Labour's guru gives warning on jobs market inequality

One of New Labour's most influential gurus is in London to spread the message that flexibility in the jobs market is not enough. Robert Reich, the former US Labor Secretary, tells Diane Coyle that governments also have to spend money and expand the economy to combat inequality and exclusion.

There are few people who manage to win respect for their intellectual abilities, political engagement and sheer likeability. Robert Reich, Secretary of Labor in the first Clinton administration is one of these rare creatures. Perhaps it is not so surprising, then, that he did not last all that long in the bear-pit of Washington and has returned to the academic world as a professor of economics.

Even so, his analysis of the world of work, set out in his 1991 book The Work of Nations, has had a lasting influence on economic policy in the US and now in New Labour Britain. Professor Reich is not entirely content about this, however. In the US at least, he reckons, his policy message has been watered down, with the Administration basking in the sheer success of the American economy in the past few years.

Speaking to The Independent yesterday, he said: "When the current expansion ends and the tide goes out again, the underlying structural problems will be revealed. We should be using this time of prosperity to tackle them."

The Reich analysis starts with the observation that demand for labour in developed economies has shifted hugely in favour of people with a high level of skills and education, leaving a surplus of those with too little education or those who happen to live in the places where there are no new jobs. The result is that inequality has widened and living standards for many have fallen behind.

"The Anglo-Saxon model is working exceedingly well for creating jobs," he says. "It is a far less successful story in terms of wages, insecurity and inequality."

Some parts of his prescription for tackling the insecurity and unfairness have become familiar and even uncontroversial. For example, he puts heavy emphasis on the importance of education and of reskilling the workforce, and on what have come to be known as "active" labour market policies, common-sense measures like having the employment service make sure the unemployed know when a job that might suit them is available.

Other parts of Professor Reich's solution are also New Labour orthodoxy. He emphasises that jobs must pay enough to ensure that anybody who is working is not living in poverty. This means introducing a minimum wage and top-up tax reliefs or benefit payments to boost the income of those on low pay. Britain should be in this position within a couple of years.

But his policy recommendations in their entirety are more radical than politicians either side of the Atlantic are prepared to accept in full. As he admits: "I'm not sure the argument has been won."

As Europe prepares for the Jobs Summit in Luxembourg next week, "The question is how do you gain the flexibility of American capitalism without the cruelties," says Professor Reich.

The answer he gives says there are three keys. One is flexibility of in the jobs market and markets for products, to allow business to operate efficiently and generate jobs. A second is agility or employability of the workforce, requiring much better education and also additional infrastructure - for example, adequate public transport to get people to where the jobs are. A third is expansionary fiscal and monetary policy.

Number one is gospel in political circles. Number two is widely accepted but not if it costs a lot of money. Number three is probably the most controversial. "It is far from clear that our economies are growing too fast," Professor Reich says. "Perhaps central bankers ought to wait until there are real signs of accelerating inflation."

He emphasises that he is not a believer in the so-called "new paradigm", the ultra-optimism about the US economy's potential growth as a result of advances in technology and productivity. But he insists that financial orthodoxy must not be allowed to prevent governments making the necessary investments in education and the structure of the economy.

It sounds suspiciously Old Labour. However, Professor Reich has nothing but enthusiasm for the new Government's policies. "The country seems almost reawakened," he says.