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Wednesday, October 14, 2009


This is a a graph of what producers are willing to Supply (orange line rising as price rises) with consumer Demand (blue line declining as the price rises). The point at which they cross is, in a free market, the natural price & amount of production. This is the basic axiom of economics. It should be taught in schools along with the 6 times table & 1066 being the date of the Battle of Hastings.

Both curves can be moved (supply by new technology, allowing or restricting imports, taxation, subsidy)(demand by advertising, scare stories). An awful lot of government activity consists of trying to alter prices without changing underlying supply & demand. That leads to shortages & official or unofficial rationing butter mountains & resources, in this case people, being uselessly stockpiled.

Applying this to unemployment it is clear that mass unemployment can only exist because of such interference. To end it we could alter our influence on both curves:

SUPPLY Britain has about 2.5 million officially unemployed & 2.5 million on disability benefit so about 5 million who could be working. It is generally accepted that both the current & previous governments used reclassifying perfectly capable people as disabled to keep the figures looking better. The fact is that the benefit system provides, both in direct payment & housing benefit & a number of other things as much money, or more, than anybody on minimum wage (£5.80 an hour for adults = £11,600 a year on a 40 hour week) will take home. Minimum wage legislation & more effectively, the benefit system, establish the maximum supply - below that sum supply drops, except for the black economy, to zero.

The Conservatives have said that they will change the rules to remove benefit from anybody who refuses a job offer. They will probably also have to ensure that anybody who accepts it under that duress & gets themselves quickly fired also loses that benefit & that the minimum wage be abolished or reduced. Whether they have the guts to follow through is something we will probably see.

In any case increasing the effective labour supply will be counterproductive unless they also deal with demand.

DEMAND To shift industry's demand for workers along the curve will require cutting the minimum cost of them. Currently there are 28.95 million in employment so another 5 million would be a 1/6th increase. On the blue curve here to increase employment by 1/6th would require cutting employment cost by about £1,000 but this particular curve shows great price elasticity (ie a steep curve). I would suspect cutting the minimum by about £2,000 would reduce unemployment to those who really are unemployable or absolutely don't want a job. That could be done by suspending the employer's contribution to national insurance & providing an annual grant of £1,000 to each employer for anybody on minimum wage. Personally I suspect that it would work better with a variable rate where there is no grant in areas where unemployment is under 5% & perhaps 2 or 3 thousand in areas of highest unemployment (Liverpool, Glasgow, Lanarkshire).

I doubt if this would cost since the state is already getting no national insurance contribution from people who are currently unemployed & somebody on minimum wage may well, if they have no family, be paying £1,000 income tax. There would be some cost to the Exchequer from subsidising people who are already working on minimum wages. On the other hand there should be a major saving from people no longer on benefit.

The effect on the economy as a whole should be to significantly increase production. The social effects are more difficult to judge. It would inculcate a habit of work rather than dependency culture; it might reduce pressure for government to increase its own employment; on the other hand it might sweep up some people who, through genuine disability or just congenital uselessness are simply unemployable. Society should look after such people, though not at the expense of seriously damaging itself.

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