1:00 AM Sep 15, 1995


Geneva 13 Sep (Chakravarthi Raghavan) -- The major factor influencing rise in unemployment in G-7 countries, is neither labour market rigidities, rising import competition from the South nor technical change, and hence labour market flexibility or protectionist responses can't provide a solution, a British economist asserted here.

"The common search for monetary credibility which has accompanied the deregulation of international capital markets, and the generally deflationary policy which the pursuit of credibility demands, is responsible for low-demand and the high unemployment," said Lord Eatwell, who teaches at Cambridge and formerly an economic advisor to British Labour Leader, Neil Kinnock.

"Deflation has proved contagious", Lord Eatwell said at an informal meeting of UNCTAD's Trade and Development Board with a group of economic experts.

The common and differential experiences of unemployment in the G-7 countries are due to factors, international and national, that inhibit an increase in rate of growth of effective demand, the British expert economist said.

Other experts had focused on financial market liberalisation in developing countries and their negative consequences, the experience in Latin America recently, and the volatility of bond and other markets.

Lord Eatwell, in his remarks focused on the unemployment issue and the G-7 experiences, noted that over the last 20 years the G7 unemployment experience comprised a common rise in unemployment and differences in that rise amongst the mainland EU countries, North America and UK and Japan. A satisfactory analysis of unemployment in the G7 should identify both the common factors and differentiating factors.

The attribution of unemployment to "lack of labour market flexibility", Eatwell said, was "an unconvincing explanation" of the common experience. So too was the explanations about the common changes in the pace of technological change and the increasing competition from the newly industrializing countries.

The import growth, as a share of the market, from the low-income countries, had increased over a 20-year period by only three percent of the market, and given the large trade surplus of the ICs in manufactures, including with the NICs, it would be difficult to blame such imports for unemployment. In the past, the import penetration from low-wage countries of Europe had been much greater, without similar problems. It was thus difficult to accept these arguments.

And it was not as if competition was only in low-skill products. The computer industry, both hard-war and soft-ware, was a high-skill industry, and also labour-intensive. There were high ratio of imports from the South, and also unemployment in high-skilled labour in the North.

Solutions have to be found by generating higher demand, in the North and globally.

Challenging the OECD Jobs Study, which attributes the differential experiences of mainland Europe, North America and Britain, and Japan as due to relative flexibility of the labour markets, in particular the limited worker protection, Lord Eatwell cited data to show that in fact the low measured rate of unemployment in North America and Japan was due to sharp increased in disguised unemployment -- with the latter defined as the absorption of potentially high productive workers in low productive jobs.

"Workers," he said, "may be forced into disguised unemployment because benefits are low, or low productivity jobs may be protected, formally or informally. For example, disguised unemployment was growing in UK as benefits are cut and inequality increases. Disguised unemployment is also growing rapidly in Japanese non-financial services and remains high in Japanese agriculture."

Responding to views that the markets and their behaviour may in fact be enforcing disciplines on governments, and this was to the good, Lord Eatwell noted that it was this reaction to the volatility in the bond and other markets including exchange markets that was resulting in the intellectual stance of policy-makers. In the UK, for example, the chief economic officers and the Governor of the Bank of England Governor had made speeches where they have declared the natural rate of unemployment for the economy at 8%, meaning that if it goes down further inflation would rise. With such a stance comes policy that keeps unemployment at 8% or more -- and with the natural rate of unemployment tending to be at the level of the actual rate of unemployment.

As a result long term interest rates remain high, thus inhibiting productive investment that would create jobs.

Asked whether the high long term interest rates could not be due to supply and demand factors, Eatwell suggested a distinction should be made between finance and manufacturing capital. There was a very high demand from businesses, demand associated with short-term finance, rather than long-term capital for equipment and investment.

The demand for short-term money was responsible for pushing up short-term rates. Long-term investment in the G7 countries was in fact far less than in the 1950s and 1960s and hence the pressure for real savings could not be causing such a dramatic increase in real long-term rates