Britain's jobs market is broken

By Fraser Nelson

The Chancellor, elected on a promise to get the economy moving, is failing badly. Debt is rising and he seems destined to lose the next election. He sees himself as a thwarted radical: he’d love to make sweeping changes, but needs to work with grumpy coalition partners. The newspapers don’t care, and say he has a “last chance” to get the economy moving – so he takes it. He unveils a plan to cut taxes for the low-paid and to halve youth unemployment. It is a huge success. His reward is another term in office and an economy transformed.

Gerhard Schröder is an unlikely poster boy for the British Conservatives, but the story of how he transformed the German economy 10 years ago is being studied with much interest in the Treasury. Gordon Brown spent most of the past decade mocking the Germans, contrasting their economic performance with our own growth, which we now know to have been a debt-fuelled illusion. As Warren Buffett observed, when the tide goes out you learn who’s been swimming naked. Britain stands exposed as the Prince Harry of the global economy, while Germany celebrates unemployment near record lows.

So George Osborne is studying what Germany got right. There is special focus on “mini-jobs”, contracts that allow a worker to earn 400 euros a month tax-free on the condition that they can be sacked at any moment. Germans can have as many such jobs as they like, but only one with the same employer. The official figures show that, within a year of their introduction, there were 500,000 more part-time jobs, with a good record of leading to full-time employment. Youth unemployment was indeed halved. None of this was pain-free – protesters lined the streets, complaining about deregulation and denouncing “devil jobs”. It was, for Schröder, a battle worth fighting and winning.

Does Osborne fancy a scrap? There is now a greater sense of urgency in No 11, stemming from the sense that this might be a one-term government after all. The greatest change in British politics this summer is that senior Tories, who had a gut feeling that they would win the next election, now expect to lose. The balance of probability was shifted by Nick Clegg’s decision to veto the boundary review; every bookmaker taking bets on the next election now has the shortest odds on Ed Miliband winning. For Mr Osborne, this means he either does something radical or goes down in history as a failed chancellor.

When Schröder faced the same choice he hired a director of Volkswagen, Peter Hartz, to design the biggest shake-up of German employment law in a generation. The report, when delivered, was carefully thought through – but the genius lay in its presentation. It was not a bloodless, wonkish work but a cri de coeur, presented as if it were Germany’s version of the Beveridge Report. The aim was to vanquish the giant evil of idleness through supply‑side reform. The report was launched to great fanfare: Hartz handed it on a computer disc to Schröder and declared that the future of two million unemployed Germans was at stake.
 
The most powerful insight of the Hartz reforms was that Germany’s real problem wasn’t the supply of jobs but producing a supply of willing workers. The federal government could borrow all it wanted, but resurfacing the autobahns wouldn’t have much effect if it couldn’t find enough Germans to do the work. Better to cut taxes on low-paid work and create a proper incentive for people to take the jobs that were actually going. Asking if this applies in Britain is like asking if Newton’s Laws apply here. The world over, the more work pays, the more people will want to work.

Britain’s problem is not job creation, as such. Employment has risen by 510,000 since the election, but most of this is attributable to foreign-born workers. They are still coming to our flatlining economy and finding work at the rate of 500 people a day, twice the rate for British-born workers. It’s hard to fault them for this, and hard to argue that they’re stealing anyone’s jobs. The main lessons are about the limitations of government job-creation schemes, and the futility of Keynesian pump-priming economics in general. Britain’s jobs market is broken – and fixing it should be the first priority.

Take a lone mother who works 10 hours a week on the minimum wage. If she works 15 hours, she is no better off, because the extra money she earns is offset by the welfare she loses. This is madness. Analysis from the Centre for Social Justice shows that if she earns £400 a month it gets a little bit better: she would be £84 richer after the effects of tax credits and welfare. Now and again, it is said that British workers lack the enthusiasm shown by immigrants. But would any worker, from any country, be cheerful about working at an effective tax rate of 79 per cent?

If the single mother in question were allowed to work under a mini-job contract, she could keep every penny. The small steps from welfare to work are easily derided, especially by those in politics who have never worked for such wages. But every jobs market needs a ladder and, at present, the bottom rungs of that ladder have been sawn off by a welfare state that has trapped the people it was designed to help. The waste of taxpayers’ money is as nothing compared to the waste of human potential. This is a problem that mini-jobs could remedy.

This German idea ticks several British boxes. It ought to appeal to Labour, which is supposedly on the side of the low-paid. It should also chime with the Liberal Democrats, who have chosen as their party conference motto “fairer tax in tough times”. What could be fairer in telling a woman who gets up at 4am to clean offices that she can keep all of the money she earns? As for Osborne, there would be thousands of workers better off because a Tory Chancellor had demonstrated a Tory belief: that money is best left in the hands of the people who earn it.

But there is a problem. Germany, 10 years ago, had a functioning coalition government. Here, the relationship between the Conservatives and the Liberal Democrats is going through a destructive phase, in which the Lib Dems define success as the shooting down of Tory ideas. Mini-jobs would have to be announced by Vince Cable, the Business Secretary, who has already caught wind of what the Tories are up to and dismissed the idea out of hand as a peculiar German solution to a German problem. He looks set to throw it into the same unmarked grave that contains Adrian Beecroft’s brilliant, rejected report into cutting employment red tape.

There is still debate in Germany about the role played by mini-jobs in its economic recovery, but in Britain the questions should be simple. Would these tax-free contracts help the unemployed? Would they help the single mother, or encourage the garage owner thinking about hiring some weekend help? All the economic data suggest high demand for flexible jobs, if only the Government would allow them.

Fighting youth unemployment is something on which there ought to be consensus across all political parties, let alone within the Coalition. Even Brendan Barber, the head of the TUC, has said that there is “much to learn from Germany, powerhouse of the European economy”. Britain may have a coalition Government, but there is only one Prime Minister.

When consensus isn’t possible, only leadership will do.

Fraser Nelson is editor of 'The Spectator’