New Labour and the Labour Market
Although New Labour’s social and economic policies clearly build on foundations
laid by previous Conservative governments, the thinking behind them is not a simple extension of neo-liberalism. Rather these policies involve a much more active role for the state in enhancing competitiveness and increasing labour supply. The Working Families, Tax Credit (WFTC) and its successor,‘working tax credit’, both aim to abolish the ‘unemployment trap’ by increasing in-work benefits so that total working income is significantly greater than out-of-work benefits. The various ‘New Deals’ were financed by a windfall levy on the privatised utilities, and involve using the benefits system as a way of launching a much more organised intervention in the labour market. The largest programme, the New Deal for Young People, makes participation in subsidised employment, training, voluntary work or an ‘environmental task
force’ a condition of receiving benefits after six months of unemployment. The first of the New Deal options for young people pays employers a subsidy to take on workers for a period of at least six months. There has been much debate about the economic effects of this, with some arguing that subsidized employment simply leads to job substitution and overlooks ‘deadweight’. Job substitution occurs where a subsidised worker replaces the job of someone else. ‘Deadweight’ is the term for those unemployed people helped into work through the scheme who would have found work anyway. If these effects are large then employment is not increased, but the employer gains an unnecessary subsidy. Looked at in this way, the apparently large numbers of people placed in jobs by the scheme may be misleading. These arguments have been answered by New Labour’s chief labour market advisor, Richard Layard of the London School of Economics. He and his coauthors argue that these objections regard the number of jobs available as static – the ‘lump of labour’ fallacy (Layard et al., 1991, 1994). What counts is the creation of a dynamic labour market.