ARGUMENT continues to rage over the state of our labour market. "Early signs of overheating" see some; others, such as Peter Warburton of Flemings and Roger Bootle of HSBC Midland, argue that there has been a sea-change and job insecurity and excess supply dominate.
In America, there is a similar disagreement, only at a much lower unemployment rate of just over 5pc. There - with no Thatcher revolution - it looks as if unemployment could drop further (maybe to 4pc) without inflationary danger: after one of the longest US post-war expansions, real wages are still stagnant.
As for here, the graph of full-time-equivalent employment shows the great collapse after 1979, when everyone said that the 3m-plus unemployed would never work again, had opted out, were unemployable , and so on. (It was "the end of work", according to one French observer). Then look at the resurgence from 1986. More than 2m jobs were created, virtually all in the service sector. The "unemployable" were employed. By 1990 unemployment had more than halved to 1.6m or 5.6pc.
What is more, real wages were still fairly restrained. Throughout the mid-1980s, money wages were rising at 7pc to 8pc; with inflation of around 5pc the implied real wage growth was below the 4pc growth of manufacturing productivity which is the ultimate pacesetter for what the economy overall will pay. This shortfall indicated a surplus labour supply, "pricing itself into work".
But, in the 1987-89 boom, the behaviour of real wages did not change; indeed it slowed down. Wage increases rose from 9pc to 10pc as underlying inflation increased to 7pc and headline inflation to 10pc. Whatever it was that caused inflation, it was not overheating in the labour market. In fact it was overheating on a grand scale in the goods market which simply ran out of capacity; hotels, plants and retail stores were groaning under the weight of an unprecedented surge in consumer spending.
That was a mistake for which we have paid dearly; but please do not blame it on the labour market. The sad truth is that had we managed to keep some sort of control of monetary demand in 1987-88, after a brief pause, unemployment would have carried on downwards. As it is, we have endured an endless rebound of restrictive policy - exchange rate mechanism and all - because of that mistake.
But what of today? I find it amazing that economists looking at that graph can convince themselves that the drop in employment since 1990 - about 11/2m - is largely voluntary, in the sense of a planned long-term withdrawal from work.
To be fair, let me try to tell their story. It is, first, that downsizing in big companies has been concentrated on older workers who have taken early retirement on a reasonable pension. Second, that among low-paid workers the benefit system stops one partner working when the other is out of work; so we have the rise in double-jobless households. Third, that we have the rise of part-time working, gathering pace, and reflecting the preferences of the people - mainly women - doing it.
Consider these in turn. Yes, it is true no doubt that some who were downsized will retire. Others, though, will come back as self-employed consultants and part-time directors. And do not forget the "cohort effect"; every year, the working age population loses one year's cohort of retirees and gains a cohort of school and university leavers.
Since 1990, six cohorts have changed places; this changing of cohorts will have removed many of the early retired and more will be removed by the year 2000. The preferences of the working age population are therefore only temporarily affected by early retirement, as we saw plainly in the 1980s.
Second, the two-jobless households are indeed a serious benefit-induced problem. But they are not new. These same households were being sucked back into work in 1986 to 1990; the reason is that, if both can get jobs, it is thoroughly worthwhile. But this possibility depends on generalised recovery.
The part-time trend is indeed longstanding and largely based on women's greater participation in work and desire for limited flexible hours. However recent part-time work has grown, above this trend, suggesting an element of making do by those who would like to work longer hours. In the short run, people will price their labour, like their houses, at a level that they think will do best for them in the end - in this sense, their unemployment is voluntary.
The point, though, is that there is a long-term profit opportunity in employing them at wages that suit them; it takes time first for recovery in demand and later for the installation of new capacity for this opportunity to be exploited.
Behind all these observed employment changes lie fundamental forces we have not so far discussed: on the one hand, all the liberalisation brought in since 1979; on the other, the newer pressures of low-wage competition with and technological displacement of unskilled workers; this implies that low-paid workers face a worsening relation between benefits and wages, despite the better relation for the average worker. Undoubtedly this is a factor behind the rise in two-jobless households; and it suggests that there may have been little effective improvement in the benefit effect on unemployment .
But this still leaves the effect of the rest of the liberalisation, especially the union laws, as well as the tougher approach to work-testing of the unemployed, now taken further by Peter Lilley's Jobseeker's Allowance.
My own conclusion, looking at both the employment data and these fundamentals, is that unemployment can fall a lot further and that the lack of wage and inflation pressure today is no fluke but a sea-change indeed.
We can build on it cautiously to avoid a deflationary bias in demand policy. No, Kenneth Clarke, do not raise interest rates; on the contrary lower them now to make absolutely sure we get a recovery.
Patrick Minford is professor of applied economics at Liverpool University and visiting professor at Cardiff Business School.
