A rational response to insecurity
Samuel Brittan: The Financial Times 30/08/2000

Workers and managers should have the opportunity to choose between greater job security and lower take-home pay.

Despite the fall in unemployment levels in North America and some European countries in the last few years, the sense of job insecurity has, if anything, heightened. Many researchers have found it difficult to unearth statistical evidence that labour turnover is higher or that periods in particular jobs are shorter than in earlier times.

In Britain, redundancy levels fell after the 1992 recession and have since remained remarkably stable at 10 per 1,000 employees a year, according to official estimates. Moreover, two-fifths of those made redundant were in employment again, usually within three months of losing their jobs.

One of the most thoroughgoing attempts to reconcile the data with subjective impressions has been made by Stephen Nickell, who, incidentally, has been appointed to the monetary policy committee of the Bank of England. (A Picture of the Job Insecurity Facing British Men, Centre for Economic Performance, London School of Economics, Dec 1999).

He finds an objective basis for job insecurity in the increased chances of a drop in pay rather than a higher chance of becoming unemployed. The prospects of pay losses have become greater even for those who stay in the same job without an intervening spell of unemployment.

This change is explained for most workers by the decline in the growth of average UK real pay in the 1990s compared with the 1980s. Highly skilled and older workers seem to face a greater risk of pay losses even allowing for the trend in average earnings.

Nevertheless, the effects reported are rather modest. The percentage of highly skilled men facing a one-yearly earnings drop of a tenth or more rose from 5.2 per cent in 1982-86 to 8.8 per cent in 1992-96 for those who did not change jobs. For those who did, without an intervening spell of unemployment, the percentage rose from 10.6 per cent to 14.4 per cent. It is difficult to believe that such wage changes explain the whole of the increased feeling of insecurity.

If shorter job tenure is a very recent phenomenon, it may not yet show up in official records of spells in employment. Even if it exists only in the mind it is still a fact of life. The "end of lifetime employment" has become a modern cliche.

Indeed, fear of job loss has been cited by central bankers and academic analysts alike as an important reason why a number of countries are able to sustain relatively low levels of unemployment, which in the past would have been associated with rising wage inflation. In other words, even the workers who have jobs hesitate to press for more pay for fear of the possible employment consequences.

The euphemistic name for job insecurity is "labour flexibility" - in one of its many meanings. It is this aspect that Alan Greenspan, chairman of the US Federal Reserve Bank, highlighted in an address in Pennsylvania in July and again last weekend.

He stated that advances in information technology had benefitted the US economy more than Europe or Japan. He attributed this discrepancy quite directly to the "inflexible, and hence more costly" labour markets of these other economies. The rates of return on investment in the same new technologies are "correspondingly less in Europe and Japan because businesses there face higher costs of displacing workers".

In the US "labour displacement is more readily countenanced both by law and culture". But because the costs of dismissing workers are lower, "the potential costs of hiring and the risks associated with expanding employment are less". The result of this "significantly higher capacity for job dismissal has been, counter-intuitively, a dramatic decline in the US unemployment rate".

But although the consequences for productivity and the unemployment-inflation relationship may be favourable, other aspects of job insecurity are not. Excessive anxiety hardly makes for an increased level of welfare. Indeed it may help explain why rising incomes have not produced increases in reported levels of happiness and satisfaction.

But do we have to accept such high human costs? The first clue to improving the trade-offs is that people differ in their attitude to change and risk. Some people see the need to retrain and change jobs as a positive challenge. There is a New York-based Five O'Clock Club that instructs its members in the art of changing jobs; and US business magazines contain many articles about "why it pays to quit". The chance to cease being a wage slave and sell services directly to business has been viewed by some as a more human kind of capitalism operating on a smaller scale than the huge corporations that emerged early in the 20th century.

For others, however, the challenge is one they would rather not face. They regard the tendency of corporations to reduce their permanent staff and to "outsource" their supplies as a threat rather than a challenge. This diversity of attitudes to risk is a theme of a paperback by Richard North, Risk: the Human Choice, (European Science and Environment Forum, £8). Some people are risk-averse and would be prepared to make sacrifices in take-home pay for the sake of greater security.

Here one sees the outlines of a possible compromise. According to the high priests of new technology, it is out of date to offer workers job security. But why not give employees a choice? Let them decide between labour contracts with high prospective rewards, but which may not last very long, and more secure jobs that pay less.

One should not pretend that the suggested solution is an easy one. A difficulty is that many of the past "jobs for life" were not guaranteed as such. There was rather the unspoken assumption that employees could expect to stay where they were, if their work was satisfactory. But it was always understood that a big shock, for instance a trade depression, or a technological revolution, might bring their employment to an end.

So in advocating the possibility of trading lower take-home pay for more security or shorter hours of work, I am not suggesting going back to something entirely old and familiar, but am really advocating a new and more explicit kind of employment contract.

The immediate response of some people is to ask: what should the government do about it? Not all problems can be solved by state action; and clumsy intervention often makes matters worse. There is plenty for policy analysts to do, but in this instance it would be best to examine existing policies and legislation to see whether there is anything in them that impedes a greater diversity of labour contracts.