Economics: It's train or pain for the unskilled

The welfare-to-work programme is directing Labour's policy on a big detached group in the labour market, the unemployed. But there are groups even within the employed who are becoming increasingly separated from the rest of the workforce. In particular, the last 15 years have seen the economic scales stacked increasingly against the unskilled.

The first graph shows just how severe these trends are. Since 1948 UK manufacturing output has more or less trebled. Manufacturers have needed more capital to do this: the capital stock has grown by about the same.

What about labour? To see what is going on, the graph splits the labour force into two broad gaps: non-manual and manual workers. Non-manuals are office workers: managers, designers, marketing executives. These workers are predominantly more educated and skilled, so their wages and employment are indicative of how the skilled have fared. Manual workers are on the shopfloor: at the assembly line, in the stores, delivering finished goods.

Manuals are predominantly less well educated and less skilled. These wages and employment trends tell us about the fortunes of the unskilled.

How have these groups done? As for the skilled (the non-manuals), after the war and into the 1970s firms were demanding more of them. Since the early 1980s their numbers have fallen back a bit, but over the whole period the demand for these worker types has risen by about 25 per cent.

What of their unskilled colleagues? The initial post-war boom just about kept manuals stable: up to the mid-1970s, their employment had fallen only a fraction. But then the crash occurs: since 1978 employment of manual workers has fallen by around 40 per cent. So, relative to the position just after the war, UK manufacturing now makes about treble the output but with around half the manual workers. And the bulk of the fall has been in the last 20 years.

The other side of the employment coin is wages. The second chart shows how the unskilled have done relative to the skilled. At the end of the war, shopfloor workers were making about 35 per cent less than the more skilled office workers. In the 30 or so years to the late 1970s they had managed to narrow that gap to just under 25 per cent. But since then the gap has gone back to 1948 levels. So the gains that took 30 years were lost in 15.

Of course the trends in wages and employment are related. Economists generally argue that if something becomes more expensive people want less of it, and there seems no reason not to apply that logic to the labour market. Up until the 1970s, shopfloor workers were getting relatively more expensive and so, not surprisingly, firms wanted fewer of them. But this explanation runs into a difficulty in the 1980s. The unskilled were getting cheaper but firms still did not want to hire them. Two other explanations are making the rounds of the economic literature. The first is globalisation. Developing countries have a predominantly unskilled labour force. Not surprisingly, they specialise in producing unskilled- intensive goods such as cheap shoes and T-shirts. As trade with these countries increases, pressure mounts on unskilled workers in developed countries.

Despite the intuitive appeal of this story, the data suggests that globalisation has had only a small effect. Import penetration has increased across all manufacturing sectors, not just in unskilled-intensive sectors. The second explanation is technology. Technical progress must be a large part of the reason why output has risen so much with fewer manual workers. If this is true then technical progress must be manual-labour saving. That is not too hard to believe: underground tunnels are now dug with one machine rather than an army of workers with shovels.

But for this explanation to make sense, technical progress must have been more labour-saving over the last 20 years than before. So what is the breakthrough? The answer is surely the computer.

What is to be done about this? It was once famously said that you cannot buck the market. So why tinker with the labour market? In our view the answer lies in the contribution of work and wages to social cohesion. Consider the funding of the NHS. An increasingly divided society enables the rich to buy their way out of public health care and its attendant problems. It also reduces their willingness to support a service that they are increasingly not benefiting from. In any case, as Professor Richard Freeman, the economist, has argued, society ends up paying for a detached labour market. Scant reward for work raises the attraction of crime. In America, where wage inequality dwarfs other countries, 2 per cent of the male labour force is in prison; in Britain, which has the next highest incarceration rate, the figure is 0.3 per cent.

The key to all this is education and training, for the relative fortunes of non-manuals and manuals are really the relative fortunes of those well and poorly educated. Of course, as the wage gap rises, the market itself provides an increasing incentive to acquire education and to train. But training needs resources. Increasingly poorer workers might have greater difficulty in borrowing money to finance education. It is important that government ensures that low-earning workers have access to whatever finance is required for education.

Along with this, the nature of work is changing. Employees of the future will need broad skills and talents that are adaptable and flexible to maybe more than one career. So training must not be too rigidly focused on specific skills; it needs to be general too. Confronting these issues is a vital step in staving off the spectre of the working poor.

q The authors are, respectively, Lecturer and Senior Research Assistant at Queen Mary and Westfield College, London. Jonathan Haskel is also a Research Fellow in CEPR's Human Resources programme. For further information on CEPR ring 0171-878 2900. The work reported here is supported by the UK Economic and Social Research Council, but the views expressed are the authors' own.

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