/ 19 October 2010

Cutting benefits for jobs

Cutting Benefits For Jobs

Who could question the need to help unemployed workers find jobs, especially when companies complain there are plenty of jobs available and no one to fill them.

The latest Nobel Prize winners for economics have examined the way markets fail to work efficiently and how barriers can be overcome or swept away.

Massachusetts Institute of Technology professor Peter Diamond, Dale Mortenson of Northwestern University and Christopher Pissarides of the London School of Economics (LSE) were awarded the £1-million prize for their work examining why unemployed job seekers fail to find work when there are jobs going begging. But the message seems to be that capital needs to work harder and workers need to fit in more closely with its ever-changing whims.

Pissarides has worked hard informing the European Union on how to free up labour markets with a mix of benefit cuts, tax incentives and a bonfire of restrictive regulations.

As his boss at the LSE, John van Reenen, said: “He has shown how labour market regulation, entry barriers to setting up new service firms, tax and welfare policies affect differences in employment across the world.”

Pissarides argued for more flexible labour rules to be included in the Lisbon Agenda on job creation — and won.

Van Reenen said they were based on “the right economic principles but the main barriers to implementing them was lack of political will”.

There is merit in examining in detail how markets work, but there is a political game afoot that undermines the labour market protections built into Continental rules to force workers to take lower-paid work when they lose their jobs.

Cutting benefits, such as housing [for rent], is top of the British coalition government’s list of measures to make the difference between out-of-work incomes and in-work incomes wider.

Taking the knife to housing benefit fits the Pissarides theory. But if it is implemented without tackling property prices and rents it is a recipe for making lots of people miserable.

Although it might make a labour-market model work like a precision engineering tool, everyone knows cutting housing benefits just takes us down the route to US-style ghettos, with poor people chased out of high-rent areas to an even greater degree than they are now.

It is a classic case where we can all agree that people need jobs and housing benefits are too high, but following the path recommended by a clever economist who says we can have higher employment after lowering benefits puts us in the position of creating another problem. —