Social security and unemployment

Most commentators on social security provision agree that the protection provided by state benefits serves a number of different purposes. These include the relief or prevention of poverty, the maintenance of income in periods of labour market absence, life course investment to support retirement and the provision of extra resources to support child care or disability costs (see McKay and Rowlingson 1999, Ditch 1999). Within the UK these different purposes have also resulted in the development of different forms of protection, subject to different rules and administrative procedures. Taken as a whole, social security is complex, confusing and contradictory, as the experience of many of the respondents in this research testifies, and we cannot hope to explore all of this complexity here. However, the study was concerned primarily with men's experiences of unemployment or labour market detachment; and the way in which the social security system responds to these issues has a particular history and incorporates a number of key elements of current policy, which are explored in more detail in this chapter.

Current benefit policies on unemployment can be traced back to the nineteenth century and to the Poor Law, the legacy of which remains to some extent still with us over a century and a half later. The concern of the nineteenth-century Poor Law was with pauperism rather than poverty, with the individuals and families who could not provide for themselves.

‘Sickness’ and ‘unemployment’ have usually been regarded as two separate, unconnected reasons why men do not work. Some men are too ill to work; others simply cannot find work. Of course, for many men without jobs this clear-cut distinction between sickness and unemployment remains entirely valid.

In reality, however, the world is more complex. It has long been recognised, for example, that there is a feedback from unemployment to ill-health – that the stress and loss of earnings associated with unemployment sometimes leads to deteriorating health (see, for example, Bellaby and Bellaby 1999). It is also true that there are many degrees of sickness, from an inability to do any work in any circumstances through to much milder limitations which restrict only the type or quantity of work a person can undertake. Added to this is the impact of benefit rules that define exactly who is eligible to be counted as sick and who as unemployed and which shift through time and vary from country to country, as ch. 2 emphasised. Where then does ‘unemployment’ stop and ‘sickness’ start? Is it really so easy to draw a line between the two?

In this chapter we explore the relationship between recorded sickness and recorded unemployment among men of working age. Once again the evidence is drawn from aggregate figures for the UK and from the survey of non-employed men first deployed in ch. 4 and described in full in the appendix.

The relationship of older men to the labour market is of particular interest and importance. As we saw in ch. 4, men aged 50–64 form by far the largest group that has become detached from employment. As Campbell (1999) has documented, in the UK during the 1980s and 1990s the increase in the number of older men without jobs was especially rapid. Only a minority of men in their early 60s, approaching state pension age, now remain in employment.

The prevailing perception is undoubtedly that labour market detachment among these older men is synonymous with early retirement. It is not hard to see why this view has taken root. In many professional jobs – teaching, the civil service and local government are good examples – pension schemes set 60 as the normal retirement age many years ago. As pension schemes have gradually become the norm in other occupations, including large parts of the private sector, they, too, have often adopted 60 as the retirement age. Increasingly it is only an unfortunate minority, mainly in insecure manual jobs and outside the scope of occupational pension schemes, who are required to work on until they are 65.

Added to this, employers have often used early retirement as a means of slimming down their workforce. Men in their 50s are frequently seen as an easy target. They can be expensive to retain, because their salaries have risen with seniority and experience.

Introduction

In ch. 1 the concept of detachment from the labour market was explored in relation to the UK. There we saw some of the limitations of conventional measures of unemployment and located the non-employed population in the context of the changing structure of the UK labour market.

Chapter 2 turns to comparative assessment of labour market detachment. The chapter opens with evidence about economic inactivity and unemployment in a number of other economies, and looks at some evidence about ‘non-standard’ employment. It goes on to give an indication of how some other states have addressed these issues, exploring the role played by both national and European policy on employment, and identifying some differences in policy response and in welfare systems. Having considered this broader international context, the third part of the chapter outlines recent developments in the employment policy of the European Union (EU), which seeks explicitly to address labour market detachment and ‘early exit’. Finally, the chapter concludes by considering a number of explanations of labour market change and welfare policy, and the political ideologies which support them.

Statistical comparisons

Unemployment

In 1999, more than one in eight of the 8 million European men who were unemployed according to the ILO definition (see ch. 1) lived in the UK– and the UK was one of five EU states in which over a million men were defined as unemployed. Male unemployment was thus a very significant and costly social issue for the EU and for several other member states.

The main findings

Our research has been restricted to just the UK so there must be caution about the extent to which the findings can be generalised to other Western economies. However, the observations that can be made about men's labour force participation in the UK are striking. At least six key points emerge.

First, the extent of labour market detachment among men is now very considerable indeed. It is well known that more young people are staying on in education and thereby delaying their entry to full-time employment. What our findings show is the dramatic rise in labour market detachment among the over 25s – a group largely clear of full-time education – and in particular among the over 50s. Unlike the gradual increase in the number of young people staying on in education, which goes back many decades, rising detachment among these men is a comparatively recent phenomenon and unlike extended stays in education it was never a sought after outcome of public policy. This rising detachment among older men has also happened during a period when the labour market was mostly plagued by a shortage of job opportunities.

Claimant unemployment comprises only a modest proportion of the total number of non-employed men of working age. The others – by far the majority – are traditionally described as ‘economically inactive’.

Field research on this book began in the fall of 1998, after I joined the faculty of Harvard Business School. The project represented a steep learning curve. My previous work had dealt with general political economy issues and with public policy institutions in China. Foreign direct investment (FDI) as an economic phenomenon and many detailed aspects of the Chinese economy were a substantial departure from both the empirical focus and the methodological approach of my earlier research.

Harvard Business School provided a rich and stimulating environment as I delved into this new topic. I became acquainted with and, gradually, engaged in many business and FDI issues by learning from my colleagues and by teaching and developing course materials for one of the most successful courses at Harvard Business School: Business, Government and International Economy, popularly known among our students as “BGIE.” As readers will discover, the thrust of the argument I develop in this book is strongly institutional, an area of political economy I have always been interested in, but my institutional argument is anchored in a firm understanding of the business dynamics and economic logic of FDI issues. In this respect, I have benefited greatly from my affiliation with Harvard Business School.

This chapter presents an analytical framework to interpret the many facets of FDI described in the previous chapter. I call this framework an institutional foundation argument. The institutional foundation argument differs from many of the standard perspectives on FDI in two aspects. First, it focuses on the motivations of and constraints on Chinese firms to account for some of the FDI patterns. Second, it makes the claim that institutional features of the Chinese economy powerfully create and shape these motivations and constraints.

Some of the ideas in the institutional foundation argument are built on a number of prominent themes in the economic literature on FDI. In this chapter, I briefly review these themes. The summary is not meant to be comprehensive but to highlight those insights that will become the critical building blocks in my own explanation of many of the seemingly unusual FDI patterns in China. In the concluding section of this chapter, I raise some potential implications about this way of analyzing FDI in China. Foremost among these implications are the benefits and costs of China's method of attracting FDI. While China's huge FDI inflows are beneficial both to promote growth and to facilitate economic restructuring, it is important to recognize that FDI's disproportionate role is predicated on a number of institutional distortions in the Chinese economy.

In 1993, Li Lanqing, then China's vice premier of the State Council, recounted a visit he paid to a truck factory in Chongqing, Sichuan province:

This observation is a powerful statement about the state of the Chinese automotive industry in the 1990s. As pointed out in Chapter 3, in 1998, there were 115 motor vehicle assembly firms in China. The average output volume was only 14,165 units. While in other countries, automotive industries are clustered together geographically, China displays a highly dispersed pattern. In 1995, there were motor vehicle assembly plants in all but two provinces, Tibet and Qinghai, two extremely poor and rural high-altitude provinces. The Chinese government had long recognized this severe fragmentation and launched several major administrative initiatives to consolidate the industry, in the 1980s and 1990s. So far, the efforts have not been successful.

In 1998, as part of a program to “clarify ownership rights,” the Suzhou municipal government in Jiangsu province began to examine and sort through all the asset holdings under its control. One Suzhou firm, Suzhou Sanguang Group (Sanguang), was scrutinized particularly carefully. Sanguang was an urban collective firm; that is, in a formal accounting sense it was a wholly owned subsidiary of an SOE. While it was highly profitable, its parent SOE was deeply troubled and on the verge of bankruptcy. Now the Suzhou municipal government was very eager to claim Sanguang as its own. As the owner of all the SOEs in the city, it demanded every right to the assets of the subsidiaries of its SOEs.

The perspective of Sanguang was drastically different. Yes, Sanguang was a subsidiary of an SOE, but the government's only investment was a few pieces of old equipment in 1966 when Sanguang was founded. Nor did the state-owned banks lend any money to the firm. In the 1980s, Bao Zhishu, president of Sanguang, and his colleagues had borrowed equipment from other firms and personally paid for all travel expenses. Despite its slim profits, Sanguang paid a substantial amount of money to the parent SOE as “management fees.”

In the 1990s, Sanguang's businesses rapidly expanded as a result of two JVs that it had formed. In 1989, on the books, the total value of its assets was only RMB 420,000 ($112,000 at the 1989 exchange rate).