It’s the Labour Market, stupid. An explanation of Trump and Brexit

‘It’s the Labour Market, stupid. An explanation of Trump and Brexit’ is the title of my new book due out in the middle of next year.  It is about the failure of the elites and the ‘left-behinds’ and the emergence of a broad-based desire for change.  It looks at the emergence of right-wing populist, anti-immigrant movements around the world.  When people are hurting they want to find someone to blame.  The book will examine the US and the UK as well as France, Germany and Italy where there are elections in 2017.  

The book is about what I call the economics of walking about.  Be creative with data and keep your eyes open.  Watch for stores and factories closing.  Look for signs that business and consumer confidence, what Keynes called ‘animal spirits, has changed. Find out what people have to say, and take it seriously. With hindsight we know that these data in early 2008 indicated that the US and the UK were in recession.  They turned down sharply after the vote for Brexit.

It is about the fact that relative things matter, which is one of the big results from the new field of behavioural economics.  When everyone is hurting then everyone is in it together, but when some gain and others don’t then that spells trouble.   The young and minorities voted for Clinton and for Remain.  The least educated, older white men who lived outside major cities voted for Trump and Brexit. This was especially likely to be in areas that had seen significant declines in manufacturing employment and had poor health levels.   In the UK it was also in seaside towns that had been in decline for years since the decline in airfares made foreign travel affordable.  It’s hard to see how they will suddenly improve.

My contention is that what happened in the labor market was crucial.  It was about the decline in the availability of good jobs.  Real wages in the UK in 2016 are still 7% below what they were pre-recession.  Decades of rising income inequality and slowing economic growth have eroded a pillar of the American Dream: the hope that each generation will do better than the one that came before.  

The question going forward is whether Trump can deliver for the left-behinds in the rust-belt states of Michigan; Ohio and Pennsylvania where manufacturing jobs have declined, principally from technological change.  Or in the coal states of West Virginia and Kentucky who have been hurt by slide in the world price of coal.  Can the UK government turn things around in the towns Wakefield and Blackpool post Brexit?  How exactly?  What if they can’t and living standards don’t rise or even fall?  Who will they blame?

What will happen to monetary and fiscal policy?  These are uncertain times and I will be watching the data closely to ensure I am not mugged by reality! 

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David Blanchflower CBE is Professor of Economics, Dartmouth College

 

 

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