Britain should learn from the revival of America’s labour force

Some of the UK’s most eminent economists - including Professor Mariana Mazzucato, the most vocal proponent of a mission-led economy - wrote an open letter to government last week pleading that the existing fiscal rules don’t lead to a doubling down on this capital-light UK economic model. That penny is now dropping. The Treasury is conducting a pension review with an aim to increase in investment in UK assets, and is also likely to review how capital spending is treated within the government’s fiscal rules. The open letter and recent published work by the Office for Budget Responsibility that identifies an increased economic payback from capital spending could be co-incidental. I tend not to believe in coincidences. This looks like a rolling-of-the-pitch ahead of the 30 October Budget.
This increased focus on capital spending is sensible, and long overdue - but even its most devoted proponents would acknowledge that delivery and payback from capital-intensive projects takes time. Furthermore, a huge body of remedial work is needed to ensure that the UK is an attractive location to deploy capital efficiently. Benchmarking the costs and lead-in times for establishing energy connections, building high speed rail, land promotion schemes, and new nuclear power facilities do not make for happy reading.
So I would return back to the initial question of the most efficient way of growing the economy. The answer right now is to look at that other factor of production - labour - and how getting more Britons back into work can be the quicker answer to the UK’s growth challenges. The 9.3 million people of working age who are currently economically inactive, alongside a further 1.4 million unemployed, is a huge reservoir of untapped economic potential. The most assured way of raising living standards of working age households is to increase well-paid employment. The first thing to note is that the UK has had, until recently, a good story to tell in this area. The last Conservative governments presided over a structural reduction in the unemployment rate, a sharp reduction of in-work poverty and - until the pandemic hit - extended a fall in the inactivity rate that had peaked at 24.2% in 1994. At the start of 2020 this rate stood at just 20.5%. Inactivity was one of the UK’s most encouraging economic data points, sitting second only behind Japan amongst major advanced economies.
What has happened since is less encouraging. A 600,000 increase in those reporting long-term sickness as a reason for economic inactivity could become a lost generation if it becomes entrenched. This would act as a prolonged drag on the national finances. By contrast, should this group be encouraged back into work this will help make a mockery of the UK’s subdued growth outlook. Getting this area of public policy right is of huge importance.
Some of this latent workforce potential should begin to return as NHS waiting lists show signs of peaking, junior doctor strike action eases, and occupational health interventions get to grips with conditions acquired or amplified during the COVID-19 pandemic. The latest data suggests this is starting to happen. But there is also an important question for the government to answer on how it encourages a much broader basket of potential workers back into the workforce. Here the lessons from the US economy may be instructive.
Traditional thinking on “what works” in the U.K. labour market emphasises the role of active labour market interventions. New Labour’s New Deal policies on the late 1990s/ early 2000s would be the obvious examples. These were tailored support programs to encourage work-readiness for the disabled, for loans parents, and for older workers. Evaluation of these programmes was broadly favourable, but there is no doubt that these programs involve up front costs. This is a challenge in what looks set to be a tough backdrop for current spending.
An evaluation of how the US labour market has behaved since the mid-2010s poses the question whether there is another way. What was assumed by US economists to be an inevitable structural increase in US inactivity has been partly reversed. The Trump and Biden administration’s economic policies of running economic demand “hot” - first through corporate tax cuts, more recently through post-pandemic subsidies - has had the effect of pulling far more US workers back into the economy than had ever been forecast. This is also not just from inward migration. There is higher participation amongst almost every key US demographic. The result is that millions more Americans are in work, and the US economy has grown above its pre-pandemic trend. A labour force participation rate that was expected to fall to below 60% - extending a two-decade decline - has rebounded to its current rate of 62.7%.
This was not supposed to happen. Stimulating demand is assumed not to have any sustained effects on the supply side of the economy. Indeed, conventional thinking is that it has costly implications for price inflation. However, the US Federal Reserve has all but claimed victory over its most recent bout of inflation - certainly before the Bank of England or European Central Bank are prepared to claim anything similar.
Labour’s economic thinkers don’t particularly like parallels with the US economy – as the world’s largest economy displays levels of inequality that do not conform with their world view. But the UK’s self-styled party of workers should consider whether lessons from US macroeconomic policy will support their primary mission for faster economic growth.