Why skills will be crucial to avoiding another Winter of Discontent

People don't talk much about the non-accelerating-inflation rate of unemployment down the Dog & Duck. Or anywhere else, for that matter. The Nairu, as it is known in the trade, is one of those subjects which can kill a party stone dead.

Fuel shortages are symptomatic of a wider problem
Fuel shortages are symptomatic of a wider problem

But the chances are that the number-crunchers at the Treasury will have been talking about the Nairu ad nauseum in the run-up to the Budget, as they attempt to find a solution to the seemingly impossible puzzle of labour shortages, rising inflation and the aftermath of the coronavirus pandemic.

In simple terms, the Nairu is the lowest rate of unemployment that the country can reasonably sustain before labour shortages start to fuel inflation. And the signs are that the UK has more or less reached it.

But while full employment – or as close to it as realistically possible in the short term – sounds like every politician's dream, the reality is somewhat more complex. Aside from the obvious problem of empty supermarket shelves and dry petrol forecourts, the real difficulty arising from the labour shortage will be the impact on wages and costs to business.

While rising wages sound like good news, and the Prime Minister has certainly tried to put on a brave face with his talk about a "high-wage, high-productivity economy". But anyone who remembers the desperate lengths the Callaghan government went to in the 1970s to bring pay rises under control – culminating in the infamous 1970 Winter of Discontent – will realise there is a definite downside to a high-wage economy.

So why are rising wages a problem? The difficulty is that, unless they are paid for by efficiency savings – the "high productivity" part of Boris Johnson's vision – they will inevitably be passed on to consumers, who will feel no better off, and demand higher wages. And thus the spiral continues.

But if ever-rising costs are met with ever-rising wages, does this really matter? Well, taken to the extreme, unchecked hyper-inflation would lead to the sort of economic collapse experienced in countries such as Zimbabwe or Venezuela, where inflation currently stands at 5,500 per cent.

Retraining will be crucial to avoid shortages

In reality, this would never be allowed to happen here. Counter-inflationary measures would be introduced, almost certainly in the form of higher interest rates – although Callaghan-style wage caps would be an alternative – which would bring inflation under control. This though, would be at the cost of rising unemployment and a possible recession.

So how can the Chancellor square the circle of labour shortages, demands for higher wages, and the threat of rising inflation?

Many, particularly those who opposed Britain leaving the EU, will argue that relaxing immigration restrictions should be relaxed to allow migrant workers to fill the vacancies. But the Prime Minister has made it clear that he wants industry to reduce its "dependency on cheap migrant labour", and besides, there are post-pandemic labour shortages across Europe, meaning this might not be the magic bullet many would hope for.

Does this leave the Chancellor between a rock and a hard place, and make a future of shortages, rising living costs and economic stagnation inevitable?

Certainly, Rishi Sunak will be aware that he has little room for manoeuvre, particularly when the Prime Minister seems set against short-term austerity measures to develop long-term

The good news is that the Nairu is not set in stone, and there are long-term measures that the Government can take to bring it down.

Many people will point out that while the unemployment of 4.5 per cent is historically low, there are still 1.5 million registered as out of work, and more than a million unfilled job vacancies. Why can't the unemployed do these jobs?

Rishi Sunak

Economists usually class unemployment in four different categories: structural, frictional, voluntary and cyclical. Cyclical, which occurs during times of recession, is not of great concern at the moment, and frictional – short-term unemployment caused by people switching jobs – is also something which is largely out of the Chancellor's control.

Voluntary unemployment, where people are unwilling to work for the going rate, can be tackled by 'stick-and-carrot' policies which make work more attractive. Rishi Sunak will clearly hope that the rise in the minimum wage will make some of the hard-to-fill, relatively unskilled labouring jobs more attractive to people who are out of work. The introduction of Universal Credit, replacing the previous myriad of different benefits, was also designed to ensure that work always paid.

But it is structural unemployment, the mismatch of skills caused by changing nature of the economy, which will be the key to unlocking the puzzle. The pandemic has exacerbated existing long-term trends; for example the switch to online shopping has led to many job losses on the high street, but also led to the demand for more delivery drivers. However, an unemployed shop manager may have neither the skills, nor the inclination, to fill the vacancies for drivers. Similarly, many people working in the hospitality trade found new employment during the shut-down, leaving labour shortages now the industry has reopened. Britain's ageing population also means there will be growing demand for workers in the social-care sector over the years to come, but filling those vacancies without a significant increase in pay levels is going to be a tough challenge. And while ministers and council leaders might say they support a pay rise in what they consider an undervalued sector, finding the money in these straitened times is another matter.

Retraining people to meet the changing nature of Britain's economy will be crucial to both easing labour shortages, and preventing a period of 'stagflation' – the nightmare combination of both soaring prices and economic stagnation which blighted the country in the 1970s. Expect to hear a lot about skills and training from the Government over the coming months. If the Prime Minister really wants to create a high-wage, high-productivity economy, training, education and the adoption of new technology will need to be central to it.

But there is another untapped resource which could provide a path out of the deadlock – the active retired. The compulsory retirement age has now been abolished, and the age at which people are entitled to receive the state pension has seen an incremental rise. But with people living considerably longer, and enjoying better health than they did even just a few decades ago, there may well be an argument for encouraging people to work for longer. Hence the recent letter to retired lorry drivers.

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