This report sets out how, despite moving in step politically of late, the US and the UK economies have had somewhat different economic experiences since the financial crisis. The most notable divergence is on employment – the issue that President Trump put at the front and centre of his economic pitch to voters. As the UK has surged ahead, with employment rates now at record highs, the US is continuing to struggle with the long running issue of declining labour market participation. If the US had the same employment rate as the UK, 11 million more people would be in work in the US.
As the new Trump administration looks for policy ideas to help “bring back” jobs to the US, it could do worse than turn to the UK for an example of a country that, although similarly exposed to the forces of globalisation and the rise of automation in the workplace, has recorded rising prime age participation in recent years. UK policy over the past two decades has improved the incentive to enter work, supported lower-activity groups into work and has created a regulatory framework considerably more encouraging of maternal employment than in the US.
More recently, rising participation in the UK has coincided with slow falls – though from a high level – in income inequality; tackling the US participation problem is also likely to tackle the long-standing issue of high income inequality in the US. Rather than devoting attention to building a wall or stopping international trade in its tracks, Donald Trump should look across the Atlantic for inspiration as to how he might bring back America’s jobs.
- If the US employment rate was a high as the UK’s, 11 million more people would be in work in America than is currently the case. This employment gap has grown substantially since 2008 – but is symptomatic of a longer run participation problem. Labour market participation among prime age (25-54 year old) workers has been falling since the turn of the century in the US, and since the 1950s among prime age men. Trends that have not been replicated of late in the UK.
- In contrast, weekly pay for the typical full-time worker would be £30 a week higher in the UK than it is today if it had returned to its pre-crisis peak, as has already happened in the US. This is suggestive of a short run tradeoff between pay and employment. However, in the longer run its clear that pay and employment can grow together. And that rising employment can be inequality reducing.
- Since the financial crisis UK inequality – which had been broadly flat for over a decade since rising significantly in the 1980s – has fallen slightly. In part, this has been driven by rising employment rates among lower income households. If Mr. Trump proves successful at Making America Great again through job creation, he might also find that he begins to reduce the internationally high level of income inequality in the US.
- Bringing back America’s jobs will involve more than building a wall. The US should look to the UK as an example of a country that has successfully increased labour market participation over recent decades. The UK’s policy mix – combining welfare policies that encourage entry into work, with reforms to boost the financial reward from work (for example tax credits and a higher minimum wage) as well as changing employment regulation to support maternal employment – has acted to boost labour market participation. The incoming Trump administration would be wise to replicate this success.