Patron of the skills arsenal

For 15 years Richard Layard has believed that tackling unemployment meant weaning the long-term jobless off the benefit culture. Now he has a chance to put some flesh on the bones of his theory because Tony Blair has drafted him in to help with one of Labour's prize projects, welfare-to-work. He talks to Kam Patel

He plays tennis twice a week and never works in the evening. And despite his appointment this week as an adviser to the education and employment department, Richard Layard fully intends to go on perfecting his strokes on the court and enjoying a few hours' relaxation after his day's work.

Layard, director of the centre for economic performance at the London School of Economics and former economic adviser to the Russian government, is the latest academic to troop into government to give Tony Blair's project a helping hand. A specialist in unemployment and education, Layard can stake a strong claim to having helped inspire welfare-to-work, Labour's big idea to get the jobless, especially the long-term unemployed, back to work - by shifting money away from benefit payments towards what Layard calls "active help". The 63-year-old academic, husband of Molly Meacher, the former wife of environment minister Michael Meacher, was among the first in Britain to suggest that the level of unemployment is inextricably linked with how the unemployed are treated. Now he will be advising government on putting this argument, which he has championed for 15 years, to work in a practical way.

The rise of persistent mass unemployment is, in Layard's view, one of the most worrying developments in Europe this century. In the 1960s most European countries had around 2 per cent unemployment. The average now for the European Union is near to 10 per cent with Britain cycling around 8 per cent. The problem goes back to the oil shocks of the 1970s, which pushed unemployment up in all western countries. But, says Layard, the development of welfare systems in many European countries neutralised the market forces that had traditionally kept unemployment under control. "Because we had this indefinite availability of benefit, it was possible for people to live in a grey kind of existence as long-term unemployed whereas that was not the case in the United States."

The welfare-to-work scheme, to be paid for by a Pounds 3 billion windfall levy on privatised utilities such as gas, water and electricity, will guarantee jobs or training to all under-25s unemployed for more than six months, and will subsidise jobs for older people who have been out of work for more than two years. Layard believes that the programme will radically reduce unemployment in Britain.

But without recent crucial changes in economists' thinking such reforms might have remained an academic dream. "There was a bad period in economics from the 1960s to the early 1980s when we had the supremacy of the minimalist approach to reality ... the idea that if you could explain everything in terms of markets and perfect competition then that was the greatest hallmark of success." Now, though, it is accepted that in order to understand economic growth, economists have to take into account the general educational level of the population and explain that level. "You cannot do that entirely in terms of costs and benefits, the analysis has also to be in terms of traditions and institutions," says Layard. Traditions and institutions like different welfare or pay bargaining systems. In Holland, for example, industry, government and trade unions participate in national wage bargaining that has a better record than Britain's laissez-faire approach of delivering pay deals that benefit the economy.

But if welfare-to-work is an attempt to deal with unemployment by addressing the failure of a welfare system now firmly entrenched as part of British culture, then Layard is equally adamant that something needs to be done to ensure people do not slide into some sort of "grey jobless existence" in the first place. And the main port of call for new Labour is education. "I think we have scandalously neglected our educational system, partly because of wrong ideas and insufficient resources, particularly for the bottom half of the ability distribution," says Layard.

The biggest single development in advanced countries this century may be the increase in living standards, but in achieving this, the pattern of demand for labour has undergone a massive change. "There is a relentless fall in demand for people with low levels of skill. And I think the biggest challenge for advanced countries is to make sure that the number of people with low skills falls faster than the number of jobs for them because the outlook for people with low skills is extremely dismal."

With surveys regularly testifying to poor numeracy and literacy - Layard points to one which suggests that one in five British-born 21-year-olds cannot add up four prices under Pounds 10 - action on education is an essential starting point. And when it comes to preparing young people for work, Layard believes that they need to be armed with basic knowledge of an area where they might start their working life. Many argue against such specific expertise on the grounds that people will hold many different jobs over the course of their working lives. But Layard says this is not true; most people will spend their life in one industry. He adds: "Of course the nature of work is changing and people will have to engage in life-long learning but unless you have learnt one job properly you are going to have difficulty learning the next one. So we shouldn't scoff at fairly industry-specific vocational training. Most undergraduates get it and I think it an outrage that we shouldn't assume that everybody else should also."

Manifestly, new Labour's emphasis is on schools and mass vocational education. So where does this leave the increasingly embattled higher education sector? Layard is clear: "In general we have a rather good higher education system but an appalling system of professional education for less academic people. There is almost no other country in the world that has the distribution of resources we have between higher education on the one hand and vocational education for the majority on the other. The priorities for any extra spending have to be improving primary and secondary education and building up a universal system of vocational education."

He is not too impressed either by the widely held belief in the brilliance of British university research. There is a "great deal of complacency" about top-rated research departments. "People assume the top three or four research departments here must be among the top dozen in the world and of course this is not true. There are many subjects for which there is no British representation among the top dozen in the world." Northern Europe and North America have similar populations and incomes yet the latter is home to three-quarters of the best research departments in the world. It is not healthy, he says, that Europe should be so reliant on North American research. So how can a shift be achieved ? "I think we should have further concentration of resources," he replies firmly.

Layard believes most people now accept that the undergraduate embarking on a first degree with free tuition through to 21 plus a maintenance grant (dependent on parental means), is receiving an unreasonably large share of public money. By contrast those who leave school at 16 but want to study after 19 have to find the funding themselves: "I think it is extremely unjust and inefficient". He believes those looking for an answer to why Britain's productivity now lags behind France and Germany's by 20 per cent, need look no further:" The lower half of our working population is desperately unskilled compared with these other countries. We must arm everybody with adequate skills and totally reject this notion that there is an inherent, huge dispersion of abilities - a view which is self fulfilling."

Concerns about unemployment are widespread throughout the European Union. Three weeks ago the incoming French socialist government announced to a stunned Bonn that it wanted a rethink on monetary union, with emphasis placed on entry conditions that emphasised jobs and growth as well as financial prudence. But Layard is strongly in favour of monetary union: "I think it will be beneficial from the British point of view. I think it will result in more jobs (if we go in early), lower inflation, lower interest rates and probably less fluctuation in output." He also welcomes the independence given by Labour to the Bank of England.

Tony Blair has said it is unlikely that Britain will be among the first wave of countries going into EMU in 1999. Layard, though, says nothing is set in stone: "All sorts of things can change. The political dimension is extremely complex. Various possible groupings of countries could go in. And surely it is the case that the more that go in, the more likely we are to make a firm commitment to going in."