Saturday, July 03, 2010

Jobs Growth - Even In The Great Depression


Wages up, jobs up... maybe the Great Depression wasn't quite as depressing as they'd have us believe

The left continues to rubbish the Office for Budget Responsibility's forecast of 2m new private sector jobs by 2015-16. This morning the BBC's Evan Davis described it as "quite a claim", and according to the Grun, Alan Budd is going to be hauled before the Treasury Select Committee to confess his manifest pro-Tory bias.

But in truth - as we blogged a couple of days ago - Budd's forecasts do no more than suggest a return to the same sort of private sector jobs growth we've seen for at least the last two decades.

The key issue is whether we can trust the private sector to deliver these jobs, given the uncertain international background. We're with Budd in believing we can, but the left reckons we can't, and warns of a second Great Depression if we and others push ahead with fiscal retrenchment.

Which is why we've taken a closer look at what actually happened to jobs growth during the Great Depression itself. Because as our previous blog noted, despite the Depression, during the early 1930s the number of jobs actually increased.

The chart above shows what happened to total employment throughout the 1920s and 1930s*. And as we can see, it was on a rising trend throughout the period, driven by the private sector.

To be sure, the onset of the Depression in 1929/30 brought a significant fall in employment with about 1m jobs lost. But within 3 years, employment was growing again. And within 5 years it has surpassed its 1929 peak. All driven by the private sector (this was pre-rearmament, and took place despite the fiscal restraint imposed by MacDonald's government).

So how was it done?

In a nutshell, monetary policy was loosened substantially, with interest rates cut from 6% to 2% (Bank Rate), and sterling depreciated by about 30% (only possible because we abandoned the Gold Standard). And that - along with the fact that no British banks were allowed to fail - was enough to save us from worst ravages of the global downturn. Despite the fact that world trade fell by a whopping 66% between 1929 and 1934.

Which is all encouragingly similar to where we find ourselves today. Yes, there's pain, and yes, jobs are still being lost. But official interest rates are even lower than they were during the Depression, sterling has depreciated by about 25%, and no British bank has been allowed to default on its deposits. What's more, although world trade fell 11% last year, the OECD expects it to grow by 11% this year with another 8% to come next. The key conditions for a decent UK private sector revival are already in place.

Of course, Cam and George do need to help the private sector create the jobs we need, by implementing the tax cuts and other measures summarised in our previous blog.

But the left's warnings of a second Great Depression are not only wildly overstated, they also ignore the inconvenient fact that UK jobs actually increased during the first one.

PS I know what you're thinking - if there were so many jobs being created during the Depression, how come there was so much unemployment? Well, as always, the new jobs were in the new industries (like cars), and they were not generally located in the same areas as the old declining industries. But abstracting from that, the reason that jobs growth did not shorten the aggregate dole queue back to 1929 levels until almost the onset of WW2 was that the working population was also growing quite rapidly. So while a net 0.6m new jobs were created between 1929 and 1935, the working population grew by around 1.4m. Which just goes to show how rapid population growth may not be the blessing the left make out when they're promoting mass immigration. (There was also the small matter of real wages being stuck at too high a level to clear the market. As described in the book referenced below, reductions in working hours following WW1 had cut worker productivity but had not been matched by pay cuts, so costs per worker increased, making them less attractive to employ. And this problem was compounded by a substantial increase in unemployment benefits, which effectively put a higher floor under wage rates... unless you're a Keynesian of course, in which case you ignore market economics and put the whole thing down to deficient demand and a lack of deficit spending.)

*Footnote - The chart is copied from The Cambridge Economic History of Modern Britain, Vol II, Ch 13. Well worth a read if you like that kind of thing.

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