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On "viable" jobs

Nobody knows what jobs will be viable in the post-Covid economy. The job of government is to support employment, not predict the pattern of it.
October 8, 2020

We need to think about Friedrich Hayek. Although he was one of Mrs Thatcher’s intellectual influences he is much more than a historical footnote. He had one of the most important insights in economics – one that is greatly underappreciated.

This is that our knowledge of the economy is much more limited than we think: his Nobel lecture was called “the pretence of knowledge.” No single mind, he said, can know all the facts that are relevant to the economy. Instead, information “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge.”

This is crucial to the question: what will the post-Covid economy look like? The honest answer is: we don’t know. The future pattern of supply and demand is the outcome of a complex process. It will be the unintended result of millions of decisions, taken by dispersed individuals for reasons we cannot know and on the basis of information we do not have. To pretend that we can foresee this result is to engage in the sort of futurology that brings economics into disrepute.

From this perspective, Chancellor Rishi Sunak is right to say “it's not for me to sit here and make pronouncements upon exactly what job is viable or not.” Our problem is that we don’t know the extent to which jobs that are not viable now because of the lockdown will be viable post-Covid. It’s obvious, for example, that jobs of theatre workers, cinema employees and sound engineers are not viable now that theatres and cinemas are closed and music festivals cancelled. But as we’ll want to go to the theatre and music events when the virus is controlled, at least some of these jobs should become viable in future. Should they therefore really be destroyed now, only to be recreated in (hopefully) a few months’ time?

The issue here is how flexible markets are. If (say) sound engineers can find work to tide themselves over and then easily return to their preferred occupation, we have no problem.

But this is not the case. The fact that unemployment was so persistently high in the 1980s shows us that jobless workers don’t easily find new work. Instead, as Abhijit Banerjee and Esther Duflo show in their excellent Good Economics for Hard Times, economies are sticky: resources don’t easily flow from one firm to another.

And even if they did do so, they cannot now simply because there are so few vacancies: the ONS estimates that there are now only 434,000 of them – only half as many as at their 2018 peak.

Which brings us to Mr Hayek again. The task of the economic policy-maker, he said is “not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment.” Rather than fret about what the post-Covid economy will look like, the government should create the environment in which this economy will be as healthy as possible,

This means providing more job protection so that companies don’t need to incur the expense of finding and recruiting workers when jobs do become viable again. The Job Support Scheme does not sufficiently do this. As the Resolution Foundation’s Torsten Bell says, it “will not live up to its promise to significantly reduce the rise in unemployment.” Of course, such protection would be undesirable in normal conditions. But these are not normal conditions. The theory of the second best tells us that when there is some deviation from optimality – and lockdowns are just that – other interventions into the market economy might be justified to offset those deviations.

It also means supporting the reallocation of workers when needed, for example by supporting training – although of course more training in itself does not create jobs.

And it also requires that the government do all it can to support job creation. Sustaining aggregate demand is part of this. So too is ensuring that new businesses get easy finance and face fewer regulatory obstacles to starting and growing. And, of course, there might be a case for the government to create its own jobs for example in decarbonising the economy.

The question, then, is not: what will the post-Covid economy look like? It is: what can be done to ensure that it is as strong as possible? Policy-makers should focus on what can be known, not what cannot.