Edward Hugh: “We can’t wait until we’re on our death bed to change the labor market”

  • Interview with the Catalonia-based Welsh economist regarding the latest unemployment figures

VilaWeb
Bel Zaballa
03.04.2014 - 12:07

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The latest data published by the Spanish Government indicates that unemployment has fallen and that the number of people contributing to the Social Security system has grown. Does that mean that the economic situation has improved and that we’re beginning to come out of the financial crisis, as Rajoy’s government insists? The economist Edward Hugh declares that the financial crisis was over more than a year ago but that the crisis in the real economy, that is, that which affects us day to day is far from over: “We keep digging and digging but we still don’t see any daylight,” says Hugh in this interview with VilaWeb, in which he gives a picture of a “new normal” with respect to the economy and the labor market.

The Spanish Government says that we are beginning to come out of the crisis and as an example offers data like the fall in unemployment. What should we understand from that?

We have to believe the data. Now, are we coming out of the crisis? What crisis are we talking about? The financial one? We left the financial crisis behind over a year ago. But if we’re talking about the crisis in the real economy, we’re not out yet. Not at all. The financial markets are going well, I even read that Greece is about to come back to the markets to sell bonds. Spain is one of the principal beneficiaries of this new found investor enthusiasm for the European periphery. The world has been turned upside down. Bad news is now good news for investors. Because there is more of a possibility that prices will fall and that Mario Draghi will introduce a program of sovereign bond purchases. Such policies make a lot of money for investors and those with shares in the Ibex. Frankly they don’t help my neighbours much.

Here’s where we wanted to go…

The practices of the central banks help those who are doing more or less all right, those who have stocks or financial instruments, but they don’t get through to the people in the street. They push the stock market up and bring bond spreads down, but this only helps shareholders and banks, it doesn’t create jobs. The labor market, as Minister De Guindos says, is beginning to recover: this month of March there were 115,000 more people contributing to the social security system than in March of last year. But unemployment has fallen by 239,000. That’s more than double. What happened to the rest of the people? Some of them have retired. But some others have let the country. Unemployment fell by 239,000 but only 115,000 found work.

There are also people who continue without work but who still don’t appear listed in the unemployment services rolls, or who aren’t collecting unemployment benefits…
Yes, but by looking at the figures from the Institute of Statistics, it seems to me that the most logical deduction is that an important number of people have emigrated. It’s true that there are people who aren’t earning a salary and who aren’t registered anywhere; these people show up in the quarterly “Labour Force Survey” which is more rigorous. Now, the tendency of that poll is more or less constant. There is a change in the tendency of the labor market. But let’s look at those figures. There are 115,000 additional contributors paying into social security this year. Following the same rate, it would take ten years until the figure reaches a million. But the number of contributors is down by 3 million from the pre crisis peak, which means it would take us thirty years to get back to the figures from before. I suppose that this rate will accelerate, but that means that for now, we’re just starting, and we haven’t made any great advances.

So, there’s not a lot of reason for optimism, then?
It’s that we’re in this “new normal”. We won’t see the sort of growth we saw before the crisis. Nothing like it. So I think it is foolish to expect any dramatic improvements in  the situation. The interpretation that I make of it is that what we have is what we should expect if we don’t do something. On present policies this is about as good as it gets. Growth of around 1% per annum. Look at it from another point of view: the payments into the social security system have fallen each year since the crisis started, and they continue to fall, while spending has grown since there are more retirees with every passing month. The pension system is getting more and more precarious. In the book “Adiós a la Crisis [Goodbye, Crisis]” I explain how, if we don’t do anything in Catalonia or in Spain to change the direction we’re going, it’s going to be inevitable that pensions start to fall. Because you can’t let people leave, and go contribute to the German system, or wherever they are, and keep paying the same amount to a growing number of people here.

What should we do, in your opinion?
More solidarity and sacrifices overall. For example, I’m 65 years old; I would say that everybody who is 60 or older should be able to retire if they want to, voluntarily. And instead, let someone under thirty take their job. To compensate, the current level of pensions would have to fall, since more people would be claiming from a fixed quantity of money. Everyone here needs to make sacrifices. There are no easy solutions left for Spain. But at least this would mean less pension now and more later as young people stay. Making people work to 67 and forcing young people to leave is little short of stupidity. I believe that in the long run we will all have to work longer, keeping in mind that life expectancy is increasing, but implementing this change right now is crazy because it blocks the young people. And that is very unfair. In fact, everything that’s happening right now is very unfair for young people. There is a generational conflict of interests that is not yet being faced. And in the second place, I am in favor—even though I know it won’t be very popular—of the International Monetary Fund’s proposal to reduce individual salaries in order to put more people to work.

Minijobs?
No, the idea would be to earn based on a 35 hour week, but actually work forty.

Wouldn’t that make people’s work situation even more precarious?
The situation is so precarious that slowly but steadily the country is dying. We are living in a slow spiral towards non-sustainability. The government debt rises every year. The young people, who are the future of the country, are leaving because they can’t enter the job market. If we don’t do anything, in ten years the pensions will be two-thirds of what they are now. And I ask: what makes more sense and involves more solidarity? Making people pay a little more VAT tax, which is the government’s proposal, in order to keep people at home because there is no work for them, or instead lower the salaries a little and—and this is very important and it’s not happening—use this money to put more people to work. I’m not saying it’s the only way, but it’s a proposal that’s on the table, and should be discussed. Or should we just stand still and watch? This reminds me of the last years of the Franco era. Franco should have been pushed aside years before, but they waited until he died in bed before making any changes. If we wait for Catalonia and Spain to die in bed, what will we do afterward? I think that we need more creativity, imagination, and energy in order to make changes and look toward the future.

Before you said that we’re in a “new normal”. What is it and where are we headed?
Normal growth will be 1%. We had gotten used to growth of 3 or 4%. Now the tendency is toward 1% and we’ll see if that gets even lower in the future. But there is a before and after of the financial crisis. None of the developed countries have been able to maintain a growth rate over 1% without economic stimulus packages. Before the crisis, the rate was higher, now it’s lower. Why? I think it’s because the population is getting older. All of that about waiting to get back to rates of 2.5% or 3% growth is smoke and mirrors.

Is there anything specific to the labor situation in the Catalan Countries?
Catalonia is doing a little better because it has an industrial sector that is beginning to attract investment, it has a tourism sector that works, and because there is growth and innovation in the food sector. But there are also a lot of young people who are leaving the country to look for work. This phenomenon is also affecting us.

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