Sharp drop in British unemployment seen by economic adviser

Patrick Minford is something of an oddball among British economists. The University of Liverpool professor expects unemployment to come down sharply in the United Kingdom over the next few years.

Most economists are less cheerful in this regard.

For instance, S. G. B. Henry, top economist of the National Institute of Economic and Social Research in London, says: ''It will be difficult for employment to be increased over the next year or two. So unemployment is likely to stay stubbornly high.''

At the moment, some 3,084,000 are unemployed, or about 12.6 percent of the labor force. By British standards, that is drastically high. What especially alarms the government was that the number of jobless has risen by some 800,000 since the recovery started, at first slowly, in early 1981. There has even been a tiny rise in unemployment in the last year, with output up some 3 percent.

A rapid rise in productivity - about 6 percent per year in manufacturing - meant fewer jobs were added as production turned up. Moreover, more young people were entering the labor force.

At first, many economists thought this gain in productivity was normal for the early stages of a recovery. They figured that eventually manufacturers would need to employ more workers as the demand for their goods continued to rise. But it hasn't happened yet.

And, says Mr. Henry, it doesn't look as if productivity growth will slump much.

From one standpoint that is great. Britain stands a chance of catching up with France and West Germany in productivity. Higher productivity also permits rising living standards. But that gain in output per person per hour also holds back employment. Mr. Henry's analysis indicates almost no change in the level of registered unemployment into 1986.

Professor Minford, however (using a different measure of unemployment that excludes those just leaving school), has the number dropping from 2.83 million this year to 1.83 milion in 1987, or from 11.8 percent to 7.5 percent.

If Minford is correct, Margaret Thatcher's Conservative Party should be in good shape when another election is called in three or four years. It will be able to boast of both rising living standards and lower unemployment.

A decade ago, if unemployment had moved anywhere near its present level, the British government would have pushed down hard on the economic gas pedal with more spending and easier credit. But there has since been an important change in thinking in this nation.

To a large extent, economists, politicians, and the public have become disenchanted with the economic pump priming technique advocated by the famous British economist, John Maynard Keynes. They saw that government efforts to counter the business cycle resulted in stop-go economics - periods of boom and then slump. Growth slowed on average and unemployment notched upward with each business cycle.

Economists on all sides began to talk of the ''natural rate'' of unemployment , alias the ''non-accelerating-inflation rate of unemployment'' - NAIRU, for short. That unemployment rate had risen in Britain for various reasons, they figured.

Economist Richard Layard of the London School of Economics argues that the NAIRU could be reduced somewhat through tax incentives for those companies and employees that settle for modest wage increases. Such relatively low wage hikes would keep business costs down, and, they hope, inflation. More of a limited supply of money could be used to create new business activities and jobs.

But the Thatcher government came into office on a program of free-market economics aimed at reducing government intervention in the economy. lt is unlikely to adapt the Layard plan (also advocated in the United States, where it probably originated).

''There is a lot less support for those types of remedies than five years ago ,'' notes Liverpool's Professor Minford.

The Thatcher program also involved a gradually reduced money supply, according to the economic doctrine of ''monetarism,'' and a trimming back of the budget deficit. This policy has basically been achieved, possibly ending stop-go economics. But unemployment has remained sticky.

To get that down, the government appears to be relying on a formula similar to that advocated by Minford, who is regarded as a key informal economic adviser. His optimistic unemployment forecasts hang on the success of so-called ''microeconomic'' changes in the economy designed to improve the workings of the market.

In other words, the British economic monetarist experiment has been carried out and proved successful in knocking down high inflation and steadying economic growth. Now Britain has launched a ''supply side'' experiment, hoping to revitalize free enterprise.

For example, the government this spring altered depreciation and employment taxes with the goal of making it cheaper to hire people, compared with buying machines, to do a job. It is hoped this will boost employment.

The Thatcher government has also attempted to increase the financial incentives for working, vs. being on the dole (unemployment benefits). At the moment, claims Minford, low-paid workers can make almost as much on the dole as when working, or more. This takes into consideration many factors, such as free medical provisions, rent rebates, rate rebates (real estate taxes), free milk and vitamins, free school meals, child benefits, family income supplements, work expenses, and so on. The government, to narrow this so-called ''unemployment trap,'' has raised the level at which workers start paying taxes, and it plans to boost that rate further over the next three years. In the United Kingdom, unemployment benefits continue indefinitely, unlike in the United States. The government has also trimmed benefits slightly.

Many of the registered unemployed are also working in the underground or shadow economy, Minford maintains. They do odd jobs without reporting it for tax purposes, and thus have even less incentive to find a regular paying job. Some estimates put the shadow economy as high as 12 to 15 percent of total output as measured by the government.

Another aim of the government - although not stated so bluntly - is to weaken the trade unions. Real wages (after inflation) have risen 2 percent a year since 1979. If they had not risen so fast, employers could have afforded to hire more workers. Weaker unions would not be able to bargain up wages so fast.

Parliament passed two employment acts, in 1980 and 1982, severely limiting the immunities of unions from civil lawsuits for inducement to breach of contracts. Legislation is pending to require strike votes by members before a walkout can be legally called.