The Guardian
The central reality of our age is that globalisation and technological change have increased the demand for people with the right education, skills, and connections - and reduced the demand for those without them.
The bottom third of our citizens are either paid less or have fewer job opportunities than before. The top third are doing fine. The middle third are just getting by.
Different nations have responded in different ways. In the United States, there are lots of new jobs, but the wages of the bottom third continue to drop, while people at the top have never done as well. In France and Germany, the bottom third are either unemployed or in constant danger of being so, but inequality is not nearly as wide as in America. Britain stands between the two extremes.
So here is the big question: are all advanced economies condemned to be somewhere on this line running from widening inequality to permanently high unemployment? The answer is no.
Imagine a three legged stool that stays upright only if all three legs are sturdy. The first leg is business flexibility. For the last decade and a half, virtually all the job growth in the US has come from small and medium sized businesses. They have much more freedom than their European counterparts to hire and fire employees, set wages, and sell where and how they want. Small and medium companies in the US also have a much easier time getting money to grow.
This first leg creates a lot of new jobs, but not necessarily good jobs. Over the same 15 years, the real earnings of almost half of all working people in the US have dropped. The least educated have fared worst. So we need something beyond business flexibility to have good jobs. Call the second leg workforce agility. Today's workers need to be specially equipped for this increasingly global, digital economy. The most important requirement is a good basic education, followed by access to technical skills and life-long opportunities to sharpen them. On this point, much of Europe beats America.
An agile workforce also has to be geographically mobile. Almost 20 per cent of Americans move every year, many in pursuit of new jobs. Europeans need to be able to move more easily. If the poor are going to be nimble enough to get the new jobs, they will need good public transport and affordable child care. Some will need special assistance - such as rent and wage subsidies.
But business flexibility and labour agility will not create enough good jobs unless the third leg of the stool is in place. Call it sufficient demand. Put simply, an economy cannot fully use its human resources unless there is enough demand for all the goods and services the people produce. Demand comes from three places: purchases by individuals and businesses, net purchases by government and net exports.
Right now, aggregate demand is brisk in the United States, but do not count on it staying that way. American consumers are going deep into debt and Asian economies are in a mess. Governments in every advanced nation are shrinking their deficits, which may be fine for the long term but will further crimp demand. Central bankers continue to be way too fearful of inflation.
Remember: You need all three legs. Business flexibility without labour agility means a lot of jobs, but many of them will pay little. Labour agility without business flexibility means a lot of over-qualified people for jobs that do not exist. Both without sufficient demand still means too many unemployed.
No nation on either side of the Atlantic has got it completely right. There is a genuine third way, but it is hard to accomplish. It requires an active government that embraces change rather than one that protects old jobs; a government that eases the transition to the new economy; and one that maintains sufficient demand. The question, still unanswered, is whether such a political oddity is possible.
