Monday, January 12, 2009

Protecting Jobs - Protecting People

With unemployment rising rapidly, especially in sectors like the car industry, there is great political pressure to do something to 'protect jobs' But, is 'protecting jobs' justified from an economic perspective? - I looked at this issue in the merits of bailing out General Motors.
  • Protecting the Right Jobs. Unfortunately, the government is often encouraged to protect politically expedient jobs rather than those which are more cost effective. For example, we often hear that the US car industry is 'too big to fail'. Therefore, the government is put under pressure to subsidise the industry to prevent job losses. However, this industry is probably the most uncompetitive and experiencing the fastest decline. Therefore, protecting jobs in the auto industry is relatively more expensive that protecting jobs in other sectors who only face short term pressures rather than the long term decline.
  • Protecting Declining Industries. Protecting jobs in practise often means protecting inefficient firms / industries who are struggling to compete. The problem is that trying to support declining industries is a bit like blowing up a punctured tyre - no matter how much air you pump in - the deflating tyre always needs more air. There comes a point when you think what's the point in trying to blow up this deflating tyres? - lets just get a new tyre.
  • Structural Change. If you studied history you would have learnt about the Luddites, - workers who went around smashing machines because they feared it was causing jobs to be lost. In a way they were right - these new machines were causing some jobs to be lost. But, less visible was the new jobs being created to make the machines and also the jobs resulting from better productivity and living standards these machines enabled. Whenever industries decline, new industries take their place. The problem is these new job opportunities may take time and be less visible. - This is particularly a problem in a recession.
- In 1945, the UK coal industry employed 450,000 men. Today it employs less than 5,000 nobody suggests we should have protected all those 450,000 jobs.
  • Protecting People rather than jobs. Rather than give subsidies to prevent unemployment in declining industries, it would be more effective to target money at enabling a smoother transition from one job to the other. If there is oversupply in the global car market, government subsidies will not solve that (in fact it will just prolong the problem). What the government should do, if anything, is deal with the market failure arising from job losses. For example, the government could provide re-training and education schemes to help the unemployed find new work. Of course, it is easy to say in theory, but, more difficult to implement in practise. Nevertheless, 'protecting jobs' is nearly always an expensive and inefficient way to try and prevent unemployment.
More on Unemployment in UK

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