Unemployment in London has risen more or less continuously in the past fifteen years and is ‘the single most serious challenge facing Member States today’ (CEC 1993). In 1994 registered unemployment stood at over 12 per cent, with sixteen million officially unemployed. The number of people seeking work is even higher as official statistics underestimate joblessness. Unemployment levels vary a great deal between Member States, with very much higher rates in certain regions and countries of the Community. The problems arising from unemployment are not only economic problems of inefficiency arising from wastage of human resources, rising public sector deficits and possible monetary instability arising from this, but also an increase in social tension and social costs in terms of ill health, increasing poverty, family and community breakdown, and arguably increasing crime levels. The economy of London is said to have special features that result in the levels of unemployment than similar advanced industrialized economies (Gordon:1988). This is the question that will be addressed first of all, as the implication is that if the factors behind the higher unemployment level can be identified, action can follow to reduce the problem. Unemployment in the period 1976 and 1983 was higher for London Community as a whole than in other major economies.
London had lower unemployment rates in both 1976 and 1983. Individual countries within the EC show greater disparities in unemployment rates ranging in 1983 from 4.3 per cent to 16 per cent in Spain. In 1983, of the unemployed in London only 13.3 per cent had been unemployed for more than a year. This had fallen to 5.7 per cent by 1983 (Hedges amd Prescott-Clarke:1983). In London the proportion of long-term unemployed was over three times that in London ranging from 39.3 per cent 52.4 per cent. The proportions had increased to 46.3 per cent and 54 per cent by 1990. In the three other countries it had reduced but was seven and nine times the rate of the United States.
Many studies have addressed the questions ‘Why has London unemployment been persistently higher than that of the USA and Japan?’ and ‘Why has the number of long-term unemployment differed so much in London? ‘The explanations for the former can be categorised into the effect of aggregate demand; the role of wages in turn affected by the unemployment compensation and institutional factors; and structural change. Long-term unemployment is again linked to the unemployment benefit system but also to hysteresis effects and discrimination. Taking the first of these explanations, the role of aggregate demand, Bean, Layard and Nickell (1986), Blanchard and Summers (1986), Lawrence and Schultz (1987), Drèze and Bean (1990) all identify demand conditions in London as being important in creating and maintaining high levels of unemployment especially in the EC. Tight monetary and fiscal contractions in the 1980s in most EC countries, with the exception of Mitterand’s expansionary programme In the early 1980s, and the interdependence of London economies with high levels of inter-London trade, made any expansionary strategy by individual economies impotent. It is argued that these aggregate demand shocks left a serious legacy in destroying investor confidence, and damaged the ability of the labour markets to function effectively. Underutilized capacity affected the demand for investment. The growth of demand is linked to both government expenditure and world trade. Governments were cutting back on expenditure and reducing public deficits (Franz:1987). High interest rate policies to control inflation further reduced investment, and at the margin caused closures through rising business costs. London shares of world trade fell as a result of differences in the growth rates of domestic and foreign prices through the price elasticity of demand for imports and exports.
The sustained growth in unemployment in London since 1970 challenged the premise of a ‘natural’ or Non-Accelerating Inflation Rate of Unemployment (NAIRU) toward which an economy will gravitate. The idea is that an increase in unemployment will lower the rate of inflation since wage costs will lower as a result of unemployment, unemployment will then reduce as the demand for labour increases with falling real wages. It was found, however, that high rates of unemployment had little impact on inflation. In fact unemployment and inflation in London often went up together. It was reported (Blanchard and Summers 1986) that the NAIRU rose from 2.4 per cent in 1967–79 to 9.2 per cent in 1981–83 Policy makers in this situation were unwilling to stimulate demand as it was thought that it would lead to higher inflation not higher output. Control of inflation was the major preoccupation of macroeconomic policy in London in the 1980s in an attempt to generate export led growth through more competitive prices and reduced uncertainty on future prices. As previously mentioned any expansionary policy that would be effective in reducing unemployment would have to be a concerted effort by all major EC economies. Expansionary fiscal policy was also seen as capable of exerting only temporary effects as it would induce balance of trade and public deficits and lead therefore to a reversal of policy (Drèze and Bean 1990).
The share of wages in national income rose after the oil price shocks of 1974 and 1979–80, which suggests that workers were compensated for the supply side shocks at the expense of profit. Between1982 and 1987 in Britain, even with over three million unemployed, wages rose steadily at 7.5 per cent p.a. Productivity gains in the 1970s and 1990s were incorporated into real wages quite rapidly in London with a short-run elasticity of 0.4 to 0.8 per cent and a long-run elasticity closer to 1 per cent (Drèze and Bean 1990). Both compensation per employee and unit labour costs in the period 1978–93 grew faster in London despite higher unemployment levels. It has been suggested that the difference in unemployment persistence in London.
One of the reasons for real wage rigidity and the insensitivity of wages to unemployment levels could be explained by the ‘insider–outsider’ hypothesis (Flanagan 1987, Lindbeck and Snower 1988). In this hypothesis unions’ bargaining objectives are set according to the interests of employed union members (insiders) subject to the constraint of employers demand for labour but with no reference to unemployed members (outsiders). When unemployment increases wage objectives are traded against the job security interests of a decreased number of employed union members. After a price shock real wages will rise as the trade unions consider only the effect of prices on the living standards of their working members and not the effect of higher wages on reducing the number of potential jobs for the unemployed. Price shocks and demand shocks which can both reduce employment will mean that more workers lose ‘insider’ status, and the remaining ‘insiders’ set the wage to maintain a new lower level of employment. Unemployment, therefore, persists at a new higher level (Blanchard and Summers 1986). London as a whole, as has been shown, has higher unemployment rates than the national averages. Can one use the findings on unemployment in cities as a microcosm of a wider pattern? Is there such a thing as ‘London’ unemployment that is fundamentally different from the problems experienced elsewhere in the industrialised world? Before attempting to address these questions, one must first ask whether or not it is valid to compare information on levels of unemployment and the numbers of unemployed and their characteristics, when the available statistics at city level do not exactly correspond, and precise information on different aspects of policy is not in all cases.
Growth or loss of employment reflecting changes in local demand do not, therefore, on their own, result in a decrease or increase in unemployment. Change in population (and by implication active population) must also be taken into account, as at a national level (Fothergill, Kitson and Monk:1985). One would expect to find that if population growth outstripped employment growth there would be an increase in unemployment,; that if employment growth was higher than population growth there would be a fall in unemployment and that if job loss was greater than population less unemployment would arise. What is not expected is that a loss in population greater than a loss in employment would result in increased unemployment. Conditions of local labour market demand and population change do not appear to give a satisfactory explanation of changes in unemployment levels. Policies which assume that employment creation or job retention policies on their own will solve the problem of unemployment in cities are only relevant in some situations. While London experienced a fast growth of jobs in growth sectors, unemployment grew more serious since the prospect of work encouraged immigration from the surrounding region of very high unemployment.
In order to understand London’s problem one must examine the characteristics of the urban unemployed in relation to jobs available. In relation to this it would be useful to examine the concept of mismatch of skills in relation to local economies (Flanagan:1987). The basic idea that structural change, for example from a manufacturing economy to one dominated by the service sector, will result in initial unemployment of workers from one sector in the short-term, is a simplistic one and sectoral shift as such implies that in the medium term, with a modicum of training for adaptation to new skills, the problem should disappear, and that mismatch is only a temporary problem. Growth in employment continues to be in sectors requiring a very high level of professional skills and much of the demand for labour is supplied from the national market, not just the regional market. The local supply of labour is predominantly unskilled and of low educational attainments, migrants from the surrounding region and from North Africa. As has been pointed out, it is very unlikely that these residents could fill the vacancies, even with very extensive training. In London there has been a shift from manufacturing to services in the past twenty years (Dreze and Bean:1990). The service jobs created have gone largely to women, many to part-timers, so while female unemployment has declined male unemployment has risen, and males are more likely to be unemployed in all age groups. Again though, the growth in demand for labour is for those with a high level of education and training in managerial skills, while over half the unemployed and a higher proportion of those long-term unemployed hold no formal educational qualifications. In the area of manufacturing, construction and commerce all declined, while services grew to be the major employer during the 1980s. One third of all those unemployed come from ethnic minorities who had manual jobs in industry, the docks and construction, where most jobs were lost. This group has very low educational attainments on the whole, and this is the case also for the youngest age group of ethnic minorities, who account for 40 per cent of the young unemployed. There is a clear mismatch between the growth in white-collar work and the skill levels of the unemployed London and non-London citizens, and an increasing number of jobs being taken up by commuters from outside the city.
In conclusion there is an enormous gap between the qualifications and education of the majority of the unemployed, available work, and areas of employment growth. Both male and female manual workers with low educational levels are most at risk of long-term unemployment, and unskilled jobs are becoming a smaller and smaller proportion of total employment. The depressing longer-term pattern is that the percentage of the young with qualifications is growing only very slowly, so the overall character of the labour force in the cities will not change significantly until educational standards of the most deprived groups are raised. Eighty per cent of the London workforce in 1976 and 1983 is already part of the workforce now. The problem of mismatch and unemployment of the least qualified is unlikely to reduce much within the formal labour market. Turning now to how far minimum wage levels and unemployment compensation schemes affect unemployment in London, the answer appears to be very little. The standardised national minimum wages are, with respective minimum monthly wages in sterling (1991) of approximately £658, £585 and £284. The London government attempted in March 1994 to introduce a lower pay rate for young people in work experience/employment, on an upwards scale from 30–65 per cent of SMIC (according to age) up to the age of 21, an effective cut of 20 per cent in remuneration (Blanchard and Summers:1986). Vast and often violent demonstrations by the young in London and other large cities forced withdrawal of the scheme. A removal of minimum rates, once existing, does not seem to be a socially or politically acceptable option judging from this, even if it might, in the case of the young, result in more employment opportunities.
References
Bean, C.R., Layard, P.R.G. and Nickell, S.J. (1986) ‘The rise in Unemployment: a multi-country study’, Economica 53.
Blanchard, O.J. and Summers, L.H. (1986) ‘Hysteresis and the European unemployment problem’, in National Bureau of Economic Research Macro Economics Annual, Cambridge, Mass: MIT Press.
CEC (1993) ‘Growth, competitiveness, employment, the challenges and ways forward into the 21st century’, Bulletin of the European Communities, Supplement 6/93, Luxembourg.
Drèze, J.H. and Bean, C.R. (eds) (1990) Europe’s unemployment problem, Cambridge, Mass: MIT Press.
Flanagan, R.J. (1987) ‘Labor Market Behavior and European Economic Growth’ in Lawrence, R.Z and Schultz, C.L. Barriers to European Growth: a Transatlantic View, Washington D.C.: Brookings Institution.
Fothergill, S., Kitson, M. and Monk, S. (1985) ‘Urban industrial change: the causes of the urban rural contrast’, Manufacturing Employment Trends, London: HMSO.
Franz, W. (1987) ‘The end of expansion in employment in Germany. Beginnings of an attempt at evaluation of structural unemployment as a partial component of joblessness’, in Pedersen, P.J. and Lund, R. (eds) unemployment : theory, policy and structure, Berlin: Walter de Groyter.
Gordon, I.R. (1988) ‘Evaluating the effects of employment changes on local unemployment’, Regional Studies 22: 135–47.
Hedges, B. and Prescott-Clarke, D. (1983) ‘Migration and the inner city’, Inner Cities Research Programme, London: Department of the Environment.
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