UK offers dubious model for reform

Date: 01/05/1997

By Tim Jones

WHEN Korean electronics group LG chose South Wales as the site for Europe's biggest-ever inward investment project last year, UK Prime Minister John Major was jubilant.

“Britain has again attracted the pick of the inward investment decisions,” he trumpeted. “It reinforces Britain's progress in becoming the unrivalled enterprise centre in Europe.”

Indeed, persuading LG to sink 2 billion ecu into the Welsh economy, creating more than 6,000 jobs, was no mean feat. And that was not all. Last year, 38&percent; of all foreign direct investment in the EU - and 40&percent; of all Japanese investment - went to the UK.

Major's campaign in the run-up to tomorrow's (1 May) British general election has been dominated by his claim that the right-wing reforms of the Eighties have loosened the grip of trade unions and brought about a more flexible labour market. This, he says, has made the UK economy unusually swift in its ability to translate growth in output into new jobs.

He warns that allowing excessive regulation and higher social security costs in through the 'back door' of the Maastricht Treaty's social chapter would ruin this.

Since unemployment is running at only 7&percent; in the UK, compared with 12&percent; in France and 10&percent; in Germany, Major's assertion appears to carry some weight - but only some.

For a start, the UK recession of the early Nineties began before everyone else's and was deeper than anyone else's, so the recovery has consequently been bouncier.

The economies closely linked to the deutschemark, such as France and Belgium, have also had to put up with high real interest rates to protect the nominal rates of their currencies.

Secondly, the greater flexibility introduced to the UK labour market has helped bring about much greater income inequality than in comparable European countries.

Moreover, the behaviour of the labour market is often determined by what is happening in the macroeconomy rather than by any rule-making or rule-slashing by governments. The flexibility which has appeared in the UK workforce probably results more from the Conservatives' deregulation of product and services markets than from their crushing of the labour unions.

The economy has experienced a generalised shift away from manufacturing into services, where unions have always had less of a presence and where people tend to work more flexibly in part-time or temporary jobs.

The government's stance may have prevented regulation-creep into these new economic areas, but that is all.

Also, with the advent of the single market, a freeing-up of world trade, and privatisation and deregulation at home, British companies are facing much tougher competition. Employers, who in the past might have given in to pressure to increase wages, now know that they cannot pass the higher costs on to their customers.

But it seems that the economy is now approaching the point at which wages are starting to inflate, and this is with a 7&percent; unemployment rate. While it may be better than other major European economies, it is still far short of the 'full' employment of the Fifties and Sixties.

If the Conservatives are re-elected, they are likely to respond with further tightening of welfare benefit rules to cajole people off the unemployment register and into low-wage work.

John Philpott, director of the London-based Employment Policy Institute, is sceptical about this approach. “The idea that you can continue to cut benefit rates until the unemployed are priced into the labour market has little empirical evidence to back it up,” he says. “The unemployed will not necessarily work and may do other things such as engaging in crime.”