Sunday, July 13, 2008
A jobless rise but not a bloodbath
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Every day, it seems, brings a new announcement of job losses from housebuilders. Totting up the numbers for the past week or so gives a figure not far short of 10,000, and this is not counting the thousands of self-employed sub-contractors who were building and fitting out new homes until the sector hit the buffers.

The job market is turning, though in a quieter way than it used to. Readers with long memories will recall the News at Ten job maps of the 1980s, when it was possible to pinpoint how many jobs were being cut and where. In a service-based economy, that is harder. People are quietly let go.

Even in Britain’s factories, where employment has dropped by an average of nearly 12,000 a month over the past decade, the process has been much less visible than it used to be.

This week we will get the official labour-market statistics, which will almost certainly show another rise in unemployment, though probably a modest one. The question is whether we are on the brink of something bigger.

There is another question, which is whether migrant workers will make the job-market adjustment in a sharply slowing economy easier or harder.

Ahead of this week’s figures, the most recent official numbers showed a 38,000 rise to 1.64m in the wider Labour Force Survey measure of unemployment over the February-April period.

The claimant count, still the more widely followed measure, rose by 9,000 to 819,300 in May and is up by 24,400 since its low point in January. The unemployment rate on this measure is 2.5%, bang in line with what economists have traditionally thought of as full employment.

That is important. In the recession of the early 1990s unemployment started rising from a high base, just under 1.6m, double its recent lows. This downturn starts from a position of low unemployment.

It also starts from a position of record employment, more than 29.5m, driven by the private sector. In the past two years, private-sector employment has risen by 632,000, while the number of public-sector jobs has dropped by 74,000.

So where do we go from here? Two sectors, housebuilding and financial services, are in the eye of the storm, though other parts of the economy are being affected by the slowdown. The Home Builders Federation (HBF) estimates that 300,000 people are directly employed in new housebuilding, which coincidentally is roughly the same as the number employed in the City and Canary Wharf.

How many of these are vulnerable? Probably a greater number in housebuilding, where activity has halved, than in the City. There will be collateral damage across the wider housing market among estate agents, surveyors and mortgage brokers. But a wider slowdown affects most sectors. When economic growth slows below around 0.6% a quarter, unemployment can be expected to rise. Growth in the quarter just ended is unofficially estimated at 0.2% and will continue at best at this rate over the next two or three quarters.

John Philpott, chief economist at the Chartered Institute of Personnel and Development (CIPD), with his finger on the pulse of the job market, reckons the slowdown will push the claimant count up by 200,000 or so over the next 18 months.

There is an additional complication. Tougher rules are being introduced to get people off incapacity benefit and into work, and to keep them away from government employment programmes (which an OECD report last week said had not reduced youth unemployment below that in competitor countries). The effect will be to push up the claimant count.

Paul Bivand of the think tank Inclusion calculates the effect will be to raise the jobless total by 122,000 by autumn next year relative to what it would have been.

Adding these up implies that the claimant count will certainly go through 1m and could get to 1.2m, which sounds bad, though some of that would be due to procedural changes rather than the economy.

It would also be relatively mild in comparison with the recession of the early 1990s when the jobless total rose by more than 120,000 in a single month, March 1991, and increased by half a million over the winter and spring of 1990-91. In all, unemployment climbed by 1.4m in that recession. More recently, the claimant count rose by 130,000 in 2005-6.

One of the unknowns this time is whether migrant workers will be the economy’s flexible friends, having arrived in large numbers when the job market was strong but leaving again as things weaken.

This is a big issue for the next year or so, but it is also a big issue for the next 20-30 years. In the early 1990s the inflow of migrant workers dropped to zero, high unemployment acting as a powerful disincentive for foreigners to come to the UK.

This time, the sectors hardest hit, including building but also parts of the economy such as catering which rely on discretionary spending, are cutting their demand for labour. They have a high proportion of migrant workers.

At the same time, the outflow of people from Britain, 400,000 in the latest year, is likely to continue, partly because opportunities are better in the booming Middle East and Asia. Net inflows of people into Britain could turn negative.

That should help ease the unemployment problem but will raise longer-term questions. Official projections for population growth and housing assume net migration of 190,000 a year. We may be gearing up for a prolonged rise in Britain’s population that does not happen.

It may be that beyond the current downturn the flows of migrant workers will resume but it is also easy to see circumstances in which they will not. Last time it took until the late 1990s before the flow of migrant workers really picked up strongly. The character of the economy is changing in more ways than one.

PS Alistair Darling admits he runs the gauntlet of unpopular price rises when at his local Tesco. He could wear a baseball cap but the eyebrows would be a giveaway. However, John Hawksworth of Price Waterhouse Coopers might think about a disguise when shopping.

A few days ago rival accountants Ernst & Young came up with an analysis showing how ordinary families’ disposable incomes had been squeezed by rising prices. Hawksworth does not deny higher prices are having an impact, which will help slow consumer spending growth to just 0.5% next year.

But the biggest effect is not on the middle classes. In a paper, The Myth of Middle-Class Inflation Revisited, published in PWC’s UK Economic Outlook, Hawksworth points out that lower-income families have been hardest hit.

In the past four years, the poorest 30% have had a cost-of-living rise of 11.5%- 12.8%, while middle-income groups have seen rises of under 10%. The richest 10% have seen prices rise by 10.8%. It is not surprising that low-income families are hit hardest. Food and energy account for a greater share of their spending.

Perhaps the good news is that we all feel the pain of rising prices. That implies a determination not to let inflation take hold, which should offer some comfort to the Bank of England, stuck as it is between a rock and a hard place.

From The Sunday Times, July 13 2008