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Equality and full employment can co-exist

Larry Elliott

Nicolas Sarkozy: an apology. “Last month we may have given the impression that Nicolas Sarkozy would herald a new free-market dawn for France. An article headlined ‘Sarko, son of Thatch’ suggested that Mr. Sarkozy was fully signed up to the Anglo-Saxon economic agenda and would sweep away Gallic protectionism.

“We now realise that such assertions were without foundation. Mr. Sarkozy, by his insistence on removing the words ‘free and undistorted competition’ from the European Union constitution, has proved that France will remain a bastion of restrictive practices. We apologise for any confusion caused.”

Mr. Sarkozy, it appears, has had second thoughts. Far from signing up to the liberalisation agenda at last week’s Brussels summit, the new French President said the treaty should protect workers, reject cut-throat competition, and turn its back fully on U.S.-style free-market economics. “The word ‘protection’ is no longer taboo,” he said.

All of which had Tony Blair and Gordon Brown (not to mention the European commission itself) fuming. The only salvation for Europe, they argue, is to embrace fully open competition, deregulation, and flexible labour markets.

It’s not exactly clear why Mr. Sarkozy holds his renegade views. Perhaps he has taken a squint across the Channel and doesn’t especially like what he sees. He may perhaps be unimpressed by government-sponsored reports showing Britain surfing a wave of creativity and be struck instead by the property speculation, the asset-stripping, and the hucksterism that symbolise the U.K. economy after 10 years of New Labour.

Another explanation may be that Mr. Sarkozy is simply playing to the gallery. The view from the Elysee is that the Netherlands and France voted no to the EU constitution two years ago because voters were worried about the impact of globalisation on Europe’s social model. This argument cuts little ice in Brussels or London, where the call is for Europe’s pampered citizens to wake up and smell the coffee.

Mr. Sarkozy — and this is the worst insult that can be hurled at a modern politician — is nothing more than a populist. These days listening to voters and trying to give them what they want (or democracy, as it used to be called) is out.

As it happens, Mr. Sarkozy has some heavyweight support for his views. Last week’s employment outlook from the west’s leading economic think tank, the Organisation for Economic Cooperation and Development (OECD), said that globalisation had become a “potentially important source of vulnerability for workers,” and that the past 25 years had not only seen labour’s share of national income decline but also the distribution of income become more unequal.

The OECD has figures showing the share of income taken by the richest 0.1 per cent of the population in the 20th century. In Edwardian Britain, for example, the super-rich took almost 12 per cent of all income, but this share gradually declined to about 2 per cent during the 1950s and 1960s, hitting a trough of about 1.5 per cent in the late 1970s. The percentage then started to rise again, increasing to more than 3 per cent by the turn of the millennium.

Does it have to be this way? Not according to the OECD. “It has been claimed by some that only countries which emphasise market-oriented policies [characterised by limited welfare benefits and light regulation] may enjoy both successful employment performance and strong labour productivity growth simultaneously. This claim is not supported by the evidence, however.”

James Galbraith, economics professor at the University of Texas in Austin, goes one step further. In a recently published pamphlet (see below) envisaging what Europe might look like in 2042 — 50 years after the Maastricht treaty — he argues that the future of the EU depends on it turning its back on the current liberalisation orthodoxy.

The EU will only survive, he argues, if there is convergence of living standards between the poor periphery and the rich core. This convergence will not just happen, Professor Galbraith adds. Instead, it will have to be part of an economic agenda for Europe.

We all know what that agenda is at the moment. “If unemployment exists, the cause must lie in a failure of the real wage to adjust to its equilibrium value,” Professor Galbraith says. “Perhaps technological change and other factors have cut demand for workers equipped with relatively limited skills. To restore full employment, wages paid to such workers must fall.

In practice, though, this agenda presents problems for the future cohesion of the EU. It would not just mean that low-paid workers in France should accept pay cuts so they can price themselves back into jobs. It would also mean that their low-skilled counterparts in Poland must also accept a cut in their wages to maintain the same level of competitiveness. And since low-productivity workers represent a larger share of the Polish workforce than of the French, wage restraints must be more widely applied in Poland than in France.

“This is the European paradox,” Professor Galbraith says. European ideals require convergence but European policies impose divergence. If the wage-cutters and the union-bashers were right, the pamphlet adds, you would expect to find a trade-off between inequality and unemployment, but according to Professor Galbraith this does not hold true. “Countries and regions which are more egalitarian systematically enjoy less unemployment.”

Why is this so? Firstly, labour markets do not really work in the way the textbooks say they should. Professor Galbraith says we have forgotten the insights of Keynes’ The General theory of employment, interest and money.

The second strand of his argument is, however, far more surprising. “The claim that the U.S. has a more unequal pay structure than that of Europe is false. All calculations that purport to verify this claim have been based on comparisons between the entire U.S. and individual countries of Europe,” he says.

“These calculations invalidly compare a large country with many small ones, and they exclude consideration of large inequalities that exist between European countries. When these inequalities are added in, the pay structure of the U.S. emerges as more egalitarian than that of Europe.”

Professor Galbraith argues that there is no contradiction between the ideal of European equality and full employment. Nor is there a contradiction between the true lessons to be learned for Europe — expansionary fiscal policy in downturns; a national system of welfare; wage top-ups for the low-skilled — and what is good for Europe.

“The contradiction is between the policies that are required and what, so far, the political, academic, media and business elites of Europe have believed.

“Moreover, from the late 1930s through [to] the late 1990s, the U.S. had always achieved high employment by reducing inequalities in its pay structure, not by increasing them.” —

Guardian Newspapers Limited 2007

(Maastricht 2042 and the Fate of Europe by James Galbraith; The Levy Economics Institute; www.levy.org)

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