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Published on February 22nd, 2012 | by Patrick Armshaw
Image © [caption id="" align="alignleft" width="240" caption="Tesco has so far borne the brunt of the public outcry"]Photo by Maciekmusialek[/caption] By now we've all heard about the workfare scandal: as part of a reform of jobless benefits, tens of thousands of job seekers have been forced to work for organisations (non- and for-profit) for free or lose their Job Seekers Allowance. The backlash has been intense, to put it mildly. While the scheme does have its defenders, both inside and outside the government, the outcry has been vigorous enough that several companies and charities, including Waterstones, Sainsbury's and Marie Curie Cancer Care, have pulled out, Tesco (who have so far borne the brunt of the public fury) has asked the government to alter the scheme to make it voluntary, and the British Chambers of Commerce have warned that the furore may 'undermine' work placement schemes. Defenders argue that this scheme, and others like it, are essential for getting work experience to the unemployed, making them more employable when hiring eventually recovers; critics argue that it amounts to slave labour on the public dime. So how should we be thinking about this brouhaha? Is this really a battle between Economics and Justice? Actually, it isn't! Workfare is not simply unethical, it is a fantastically counterproductive programme if our goal is to help the unemployed. To see why, we need to talk about what economists call the substitution effect. The general idea is simple, and lies at the heart of market behaviour. Consider tea and coffee. They both are hot drinks that provide a nice little pick-me-up when you drink them. They are also substitutes for each other: if your local Prêt is out of tea you might buy a coffee, and vice-à-versa. If the price of coffee suddenly drops (because of a massive increase in the world's coffee supply) you would expect the price of tea to drop as well, as consumers drink more coffee and less tea. This is also how market competition is supposed to keep prices low: if you and I both sell the same shoes, consumers will most likely buy the ones that cost them less. And this effect also occurs in labour markets – employers will pay the lowest wages they can that still allow them to attract enough workers. And if companies can choose to hire people to work for nothing, there is no earthly reason why they would choose to pay them instead – unless, that is, the PR damage is so great as to make 'free' labour unattractive.

But lower wages and higher unemployment are not the only problems with his scheme. After all, the shelf-stockers a Tescos still have to eat, and someone has to pay them. Under the Workfare scheme, that someone is the rest of us. 'But', you might argue, 'we're paying them anyway! Why not make them work for it?' An excellent question, you clever reader! In fact, that's exactly what the government should be doing – only instead of subsidising free unskilled labour for corporations, how about actually giving jobs to job seekers? We could hire the unemployed to build infrastructure, such as railroads and bridges, or to teach our children, or police our streets, or do any of the things that the coalition is eliminating via cuts and misguided austerity. It is one of the bigger ironies of austerity that every government worker thrown out of work ends up on unemployment – Workfare compounds the problem by replacing hired workers in the private sector with forced labour, and all at cost to the taxpayer.

So what of the claim by defenders of Workfare that it's better for the unemployed to have experience on their CVs, even if only for 6 weeks at a time? Won't Workfare make the unemployed more employable, or a least keep their skills and work ethic from deteriorating? There is some force to this argument – the 'scarring' effect of long term unemployment is real, and has been widely studied. The problem is that lack of experience isn't what is preventing people from working – it is the lack of jobs! If companies were having trouble finding experienced workers we'd expect to see wages being bid up as businesses compete for workers – but this is precisely what is not occurring. Wage growth is well below the rate of inflation, meaning that in real terms wages are shrinking. In an economy where there are plenty of jobs but not enough experienced workers, this programme might make sense. But in Britain today it amounts to little more than a modern workhouse.

At heart, the effect of the Workfare programme is to use taxpayer money to pay private sector wages – a gift from all of us to Tesco and other major employers. Companies don't hire out of charity – they are in business to make money – and the jobs they are staffing with 'free' labour would have to be done anyway. Workfare undercuts actual job seekers, redistributes wealth from the middle classes to corporations, and offers little benefit to those caught up in it. The protesters are right – this is a bad policy on the merits and should be scrapped. It's time for the government to focus on increasing demand and putting people back to work – after all, the only way to end an unemployment crisis is to end unemployment.

2

Workfare, Tesco and the Substitution Effect

Photo by Maciekmusialek

Tesco has so far borne the brunt of the public outcry

By now we’ve all heard about the workfare scandal: as part of a reform of jobless benefits, tens of thousands of job seekers have been forced to work for organisations (non- and for-profit) for free or lose their Job Seekers Allowance. The backlash has been intense, to put it mildly. While the scheme does have its defenders, both inside and outside the government, the outcry has been vigorous enough that several companies and charities, including Waterstones, Sainsbury’s and Marie Curie Cancer Care, have pulled out, Tesco (who have so far borne the brunt of the public fury) has asked the government to alter the scheme to make it voluntary, and the British Chambers of Commerce have warned that the furore may ‘undermine‘ work placement schemes. Defenders argue that this scheme, and others like it, are essential for getting work experience to the unemployed, making them more employable when hiring eventually recovers; critics argue that it amounts to slave labour on the public dime. So how should we be thinking about this brouhaha? Is this really a battle between Economics and Justice?

Actually, it isn’t! Workfare is not simply unethical, it is a fantastically counterproductive programme if our goal is to help the unemployed. To see why, we need to talk about what economists call the substitution effect. The general idea is simple, and lies at the heart of market behaviour. Consider tea and coffee. They both are hot drinks that provide a nice little pick-me-up when you drink them. They are also substitutes for each other: if your local Prêt is out of tea you might buy a coffee, and vice-à-versa. If the price of coffee suddenly drops (because of a massive increase in the world’s coffee supply) you would expect the price of tea to drop as well, as consumers drink more coffee and less tea. This is also how market competition is supposed to keep prices low: if you and I both sell the same shoes, consumers will most likely buy the ones that cost them less. And this effect also occurs in labour markets – employers will pay the lowest wages they can that still allow them to attract enough workers. And if companies can choose to hire people to work for nothing, there is no earthly reason why they would choose to pay them instead – unless, that is, the PR damage is so great as to make ‘free’ labour unattractive.

But lower wages and higher unemployment are not the only problems with his scheme. After all, the shelf-stockers a Tescos still have to eat, and someone has to pay them. Under the Workfare scheme, that someone is the rest of us. ‘But’, you might argue, ‘we’re paying them anyway! Why not make them work for it?’ An excellent question, you clever reader! In fact, that’s exactly what the government should be doing – only instead of subsidising free unskilled labour for corporations, how about actually giving jobs to job seekers? We could hire the unemployed to build infrastructure, such as railroads and bridges, or to teach our children, or police our streets, or do any of the things that the coalition is eliminating via cuts and misguided austerity. It is one of the bigger ironies of austerity that every government worker thrown out of work ends up on unemployment – Workfare compounds the problem by replacing hired workers in the private sector with forced labour, and all at cost to the taxpayer.

So what of the claim by defenders of Workfare that it’s better for the unemployed to have experience on their CVs, even if only for 6 weeks at a time? Won’t Workfare make the unemployed more employable, or a least keep their skills and work ethic from deteriorating? There is some force to this argument – the ‘scarring’ effect of long term unemployment is real, and has been widely studied. The problem is that lack of experience isn’t what is preventing people from working – it is the lack of jobs! If companies were having trouble finding experienced workers we’d expect to see wages being bid up as businesses compete for workers – but this is precisely what is not occurring. Wage growth is well below the rate of inflation, meaning that in real terms wages are shrinking. In an economy where there are plenty of jobs but not enough experienced workers, this programme might make sense. But in Britain today it amounts to little more than a modern workhouse.

At heart, the effect of the Workfare programme is to use taxpayer money to pay private sector wages – a gift from all of us to Tesco and other major employers. Companies don’t hire out of charity – they are in business to make money – and the jobs they are staffing with ‘free’ labour would have to be done anyway. Workfare undercuts actual job seekers, redistributes wealth from the middle classes to corporations, and offers little benefit to those caught up in it. The protesters are right – this is a bad policy on the merits and should be scrapped. It’s time for the government to focus on increasing demand and putting people back to work – after all, the only way to end an unemployment crisis is to end unemployment.

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