Time For A Cure For Unemployment
[Reprinted from Land & Liberty, Summer
Perhaps the most acute and persistent of all social
problems in Britain is mass unemployment. For many centuries, and
still today, unemployment has had a close relation with the control
and ownership of land. As far back as the 15th Century, English land
enclosures for wool production led to the appearance of landless
bands of "sturdy beggars". By the late 19th Century,
unemployment came to follow a pattern associated with booms and
slumps, and that alternation of booms and slumps still continues.
But the so-called "trade cycle" is a description rather
than an explanation.
After the 1914-18 war a new variant of the pattern of unemployment
appeared. Even in boom conditions there was a large residue of mass
unemployment. After the 1939-45 war, however, chronic large-scale
unemployment seemed to have vanished for ever. Full employment after
1945 was achieved primarily by what is known as "demand
management", that is by printing money and injecting it into
the economy through public spending, in accordance with Keynesian
principles. This produced troubles of its own - adverse side effects
of the medicine -- and since the middle 1970s large-scale
unemployment has returned with a vengeance. Unemployment has not
been exclusively the curse of people who live on wages or salaries,
for it has been accompanied with business failure and collapse.
It is surely absurd as well as tragic that great numbers should be
unable to find jobs when so many people, often the same people, are
living in want. In a sustainable and well run society, the problem
would not be to find jobs for people, but to find people for the
jobs which need to be done.
What causes Unemployment?
We have not much hope of curing unemployment unless we know how it
is caused. All kinds of theories have been offered to explain
Thus, some people have suggested that there is a "trade off"
between inflation and unemployment. This does not explain -- for
example -- the fact that unemployment was far higher in the late
1970s and early 1980s when inflation was higher than in the 1950s
when inflation was much lower.
Others have suggested that high unemployment in Britain is related
to some peculiarly British trait, like the tradition of the "gentleman":
the tendency to undervalue technology by comparison with the arts
and professions. But unemployment is widespread today not only in
Britain but also in countries where British values do not hold.
Mechanisation has also been suggested as a cause of unemployment.
No doubt inventions often reduce the amount of labour required to
satisfy some particular demand, but this does not make the supply of
labour superfluous. Wants remain unsatisfied. Indeed, the long
period of full employment, from the 1940s to the early 1970s, was a
period of rapid mechanisation.
Towards a better Explanation
The various explanations of unemployment which are most commonly
suggested are all essentially unsatisfactory. So where do we look?
There are two factors which are rarely mentioned, and even less
appreciated: the property market and the tax/benefit system. In
relation to the unemployment problem, these represent two faces of a
single coin. It is necessary to consider both of them.
Types of taxation
There are two quite distinct categories of taxation. Taxes such as
VAT and Income Tax act as disincentives to production and trade. By
contrast taxes on land have a stimulating effect on trade by
encouraging productive efforts and discouraging the practice of
holding land out of use.
The present tax system clearly acts in various ways as an obstacle
between people who want to work, and the work which they could
usefully perform. But the influence of tax on the economy is more
profound than this. What is not taxed is quite as important as what
What Isn't Taxed
The British tax system has no tax which falls directly on the value
of land. The cost of holding land which is not in use is no more
than the cost of servicing any mortgage and the rent which has been
foregone. At times when land values are rising quickly, as they did
in the late 1980s, these costs are often well worth bearing. Hence
land ownership is often a tax haven. This has distorted patterns of
investment for decades. Fortunes have been made by purchasing land
cheaply, holding on to it, and selling at the most opportune moment.
All this is not a "zero sum game". That is to say; from
the point of view of the country as a whole the gains exceed the
losses. The supply of land is fixed. Every site is unique, and if
land becomes the subject of speculation it is either not used at
all, or it is under-used. A valuable building plot may be used as a
car park; or cabbages may be grown on a plot suitable for a hospital
or for housing.
The consequences for the economy are deeply damaging. "Land",
in the economic sense, includes all natural resources, and the
unemployed are denied access to nature's store of raw materials.
No-one can produce goods, or provide services, without access to
land. No business can function without suitable premises. A site
held out of use means that labour is deprived of an employment
opportunity. No doubt that site will be used sooner or later, but
time is of the essence. If a factory site where 100 people could
work is held vacant for five years, 500 job-years are lost forever.
To understand land speculation, it is essential to remember that
the land market does not perform like the market in, say, tomatoes
or lorries. With both consumer goods and capital goods, the pattern
is usually simple. If there is a glut, the price falls. If there is
a shortage, prices rise. When prices rise, tomato growers or lorry
manufacturers decide to produce more, and prices tend to fall again.
Alternatively, the producers or manufacturers simply move their
goods from places where they are sold relatively cheaply to places
where they are relatively dear.
The land market acts in a different way. No more land can be
produced to satisfy increasing demand; nor can it be moved from one
place to another. If land prices rise, more people attempt to buy --
just the opposite of what happens in the other two cases. When there
is a big demand for land, people do not bring it into use, but hold
it back from use in the hope of even greater increases. This is land
speculation. Land speculation means that people are unable to use
land to produce goods to satisfy their own demands, or the demands
of other people. The result is less demand for labour, leading to
Tax and Unemployment
Most existing taxes impair the economy. To take a simple example,
tax accounts in total for over 40% of the cost of a restaurant meal.
Eating out becomes a luxury and the catering industry suffers.
Something similar applies to most of the familiar taxes which are
imposed on goods and services, especially VAT.
But direct as well as indirect taxes foster unemployment. It is now
accepted that work-related taxes are a major component of the
poverty trap, sometimes called the "tax wedge", which is
an important factor in generating unemployment.
High Labour Costs With Low Wages
Although no general minimum wage legislation operates in Britain, a
minimum wage is established in a rough-and-ready way by the cost of
buying labour out of unemployment. In order to do this, the employer
must match, in take-home pay, at least the amount which is being
received in unemployment and welfare benefit. He must also match
other benefits for which people may qualify when unemployed, such as
income support, mortgage assistance or housing benefit, free school
meals, free NHS prescriptions and Council Tax assistance. To bid
successfully for unemployed labour, the employer must further add on
the income tax and National Insurance (NI) contributions nominally
paid by the workers, as well as his own slice of NI contributions
made on their behalf. There is a huge gap between what the employer
pays and what the employee receives. This has brought about a
seemingly impossible situation: an economy with low wages, yet high
It is essential to be aware of what is happening here.
Pay-as-you-earn income tax is usually considered by workers as a
deduction from their wages; their concern is with what their net, or
"take-home", pay will be. The employer, looking at what he
must pay, also recognises that "gross pay" is a purely
notional amount. From his perspective, the various taxes, whether
nominally paid by the employee or by himself, act for all intents
and purposes as a payroll tax. They are a claim by government on the
wealth created by the business.
The situation is similar with indirect taxes. What concerns workers
is not how much money they have in their pay packets, but what they
can purchase from the proceeds of their labour. As Adam Smith
recognised more than two hundred years ago, not only are direct
taxes such as income tax passed on, but so also are indirect taxes.
The consequences of this are felt most severely by those with the
least skill, by labour-intensive industries, and by people in
marginal locations and marginal activities. Thus, British Coal's
Annual Report, 1991, showed that the production cost of deep-mined
coal was £41 a ton. Of this amount, £8 consisted of taxes
which had ultimately to be borne by the coal industry. Not
surprisingly, this means that the British coal industry is
uncompetitive in world markets, despite the progress that has been
made in improving efficiency. Other threatened industries, such as
steel, are suffering in a similar way. So also are particular
locations, like Northern Ireland, Liverpool and Tyneside.
Wage-related taxes destroy economic activity which would otherwise
provide goods at a competitive price, and livelihoods as well.
Taxes on wages, goods and services also bear down especially hard
on the public services. The shape of the tax system explains the
fact that it is very costly to employ people to do relatively
menial, but valuable, tasks. As a result -- to give but a few
examples there is a shortage of hospital cleaners, the
apprenticeship system is all but dead, street pavements are being
neglected, public lavatories are rapidly disappearing, bus
conductors have almost vanished, and railway staffing has been pared
to the bone, to the great inconvenience of the passengers.
Taxing the Value of Land
If a fair rent was paid for all land with no speculative element,
and that rent was taxed, then unemployment would be reduced
dramatically. The four main reasons why this would happen are:
- 1. It would put a cost on holding land. This would discourage
land speculation, and if the tax were set at a sufficiently high
level would end it altogether. The property market would be
freed, and commercial premises would become more readily
- 2. The revenue raised by Land Value Taxation would make it
possible to phase out those existing taxes which are so damaging
to employment, such as VAT.
- 3. LVT would certainly reduce, and if implemented in its
fullness, would abolish those trade cycles which have been the
most important factor in causing unemployment for hundreds of
- 4. There would be other social benefits, each bringing
financial advantages. Because there would be much less
unemployment, changes could be made to the benefit system so
that it supported with dignity those who were genuinely unable
to work. There would be many more vacancies than people seeking
them. Crime rates would be reduced: The health of the nation
Unemployment is caused by governments who do two things wrongly.
First they allow speculation in the value of land in the mistaken
belief that this process is creating wealth. In reality it is
causing major inefficiencies in the free enterprise process and
inhibiting wealth creation.
Secondly they collect public revenue from the wrong source. They
impose income tax and VAT on the activity of wealth production and
its exchange. A substantial proportion of taxation then has to be
used to prevent destitution amongst those prevented from working
because the free enterprise system has been rendered inefficient.
The practical solution is to collect the rent of land for the
public purse, while at the same time reducing, and if possible
removing other damaging taxes: VAT and income tax in particular. It
is noteworthy that the rent of land in 1995 was four fifths of all
income tax. Collecting the rent of would stop the speculation
without burdening production or services. Removing VAT would
stimulate the economy without causing inflation.