Tackling Unemployment

Richard Layard is one of Britain's foremost applied economists whose work has had a profound impact on the policy debate in Britain and abroad. This book contains his most influential articles on unemployment. It is published along with a companion volume, Tackling Inequality, which also includes his work on economic transition. Tackling Unemployment explains what causes unemployment, and proposes what can be done to reduce it. It shows that the two most important ways to reduce unemployment are through welfare reform and improved wage flexibility. If unemployed people are sustained with cash handouts for an indefinite period, as they are in much of Europe, this increases long-term unemployment. The answer, as Layard has argued since the early 1980s, is 'welfare-to-work': the money wasted on unemployment benefit should be used instead to guarantee work. Wage flexibility is another key to full employment. At the aggregate level, this can be secured more easily by coordinated wage-setting than by a purely free market. However, it is also crucial that relative wages can adjust across regions and skill groups in order to reduce imbalances between labour demand and labour supply. To prevent devastating increases in wage inequality, the skill levels in the workforce must rise fast enough to keep pace with employers' increasing demands for skill. Careful empirical research and analysis leads to the rejection of many other supposed remedies for unemployment. False solutions include shorter working hours, early retirement, less employment protection and lower employment taxes. But, as Layard explains, there is a strong case for lower taxation of low-wage workes The book insists that all solutions be analysed within a single coherent framework that actually explains why unemployment is as it is. This framework, the so-called Layard-Nickell model, is the core of the book.