Sunday, December 19, 2004
Does bubble-bubble mean unemployment trouble?
Posted by David Smith at 10:00 AM
Category: David Smith's other articles

Could it be that, after a slumber of Rip Van Winkle proportions, something nasty is starting to stir in Britain’s job market? Central to the macroeconomic success story of recent years is that falling unemployment has not triggered higher inflation.

The Bank of England began life as an independent body in 1997 fretting that unemployment had already fallen too far, and that keeping inflation under control might require it to stop falling, or even rise. At that time unemployment on the claimant count was more than 5% of the workforce, while on the wider Labour Force Survey (LFS) measure it was over 7%.

The Bank was fretting unnecessarily. In the past seven years the claimant-count rate has halved to its present 2.7%, while the wider measure has dropped to 4.7%. And all this without any sign of what we used to call the wage-price spiral.

This has arguably been the most important shift in the economy. In the 1980s, a decade characterised by high unemployment, often of more than 3m, it was feared that even a modest drop in the jobless total would trigger inflation.

Economists estimated what is unattractively known as the Nairu (the non-accelerating inflation rate of unemployment) at 10% or 12%. In plain English this meant the expectation was that if unemployment dropped into single figures, inflation would begin to take off.

Even in the mid-1990s, by which time the economy was clearly benefiting from the labour-market reforms of the previous decade, estimates of the Nairu by bodies such as the OECD (Organisation for Economic Co-operation and Development) were about 7% to 8%.

The fact that economists could get something as fundamental as this wrong suggests we should treat all their utterances with a sackful of salt.

There were, however, mitigating circumstances. In the 1980s the problem was too much labour supply: the great wave of 1960s baby-boomers entering the job market. The effort to aborb them meant a breakneck pace of economic growth. When the Tories delivered that in the late 1980s, high inflation was indeed the result.

There is also evidence that, just as unemployment breeds unemployment — once out of the job market for any length of time people find it hard to get back in — so the opposite effect occurs. The steady fall in unemployment over the past 11 years has drawn more and more people back into jobs and, in general, they have stayed in them. Economists call this effect hysteresis; employment breeds employment.

There is also the perennial question about whether the unemployment figures give a true picture of the tightness of the labour market. Alongside rising employment and falling unemployment, economic inactivity has also been increasing. The number of economically inactive people of working age now stands at 7.9m, a record. My view is that, notwithstanding this, the job market is pretty tight. Most of the economically inactive, particularly the third of them on incapacity benefit, are so-called labour market “outsiders”, who cannot easily be absorbed into jobs.

The question is: how tight? Figures last week showed the claimant count down by 3,400 to just 833,200, and the LFS measure down 29,000 in the latest three months to 1.39m. They also showed the underlying growth in average earnings, excluding bonuses, up to a 2Å-year high of 4.4%. That is quite close to the Bank’s comfort ceiling for earnings growth of 4.5%.

One reason why earnings growth has moved higher is that many wage-bargainers still base settlements on the old retail prices index (RPI). The headline RPI is running at 3.4%, compared with just 1.5% for the consumer price index, which has yet to establish itself.

It is also true that the public and private sectors are competing hard for workers. Richard Jeffrey, head of research at Bridgewell Securities, points out that private-sector job vacancies are rising strongly at a time when public recruitment remains buoyant. The biggest jump in earnings in the latest figures was in the public sector.

As an aside, it is hard to get too worried about the housing market and consumer spending (retail sales showed an unexpectedly strong rise last month) when the job market remains so robust.

Where do we go from here? As noted above, people have called turning points in the labour market wrongly before. Wage discipline, which is what we have had, is not going to disappear overnight.

Even so, there is a limit to how much further unemployment can fall from present levels. Whether we have a wage problem probably depends mainly on the public sector. Gordon Brown has announced plans to cut a net 71,000 Whitehall jobs and a further 20,000 in the devolved administrations. The expansion of the public sector has been tremendously useful in keeping unemployment down but has gone too far.

If the chancellor’s cuts signal that this expansion is over, all well and good. But if Oliver Letwin and the Tories are right, and these reductions are phoney, amounting to no more than window-dressing, and overall public-sector employment has much further to rise, there could be trouble.

The labour market is not yet boiling over but it is simmering a little too powerfully. The Treasury needs to turn down the gas before the Bank, with higher interest rates, does it for them. That is not yet on the agenda, although recent economic data have gone against those looking for early rate cuts. Watch the job market closely in the coming months.

PS: The waiting is over, and it’s a no-brainer. This is a banned expression from now on and the clear winner of my competition for most irritating business-related jargon. As one correspondent put it, if a consultant tells you something is a no-brainer it implies that you, the client, are too stupid to have spotted it.

The competition produced more than 200 examples, which I have narrowed down to 25, for reasons to be explained below. The others, not in any order, are: think outside the box; blue-sky thinking; helicopter view; ostrich mode; hit the ground running; pushing the envelope; growing the business; customer focus; reinvent the wheel; benchmarking; strategic fit; synergy; low hanging fruit; total quality management; vision/mission statement; touch base; and let’s not boil the ocean.

Included in my top 25 from economics (indeed, this column) are soft landing, win-win situation and negative growth. Business jargon that has made it into politics includes step-change; there are no problems — only opportunities; and game plan. I still won’t be entirely happy until I hear Tony Blair say: “You can talk the talk, but can you walk the walk?”

Most are self-explanatory. Let’s not boil the ocean apparently means don’t be overambitious. Ostriches bury their heads in the sand; helicopters look down from above. So good was the response I have increased the prize. There are copies of Free Lunch (jargon doubling as a book title) for Robin Mitchinson and for a woman who wishes to remain anonymous, for her brilliant parody (or at least I think it was) of a letter written by her jargon-addicted boss.

I promised a business tool. Robin was one of several readers who sent what in polite company should be called jargon bingo. Draw a grid, five squares by five. Write into it the 25 terms above. Next time you are at a conference, cross them off when the guy droning on in front of his PowerPoint slides says them. Complete a line, either horizontally, vertically or diagonally and shout “Bingo”. It’s probably not sensible to do it if your chairman or chief executive is making the speech.

From The Sunday Times, December 19 2004

Comments

Set against the 7.9m economically inactive members of the labor force, it’s hard to see the unemployment figures as anything other than meaningless. The figure now just measures movements in a distinct but probably not very representative sub sample of what is normally understood to be the unemployed. The main problem is therefore, as you say, that the government is therefore flying blind.

But a second more important problem maybe the hysterisis effects from the public sector hiring binge. How easily is a former “diversity out 5 a day reach worker” going to reintegrate into the private sector (or at least the productive part or the private sector)? This I suspect is going to be the next pool of workers joining the 7.9 mil!

Posted by: giles at December 20, 2004 05:52 PM
Post a comment









Remember personal info?








    •