage areas - as with the textiles industry - or subsidised, directly as with the EU common agricultural policy or indirectly, by policy measures which increase productivity. However, the green line shows the curve that relates the cost of substituting capital for labour: using a ditch digging machine instead of a gang of ditch diggers. Where the green line lies above the blue lines, labour holds its own. However, automation, redesign and the changing nature of production is moving the green line sharply to the right of the figure. Low skill jobs are being lost, or wages are being forced down to keep the worker competitive.

Figure 9: the changing inputs to US manufacturing.

The figure shows the consequences of capital deepening on jobs in the US over 35 years. White collar labour intensity is halved, whilst blue collar jobs are on their way to elimination. (A note of caution: outsourcing, discussed elsewhere, may have caused some jobs that were previously classified as manufacturing to be redefined as services. An example of this would be security provision. )

Whatever the ultimate scope of capital deepening, the impact on low skilled jobs is profound. The average worker in the US is now only marginally better off than they were in 1973, measured in real terms. The cars and health care they buy are better and public services are probably of a higher quality, but the wage package buys the same number of units of them. The top 10% has seen its earning double over the same period and the bottom 20% has seen income halve.

Figure 10: The real earnings of and divergence between skill groups.

The figure shows the earning of US men between 1975 and 2000, indexed such that the earnings of those with only primary education are set equal to 100 in 1975. The pattern of disengagement amongst the low skilled is evident and progressive over time, whilst the reward to tertiary education is self-evident. Research on the social returns to education in the poor nations show similar, but greatly enhanced intensity.

The policy prescriptions in respect of overall employment are relatively well-understood. The link to competitiveness and the long term quality of is, seemingly, clear. The economic argument should, however, we weighted for two factors. First, the more strongly this argument is followed, the harder it may be for the disengaged to find a role to play. (The consequent welfare and policing bill may prove large.) Second, the policy levers do not connect as straightforwardly to motivation as an economist might assert, particularly in the middle ground an din areas where engagement, rather than paid work, is the dominant principle. Once again, the direct and political cost of disruption may be considerable

Creating engagement.

The least skilled tend to be the least employed in virtually every industrial society, but not always the least engaged. Sometimes the engagement may involve crime, discussed elsewhere. In other cases, it may involve caring which would otherwise be supplied at high economic cost. However, core formal unemployment is often concentrated on a predictable cadre and is often inter-generational. Concentrated, chronic unemployment generates a caustic culture of its own, and often becomes a focus for crime and the actions of bored minds. Managing this must be a priority in all societies.

Figure 11: Changes in disposable income in US households 1997-99.

The simplest and most effective solutions engage in frank social engineering. They note that the barriers to engagement are often complex. People may be in the wrong place and the system of welfare may tie them to this. They may lack information or confidence. More particularly, however, they will lack skills, in two particular ways.

First, the disengaged tend to lack objective skills, such as those measured by examinations. Britain and the US have rates of functional illiteracy and innumeracy that affect a fifth to a quarter of the adult population. This failure to acquire basic skills is highly focused on the lowest socio-economic cadres, where disengagement is at its most pronounced. This failure to achieve seems to occur for reasons which more to do with the prevalent ethos than with access to education or to weak educational facilities. There is no evidence that 'affirmative' changes in the educational environment, such as lowering class sizes, has much impact on attainment. However, the home environment may not encourage learning. Peer pressure is also a potent force, one which has a particular resonance with Figures 2 and 3. The disengaged are often Aspirers and their children are acutely aware of consumer goods and media models of affluence. At the same time, life expectations are measured by the meagre bracket on this figure, which we discussed earlier. Routes to success - such as sport, pop music and drug trading - are seen as the necessary wings needed to reach consumer heaven. Learning is not seen as a significant feather for these wings.

Second, the disengaged may lack 'navigation skills', which we have discussed elsewhere. Specifically, if they have been exposed only to a specific milieu, then they may find it hard to pick up the norms of other areas of activity. They may see no use for formal skills until the context in which they are to be used is made clear. The US has pioneered experimental work that has now been turned into a 'technology' of dependency management, whereby - for example - remedial classes are offered on how to handle a job interview, how to dress for work, how to limit slang and street jargon in speech, how to inspire confidence in a potential employer. These classes, based on self-help groups and mentoring, have proven spectacularly effective. Further, the most vulnerable to exclusion have been shown to be those who are those born to single mothers from an ethic minority into a disengaged milieu. Such children are given special crèche facilities, where they are given insight into how their society works, and what is possible in the world beyond the only one that they can know.

These positive interventions deliver their best results when active measures are taken to suppress dependency. In the US example, those claiming benefits have to show active search for work, and are - in some cases - placed in subsidised work until they can find market-priced jobs. The period of dependency is limited, and an individual can choose when to exercise this right. Taking welfare places obligations on the beneficiary, however, and these are to find a job if not in some way incapacitated from doing so. The results of this have been spectacular both in reducing the level of dependency and in creating enthusiasm amongst those directly affected by these measures. The level of crime has been considerably reduced where the experiments have been running for a decade.

Figure 12: US levels of welfare dependency respond to full employment and to 'social engineering'.

The scale of US success can be seen in Figure 12. The US economy is managing an unprecedented feat in modern times, which is to maintain historically fast growth and full employment whilst managing inflationary pressures. In particular, wage-driven inflation is minimal. US training and education are not exceptional - indeed, score badly when compared to peers. It is the systematic approach which seems to have won this particular prize. Other nations may find the methods politically unacceptable or a set of choices which are not for them. Equivalent balances will, however, define the nature of success in the next twenty years. The battle for competitive success will, however, be fought out less in the management of the disengaged, desirable as this may be, than in the renewal of talent in the middle ground, in the efficient workings of labour markets and in the effective use by companies of the human resource that they can access.

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