Work and Pay

Full employment as an anti-poverty strategy

  • Published: Aug 08, 2013
  • Author: Adam Tinson
  • Category: Work and Pay

The idea of full employment has been making something of a comeback recently, at least in certain circles. Shadow Work and Pensions Secretary Liam Byrne made a speech recently entitled ‘The Road Back to Full Employment’, and organisations such as IPPR, the TUC, CLASS and the Resolution Foundation have also been engaging with the idea. The idea is also being pushed in the US. Our forthcoming Monitoring Poverty and Social Exclusion in Wales report draws on some of the arguments in favour of full employment.

Full employment generally takes one of two definitions: a low unemployment rate (most likely one consistent with the unemployment rate that does not lead to accelerating inflation in the absence of formal wage controls), or a high employment rate. The difference between these two measures is what is happening amongst those not in the labour force – a low unemployment rate could be consistent with a low employment rate if many people have become discouraged and stopped looking for work altogether. Of course, there may also be substantial variation between a high employment rate where many people work part-time (such as the pre-depression 2000s) and one where the vast majority work full time (as was the case during the post-war years). 

There are several ways to approach the effects of full employment on poverty. The figures show that poverty risk varies inversely with work intensity, from workless to full working. However, the improvement in employment rates from the 1990s to the 2000s (from around 68.5 in 1993 to 72.6 in 2007) did not result in notable declines in poverty for those of working age. Over this period, poverty rates increased for working age adults without children and decreased for those with children, though the latter is likely due to interventions such as tax credits (though lone parent employment rates did improve).

This gives a slightly depressing image of the capacity of full employment to eradicate poverty. After all, that period includes the longest sustained period of economic growth on record and employment rates which rivalled those of post-war years. There is a third understanding of full employment which might unravel this problem. The American economist Jared Bernstein understands full employment as “the unemployment rate consistent with broadly rising real earnings.” This is consistent with a higher employment rate as well: the period Bernstein refers to as an example of this is 1995-2000, where the US employment rate averaged 73.5%. As Bernstein also notes, there was an increase in the average hours worked as well as rising real earnings, especially for those lower in the income distribution. It is not clear that this was happening in our long decade of growth, given that hours worked were declining on average and real wages beginning to stagnate.

A problem flagged in the IPPR report is that whilst full employment would lead to falls in absolute poverty, relative poverty might remain constant as median incomes rise. A 2011 study by Marx et al looked at this relative poverty question across the EU in relation to the Europe 2020 goal of a 75% employment rate. Using regression analysis with a moving poverty line, most of the impact on reducing relative poverty is undone by higher median incomes (figure 1, p.19). Reading off the graph, poverty seems to fall by around three percentage points in the UK before the median is adjusted and around one percentage point afterwards. Altering the model so that work flows to workless households first and low work intensity households second (the distributional point above) improves it again by around 0.75 percentage points in the UK (figure 4, p.23). This is for the working age population – the paper also suggests that the proportion of the population in poverty overall would be static (p.32) – as the rising median pushes pensioners into relative poverty.  

This suggests several points. Small falls in relative poverty accompanied by rising median incomes is a good outcome (better than what the UK may face over the next few years: falling median incomes and growing relative poverty). It also suggests full employment is not the whole answer in terms of relative poverty, though the EU’s 75% is less ambitious than the IPPR 80%. The Marx et al paper’s result on static overall population poverty may not be that important with pensions rising in line with earnings at the very least, thanks to the triple lock (which may be more affordable under full employment).

Why is all this worth saying? The government seems remarkably at ease with the current levels of employment (how many times have we heard ‘more people in work than ever before’ recently?). But they should not be complacent. Both government and opposition need a more positive vision for the future than endless austerity, Euroscepticism, and hysteria over scroungers and migrants. If not full employment, what?

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