Explaining the rise in employment

After yesterday's unemployment figures I was looking for reasons for the continued rise in employment when the economy is basically flat. I found the article below from October.

In past recessions firms have shed labour and, because the least productive have been allowed to go first, average productivity has risen. This has not happened since 2008.

Because of the much more flexible labour market real wages have fallen for those in work and so firms have not had to reduce their labour force as much as in previous recessions. Therefore the productivity 'jump' has not materialised.

Is that really enough to explain the flat productivity levels reported? Well probably not, but add to this low morale of the workforce given the falling real and nominal incomes and maybe this is enough.

Because of falling wages and no productivity increases firms have had to take on more labour to raise output. They can do this because they can offer lower wages for the higher output levels.

The article compares previous recessions and offers some thoughts.

The BBC article is here

Unemployment falls and employment rises

The strange course of unemployment continues with a rise in employment and fall in unemployment.

A rule of thumb is that there has to be around 1% growth in the economy to maintain the level of employment. This is because productivity improvements account for about 1% of growth.

The economy is not growing by anywhere near 1% and so the question has to be asked where are the jobs coming from. Sadly the data does not help us much and more work will have to be done here.

A good sign is that full-time jobs grew strongly. Sometimes the growth in jobs is part time and so the benefits are not as great as they seem. On the down side there was a rise in unemployment for the 18 to 24 year old group.

The BBC report the figures here

A policy conflict with no easy answers

The government wants to cap benefit rises at 1% a year for the next three years. It's beings strongly criticised as being unfair.

The arguments are actually about two issues. Long term supply-side incentives and income distribution. The first is much more straightforward to explain than the second.

One of the biggest problems faced by those out of work is the difference between in-work and out-of-work income. When the difference between the two is small the incentive to take a job is less and may prompt some people to remain on benefits rather than take a job. This is known as the unemployment trap.

During the period since 2008 the incomes of those in work have risen only slowly and at less than inflation, and for some nominal wages fallen. But benefits have gone up in line with inflation, which in some years has been well above target. So the difference between in and out-of-work income has narrowed. The government argue that the cap on benefits will restore the balance and raise incentives to work.

The case on income distribution can be argued both ways. Those on benefits are the least well off in the UK and it has been long established that they will be guaranteed an income that allows them to at least take a part in the normal activities of society. Therefore raising benefits by less than inflation represents a real cut in their incomes and breaks this social contract.

However against this the case can be made that the faster rise in benefits than in wages has led to an unintended change in the UK's distribution of income. While those on benefits will be worse off through this measure they will simply join the rest of society in the experience of recession. The distribution of income will be restored to the one that existed before.

There is no doubt that the distribution of income is the macroeconomic target which gets the lowest priority. The question really is do we want to prioritise long-run efficiency or compassion. No easy choice.

The BBC explains the measure and the arguments here

Who carries the cost of a flexible labour market?

Today it was reported that over 3 million people in Britain are underemployed. The exact meaning of this is covered by an ONS video which is embedded in the Daily Telegraph article below, but essentially it means workers who do not work full time.

Inevitably those who are underemployed want to work more hours, usually because they need the higher income.

The rise in underemployment is bad news for those who would like more work and can't get it. They are clearly worse off. For many the data confirms their fears that the true cost of the recession is far higher than the unemployment figures suggest and solves, partly, the puzzle of why unemployment has risen so little in the recession.

For those who advocated the relaxation of labour market rules in the 1980's and 90's the figures will come as a vindication of that supply side policy. Because of the greater flexibility of the market some workers have accepted lower wages and shorter hours rather than becoming unemployed. The pain of the recession is spread more evenly and the economy has not suffered as much disruption as it would have with mass redundancies (which are the alternative to shorter hours).

Some would argue that the unemployment figures are a misrepresentation of the current economic situation, but for most economists it is a welcome sign that the supply side reforms of the Blessed Margaret continue to help the economy.

The Daily Telegraph cover the story here

Supply side policy failure

Supply side policy is known for its long lag time and the uncertainty of its outcomes. Today we have evidence of this in the measures implemented to reduce long term unemployment.

The 'Welfare-to-work' programme aims to help those who are long term unemployed return to work. Those who have been out of work for more than six months find it especially difficult to find work. They have become disenchanted and detached from the workforce, as they loose the skills and habit of work and become more distant to current work practises. Perhaps it is needless to say that as the period of unemployment becomes longer these problems worsen.

So the government have been paying for additional help, through private sector organisations, to get the long term unemployed back to work. They do this by a variety of methods that often includes training.

A report has shown that the number of people helped find a job is just 3.53% of those on the welfare-to-work programmes have found jobs.

Is this policy a waste of money? In a period when the government spending much more than it anticipated would a policy of doing nothing and simply paying the benefits be a better idea?

The BBC cover the story here

Unemployment down - at least in some ways

The debate on whether the recovery is going to be sustained will go on for a long time. Yesterday there was some good news on unemployment, although not consistently, and a warning from the Bank of England that the recovery will be slower than they previously expected.

The unemployment figures on the ILO measure fell by 49,000, largely due to a fall in youth unemployment. This really is good news as it means that the jobs market at the bottom end may be recruiting again. If school and university leavers had to endure another year of poor recruitment then then problems of long term, but young unemployed would present a massive policy problem for a decade at least.

Unusually the claimant count measure of unemployment rose. This difference is unusual because it is harder to get Job Seekers Allowance than it is to say you are unemployed according to the ILO definition. However we should wait for more data before reading too much into this.

Meanwhile the Bank of England said that the growth of the economy will be much slower than they thought in their last report, just three months ago. They now think the economy will return to 2008 levels of output in 2015 and not 2013. That is really quite a big difference.

The bank expects recovery to be uneven and does not rule out future declines in output in some quarters. The Euro area recovery is key. If Europe does not recover, and today it was announced that the Euro area slipped back into recession, then Britain will suffer too.

The BBC review the unemployment figures and comment of future prospects here

The sharp end of international trade and specialisation

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Ford have announced the closure of the Transit van factory in Southampton. The last 500 jobs will be lost from a plant that has produced over two million vans since 1972.

This was not a surprise. A Belgian Ford factory is also to close as the vehicle maker can produce far more cheaply elsewhere.

The closure reflects the continuing decline of Britain’s comparative advantage in basic manufacturing. Turkey will benefit as all production is transferred there.

The move illustrates one of the important effects of specialisation and exchange. We know that specialising allows more goods and services to be produced overall and through trade everyone can consume more and so be better off.

While overall welfare rises somebody bears a cost during the 'adjustment period'. This must occur as an industry grows in one trading partner through specialisation another, somewhere else, must decline. Where an industry declines workers lose their jobs and must seek new ones.

Those who lose their jobs are structurally unemployed. They are in need of retraining and because so many are losing their jobs at the same time it may be difficult to clear the local labour market for some time. The costs will fall particularly heavily on the over 40’s who will find it most difficult to find work.

A point to consider is why BMW (the Mini) and Honda are growing in the UK. Is it because of their product?

The local paper reports this move here

Employment at a record high

If there is something to celebrate it is that there are more people in work in the UK than ever before. In addition unemployment has fallen from 8.1% to 7.9%, a significantly larger drop than was expected.

This is good news for the economy because more people in work implies higher Real GDP and so an improvement in the standard of living. The Government will be pleased because tax revenues should rise leading to a smaller deficit.

The question of why employment is so high in a recession is one we must visit again. It is almost certainly due in part to a demographic anomaly. The size of the workforce must have risen. Fewer people leaving the workforce (for example not retiring at the previous normal age) and more people gaining jobs would explain this. While a substantial number of people remain unemployed there are more jobs.In other periods unemployment would have fallen substantially already.

There are particular concerns. The young are finding it increasingly difficult to get work and the difference between geographical areas is also widening. Scotland saw a rise in unemployment as did Northern Ireland. Cambridge has the lowest jobless rate overall in the country. Horsham has 1.6% unemployment, Birmingham Ladywood 12.2%. These are big differences showing the costs of unemployment are not evenly distributed.

Good news has to be welcomed. It will help boost confidence in both households and firms, but we really have to start asking about how youth and long term unemployment will be solved over the next few years.

The Telegraph report the figures here with numerous links to related stories.

Does easier hiring and firing mean a better economy?

A major improvement in the UK economy since 1980 has been the improved supply side performance of the economy.

The main aim of the supply side reforms has been to make the market work better. That includes reducing regulations that makes it more costly for businesses to operate. By reducing costs not only do profits and so investments rise, but firms are more confident in their chances of success and so expand more quickly.

One area of concern has always been the ease with which firms can get rid of staff. If it is easy to fire staff then, so runs the argument, firms will be more willing to hire staff. If it is difficult to shed staff then firms will hold back on recruitment just in case they don't need the staff for long.

A classic example is the French who provide employment protection after just three months. As  a result many French workers find themselves on a series of short contracts making it impossible to borrow money long term.

Now the government is proposing making the cost of losing staff less by altering the rules on compensation for unfair dismissal. The Business Secretary, the very sensible and wise economist Vince Cable, (no political bias here) has rejected the idea of 'no fault dismissal' which would allow hiring and firing at will. But he has supported the idea of reduced compensation.

Will this accelerate the rate at which firms hire labour and help reduce unemployment? That is the acid test.

The BBC reports the proposals here

The unemployment puzzle

The economy is supposed to be in recession. The relationship we expect between GDP and Unemployment is that as GDP falls unemployment rises. But it has fallen.

To make it even more strange the number in work rose by a staggering 236,000 in three months. There are now 29,600,000 people employed in the UK.

Of course there are other factors to consider. Only 100,000 of the new employees were working full time for example.

Also the long term unemployed, those unemployed for more than a year, rose again.  This is worrying because some people seem to becoming detached from the workforce.

The figures need to be treated carefully. What was the Olympics influence? Will it be reversed in the next figures> But the most important question - is there really a recession if unemployment is falling and employment is rising?

The BBC cover the figures here

Click through to the BBC economy page for more data

Pigou claims another victory over Keynes

The path taken by unemployment over the period of the recession is very odd. During recessions unemployment should go up as real output falls. In line with this employment should fall.

Well that has not happened for a lot of this recession and explanations of why that is the case are far from complete.

The article below, by Stephanie Flanders of the BBC, looks at some of the issues. It could be because so many of the new jobs, over half a million more than two years ago, are part time. It might be because those who have chosen self-employment over unemployment are actually 'self-unemployed' having no significant work to do.

Two explanations Flanders does not mention are:
1. The effect of mobile European workers - if they go home when there are no jobs this stops unemployment rising as each job is lost. This only explains the low rise in total unemployment.

2. Real wage rates have fallen, allowing firms to employ more people.

The second explanation is simply markets working as they should in a microeconomic sense. When there is a surplus of a product then price falls. This encourages higher demand, but lower supply and the market clears.

Pigou and other leading economists explained that this is what would happen at the start of the Great Depression and that this would lead to unemployment falling and output recovering. Of course the 1930 recession continued into the Great Depression and Keynes explained this by saying wages were 'sticky downwards' and the market adjustment didn't happen.

The supply-side reforms to the labour market and the draconian approach to public sector pay since 2009 have allowed real wages to drift down. Firms can now afford to take on workers with lower productivity and so employment could rise with a lower rise in real GDP associated with it.

There are multiple factors at play here, but I'd like to think that Pigou got this one right.

Stephanie Flanders article is here

Unemployment and poor mental health

One of the stated costs of unemployment is that the unemployed become depressed and suffer more physical illness.

The cause of the physical illness is usually put down to poorer diet and also stress. Of course worrying about the future in a recession is easily understood.

There is evidence that the UK is taking more anti-depressants. The article below makes a real meal of it but it is clear that this provides casual empirical evidence to support this particular cost of unemployment.

The BBC article is here

Permanent damage to supply side - NIESR

A regular report by the National Institute for Economic and Social Research (A bit like the IFS without the political posturing) has said they expect unemployment to reach 9% and not decline until the end of 2013.

This continued economic weakness will do long-run damage to the supply side of the economy. This will include the loss of motivation and skills of many workers who find themselves in long term unemployment. It will also lead to the loss of productive capacity, which had initially fallen into disuse but is eventually derelict and scrapped.

Interestingly the NIESR suggest, as I have, that there is a need for a moderate and targeted fiscal boost. They say:

It remains our view that fiscal policy could be used to raise aggregate demand in the economy with little to no loss of fiscal credibility. We have never and do not now advocate scaling back the government’s medium- to longer-term policy of fiscal consolidation. However, the UK also suffers from a lack of demand in the short term. As we noted in our January Review, a 1 per cent of GDP increase in government investment this year would boost GDP by around 0.7 per cent, assuming no reaction by the MPC. A temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclically-adjusted current budget in 2016–17. 


Interestingly there is a one year estimate of the multiplier effect in that paragraph. Suggesting that governments are not really that powerful when it come to demand management.

The BBC covers the story here

Unemployment, a ray of hope or not?

Unemployment rose to 8.4% (2.67 million) last month on the LFS measure. The claimant count rose to 1.61 million.

There is no doubt that rising unemployment is bad news. The cause is, however, largely due to public sector job losses rather than cyclical unemployment which had been driving the figures higher since 2008.

The loss of public sector jobs has had the surprising effect of raising female employment. The state sector employs more women than men and the loss of public sector jobs means that the number of women unemployed has risen sharply and increased as a proportion of the total.

The BBC article below points out some significant points in the figures and also graphs them. You should visit the BBC economy page here and look at their map of unemployment too.

Is this the start of the 'flattening out' of unemployment? Will the private sector at last start driving a recovery. All these and more questions to be answered in a future episode.

The BBC report the figures here

Unemployment - an insight

David Blanchflower is an expert on the labour market. He was once on the Monetary Policy Committee and constantly worried about the effect of monetary policy on the jobs market, which annoyed the government as it was inflation he was meant to be worrying about.

In the piece below he looks at the current state of the UK labour market, considers why it has performed in the way it has and what schemes might work to improve it. This is a must read article.

You will notice that he too refers to the film 'The Full Monty', so its not just me!

Blanchflower's article is here

Neet's to be helped

Click on image to enlarge

NEET's are  young people Not in Employment, Education or Training. There are a worryingly large number of them.

The problem is that a 16 or 17 year old, with no GCSE's above C grade, is really quite low down the list when it comes to picking amongst job applicants. The very poor job market means that many of the people in this category are not getting that first job they need to gain experience.

The problem is that if a 16/17 year old does not get a first job until then when will they? The possibility of a lifetime of short term, casual jobs is quite likely and this equates to a lifetime of poor living standards.

So giving these people a start is important and a new scheme has been announced. Essentially employers will be given a subsidy to employ 16 and 17 year olds who qualify. Hopefully the skills they gain will allow their continued employment.

This is a supply-side policy. It is targeted, it affects the costs of firms and it is expanding the productive potential of the economy. Like many supply side policies the effects will take some time to come through and are far from certain to work. Maybe the firms will take the money, employ the young workers for a short time and then release them having benefited from cheap labour. Of course those people do now have work experience, so some good comes of it.

The budget, £126 million, is small but as each employer will only get around £2000 per employee the measure could benefit a lot of NEET's. But is it enough? That remains to be seen.

The Guardian has some NEET's data here

Unemployment hits 17 year high

Unemployment continues to rise and there isn't going to be a let up soon. The poor growth in the EU and USA means that the world economy is not growing fast enough to maintain employment.

I have written at length on youth unemployment before, but that has reached a new high, and again this has a way to go.

A factor that is making things worse is the fall in public sector workers. 65,000 fewer public sector workers were offset by only 5000 more private sector workers. Remember the plan was that the private sector would grow enough to allow for the  public sector expenditure cuts.

While the situation gives scope for cheap jibes of 'too much too fast' there does have to be serious questions about how best to deal with the situation. Policy trade-offs are a harsh reality for everyone.

Details from the Independent here

Plan C urged by IMF, World Bank, WTO and others

Forecasting economic conditions is a critical part of setting policy.

Consider mid 2010. The economy appeared to be returning to normal growth, albeit slowly. The fiscal and monetary stimulus given to the economy appeared to have been successful, but debt levels were rising rapidly. Forecasts told governments that they could expect modest growth that would allow them to restore the public finances.

But the forecasts were incorrect. Growth faltered and then fell and is now virtually non-existent. Further monetary stimulus has kept heads above water, but now there is a danger that withdrawing more of the fiscal stimulus could do harm.

At present the fiscal stimulus provided by the government is over £160bn in the financial year. That is a huge boost to demand. But the plan is to reduce this through expenditure cuts. The IMF and others have now warned that this could be too much.

Policy must react to the current situation. Stimulate the demand side of the economy in recession, and work on the supply side during growth periods. Monetary conditions require stability at all times and right now that means boosting the money supply (Plan B) to prevent a 30's style contraction (so high marks to Mervyn King on that one).

So now may be the time to call a halt to cuts. Further stimulus is likely to have little effect and would scare the markets. However cutting expenditure will have a negative multiplier effect on Aggregate Demand and that could tip the economies of Europe into recession. That seems to be the concern of the IMF and others and you can probably see their point.

The Guardian covers the story here

UK Unemployment

 UK CPI inflation

There is a well known relationship in Economics, called the Philips Curve. It states that there is a trade off between inflation and unemployment. As unemployment rises inflation subsides.

This relationship was solid until the mid 1970's but broke down in spectacular manner with rising unemployment and inflation appearing simultaneously. However many continue to look for this relationship in the data and the figures announced in the last two days will be seen as a return of the relationship.

Inflation has fallen sharply, so sharply that the Bank of England are worried about undershooting their 2% target. Unemployment edged up, less than feared, but it remains on an upward trend.

The causes of the rise in unemployment and fall in inflation are well known. But this is a perfect example to use when looking at the trade offs between the two variables. It makes it very difficult for governments to achieve their objectives in both.

Can you see the trade off in the data above?

BBC on inflation figures here

BBC on the unemployment figures here

The unemployment and crime link

One of the costs of unemployment that students often like to talk about is a rise in the crime rate. This is a long established relationship that suggests the more unemployed there are the greater the poverty and so the greater the incentive to resort to crime.

In fact in the recession itself crime figures actually fell, but now comes news of rising retail crime. The value has retail crime has risen to £1.4 billion a year. This is a mixture of shop lifting and fraud.

So when discussing the costs of unemployment can we still claim the link to the crime rate? Well possibly not. Petty crimes by individuals appear not to have risen, but crimes by gangs of shoplifters and other fraudsters (which requires far greater organisation and planning) has risen.

The story is covered by Sky here