Unemployment was so explosive a political issue in the 1970s, it led the Conservatives’ campaigning not once but twice. In autumn 1978, expecting James Callaghan to call an early election, they peppered Britain’s billboards with the picture of a snaking ‘dole queue’ and the slogan 'Labour Isn’t Working'. This drew attention to the crumbling of Labour’s traditional commitment to full employment. The unemployment rate, 2.7% when Labour won their second election in October 1974, was 5.9% in October 1978.
While the autumn election never materialised, the subsequent ‘Winter of Discontent’ gave the Conservatives a historic chance to exploit labour’s evident disillusionment with Labour. Dusted-off with a reminder that ‘Labour Still Isn’t Working’, that poster is now the best-remembered of their successful 1979 campaign.
‘Labour Isn’t Working’ has become the poster-child of political advertising. Surprisingly, the director whose eponymous advertising agency (Saatchi and Saatchi) dreamt it up was at first unsure about whether to use it. This may partly have been because the iconic image was actually photographic sleight-of-hand, conjuring up the never-ending dole queue from a cast of 20 Young Conservatives. The photo-shoot’s organisers hadn’t even tried to recruit any genuinely unemployed people, fearing that few would want to help the Conservatives return to power.
The lapse from full employment had begun under the previous Tory government, with Edward Heath presiding over the headline rise to one million jobless in 1972. Although the rate had risen after Labour was forced into budget deficit reduction measures in 1976, it was falling again after February 1979.
However, Margaret Thatcher’s brand of Conservatism renewed the party’s confidence in campaigning on labour-market issues. The strikes of winter 1978/9 enabled them to blame the loss of work on ‘irresponsible’ trade unions, whose pay-claims were argued not only to fuel inflation but to reduce the number of jobs that private enterprise could create. The idea of helping people “price themselves into work” was displacing the belief that governments were capable of, or even responsible for, creating jobs for all.
Rebranding Conservatives as the party of employment
Critics of Conservative policy had long argued that by pursuing price stability (or, at least, lower inflation) they would necessarily send the unemployment rate up. Aggregate demand would be reduced by public spending cuts and increases in interest rates, which would make it harder for industry to invest and (by strengthening the Pound) to export. The ‘Phillips Curve’, which showed higher unemployment to be the inescapable cost of lower inflation, had reigned throughout the 60s and was still widely believed.
The Phillips Curve Explained
Thatcher sidestepped this attack by embracing Monetarism, the economic approach that US libertarian Milton Friedman had managed to advance as an alternative to post-war Keynesianism. According to Friedman, inflation could be reduced just by curbing the growth in the money supply. This did not have to cause any increase in interest rates, because the assurance of lower inflation would simultaneously reduce the demand for money. With no rise in interest rates, there would be no over-valuation of the Pound. So neither investment nor exports would have to fall.
Indeed, curbing inflation would (in Friedman’s view) boost private output and investment, because free markets gained strength when prices were more stable. Better still, the Monetarists’ main way of curbing money-supply growth was to reduce the government’s budget deficit. This would, according to conservative economists of the time, release money that was ‘unproductively’ spent in the public sector to be ‘productively’ invested and consumed in the private sector.
Lower public spending would make way for tax cuts, allowing a further release of private enterprise – and higher tax receipts, according to the ‘Laffer Curve’which some Monetarists took seriously. So this new approach to curbing price rises would simultaneously boost the ‘real’ economy, and bring down unemployment. For good measure, the Conservatives promised to rein-in Trade Union powers, promising that lower wage claims would also bring inflation down and job opportunities up.
The road back to full employment: longer and twistier than anyone imagined
The Conservatives’ election win in 1979, and Thatcher’s two subsequent re-elections, allowed her Monetarist principles to be put into practice. Her first Chancellor, Sir Geoffrey Howe, duly sought to constrain the growth of the money supply through a fiscal deficit reduction. This relied almost entirely on public spending cuts, since a doubling of the indirect tax rate (VAT rising from 8% to 15%) was offset by a reduction in direct taxes (basic-rate income tax dropping to 30% from 33%) . Notoriously, Howe carried on attempting to reduce the deficit even when the economy fell into recession. His restrictive 1981 budget drew an angry letter from 364 economists, warning that this would only deepen the downturn.
Although Howe (and his successor Nigel, now Lord Lawson) are benignly judged, those 364 dissenters proved largely right. Unemployment rose from just over 1 million in 1979 to more than 3 million by 1982, despite numerous changes to statistical measurement which kept the headline figure down. Contrary to the Monetarists’ assurances, interest rates rose, and the consequent strengthening of the Pound was exacerbated by bounty from the North Sea, which made the UK a net oil exporter from 1980. The damage to investment and non-oil exports led to manufacturing output falling 17% between the end of 1979 and the first quarter of 1981. The UK has had a structural current-account deficit, relying on inflows of capital to stay afloat, ever since. Meanwhile inflation, initially raised by the VAT increase, did slow to 4% in 1983, but jumped back to almost 8% as the economy recovered in 1985. The Monetarist approach, heavily modified by Lawson, was quietly buried under his successors Norman Lamont, John Major and Kenneth Clarke.
The UK unemployment rate did eventually decline – falling below 5% during the long boom of 1993-2007, and (after the post-Crash recession) dropping sharply to 5.7% in January 2015 from 7.2% a year earlier. ‘Pricing people into jobs’ or moving them into self-employment has been central to the most recent reduction, and would have been impossible without Thatcher’s labour-market reforms.
But young people’s and ethnic minority joblessness – live issues in 1979 – have worsened under the Coalition. And today’s falling unemployment and historically low inflation have been achieved against a background of accelerating monetary growth. Thatcher’s Monetarist economic philosophies, like her young supporters in the iconic poster, were an effective gloss quickly painted-over by pragmatism once in power.