Sunday, May 22, 2005
Relax, there is no need to be gloomy about jobs
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

What has been the most remarkable thing about Britain’s economy over the past decade or so? There are several candidates, but high on the list, undoubtedly, has been the performance of the labour market.

Employment has risen and unemployment fallen, year in, year out. The claimant count stands at 839,000, 2.7% of the workforce, equivalent to “full” employment on the traditional definition used by economists. Employment, measured by the Labour Force Survey, has risen by 3.3m to 28.6m from its low point, which was as long ago as 1993.

It has, then, been an astonishing success story, attributable to the combination of better macroeconomic policies from the early 1990s on, in combination with the labour market flexibilities won during the 1980s.

The job market also tells us a lot about why Britain’s economy has managed to keep going through 51 quarters of continuous growth while competitor countries have faltered. Rising employment has maintained consumer confidence through thick and thin, giving people the ability and the comfort to borrow and spend.

It has also, I would concede, been a big factor in supporting the housing market. My “no crash” view on house prices relies in part on the argument that the economy avoids recession and a sharp rise in unemployment. The crash of the late 1980s and early 1990s only really got into its stride once unemployment, which had been falling, began to rise with a vengeance. A big rise now would not necessarily mean all bets were off concerning house prices, but I would certainly think about wanting to hedge them.

I know, by the way, that there are certain caveats to be applied to the figures on jobs. There are, for example, 7.9m “economically inactive” people of working age, nearly 2m of whom say they want a job. The numbers of economically inactive have, however, been between 6m and 8m for decades and the latter figure, those who say they want work, has dropped by about 400,000 over the past five years.

I know also that there are many more public-sector workers than there used to be. John Sunderland, president of the CBI, told its annual dinner last week that one reason The Guardian could never go tabloid was because even as a broadsheet it had grown too fat on public-sector job advertisements. He upbraided Gordon Brown for the 900,000 increase in state jobs since 1997.

That may overstate it. Official figures show, in fact, 583,000 additional public-sector jobs between 1998 and March 2004, after an 815,000 fall between 1991 and 1998. Taking the two periods together, and allowing for some growth in public-sector employment since March 2004, the net effect is that the 3m jobs created since the early 1990s are overwhelmingly in the private sector.

Is that now coming to an end? Has the “business goose”, to use Sunderland’s phrase, been plucked and squeezed so much that it is incapable of creating any more jobs? The Chartered Institute of Personnel & Development, in its latest quarterly labour market outlook, based on a survey of 1,300 employers, finds that while 49% expect to increase employment over the next quarter, a net 23% think they will be employing fewer people in a year’s time.

Add to that the latest official figures which showed that the claimant count, while low, rose by 8,100 last month, its second successive rise. Bring in, too, the fact that manufacturing jobs have slid to a record low of just 3.2m, that retailers are warning of their most difficult year for at least a decade, and that public-sector jobs growth is starting to be reined back by a chancellor determined to meet his fiscal rules, and it would be easy to get gloomy.

A sustained rise in unemployment, particularly after such a prolonged fall, would hit hard. As Richard Layard, Stephen Nickell and Richard Jackman point out in a new edition of their book Unemployment (Oxford University Press), the effects go beyond the economic. Becoming unemployed is one of the worst experiences a person can have — “similar to divorce or bereavement”, they point out, citing new research.

So how worried should we be? The two-month rise in the claimant count should not trouble us greatly. Such short-term increases have happened before during the long unemployment fall. The wider jobless measure, based on the Labour Force Survey, showed a 15,000 drop over the latest three months.

Not only that but employment showed a pretty healthy 87,000 increase in the three months to March. That was split between a 146,000 increase in full-time jobs and a 59,000 drop in the number of part-timers. Rising full-time employment is normally a sign of strength in the job market.

Where are the jobs coming from? Apart from the continued, if soon to be slower, rise in public-sector employment, the latest 12 months saw a rise of nearly 80,000 in construction jobs, 30,000 in financial and business services and a similar amount in distribution, including retailing. Retailers may be downbeat but they plan to increase their floorspace in the coming years. Those new shops have to be staffed.

We should not forget, either, that there is a built-in self-regulating mechanism in Britain’s job market. The economic migrants who have been attracted here by job vacancies will no longer come if the jobs dry up. The size of the workforce is more variable than it used to be.

This is a downbeat time. Miserable spring weather and a depressing general election campaign mean the feelgood factor is lacking among employers and employees. But things are not that bad. An optimist would say the labour market has cooled enough to head off the need for higher interest rates but not sufficiently to produce a significant rise in unemployment.
There is plenty of gloom around. But now is not the time to get overly gloomy about jobs.

PS: There appears to be a small unit in the Bank of England working on footballing analogies for Mervyn King, the governor, to put in his speeches. I have a similar unit working on Star Wars’ analogies but the best they have come up with so far is Revenge of the Smith.

King’s latest, the Maradona theory of interest rates, in his Mais lecture at the Cass Business School, City University, was one of the most creative yet.

He recalled the second of the Argentinian’s goals against England in the 1986 World Cup. Maradonna ran 60 yards with the ball, beating five England players, by the simple device of running in a straight line while they expected him to dart to the left or right. In the same way, he suggested, the Bank’s monetary policy committee (MPC) can convey the impression it is contemplating raising or lowering interest rates, feinting in either direction, without actually doing anything. But it still has an effect.

The money, bond and currency markets respond as much to the talk of interest-rate changes as to changes themselves. So too do households and businesses. If they read in the newspapers that rates may rise, they rein back spending, and vice versa when the talk is of cuts.

There is, however, a limit to how long the MPC can keep going in a straight line before people get wise to its tricks. The longest period of unchanged rates in the period since independence in 1997 was the 15 months from November 2001 to February 2003. The last time the MPC adjusted rates was in August last year, so matching the record would take us up until November. The way things are going, we should have a cut in rates about then.

From The Sunday Times, May 22 2005

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