Sunday, October 18, 2009
Job market lift should keep unemployment below 3m
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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It should have been what golfers call a "gimme", in other words an easy tap-in, but the formal end of the recession has turned into a cliff-hanger.

On Friday, the Office for National Statistics will publish gross domestic product (GDP) figures for the third quarter of the year. Expectations that they would show a rise were tempered by weak industrial production figures a few days ago.

The National Institute of Economic and Social Research, which has cornered the market in guessing GDP numbers in advance, thinks those production figures mean we will get a flat figure. That, to mix metaphors, would be a goalless draw, enough to signal the end of recession but not to show that recovery has started.

The Treasury never had great expectations for the third quarter. Its forecast is turning out to be wrong not because it thought growth would be back by now it assumed a flat third quarter but because of a big slide, 2.5%, in the first quarter.

We shall see what the GDP figures bring but we should also note that if the recession is not declared officially over, it should be. Last week brought two separate bits of good news from the jobs market. They do not mean that unemployment has peaked and they do not necessarily tell us that it will be onwards and upwards for jobs from now on. But in the context of what until even very recently were exceptionally bleak forecasts for unemployment, some of them verging on the bonkers, they were very welcome.

The first was from the Department for Work and Pensions. Yvette Cooper, its secretary of state, ordered an investigation into why the two main unemployment measures, the claimant count and the Labour Force Survey measure, were diverging. The former was just above 1.5m but the latter racing towards 2.5m.

Part of the answer was that the Labour Force Survey measure is swelled by more than a quarter of a million full-time students looking for jobs. They are not entitled to benefits, which is why they are not in the claimant count.

There is nothing wrong with students looking for part-time jobs to stretch their loans but they should not be in a true measure of unemployment.

Unemployment among 16-24 year-olds is 945,000, which is unacceptably high. Take out the 257,000 students, however, and it comes down quite a bit. More than three-quarters of "unemployment" among 16-17 year olds is school or sixth-form college students looking for Saturday jobs or other part-time work.

This affects perceptions about unemployment levels but also rates of change. In the latest three months (June-August) unemployment among 16-24 year-olds went up by 19,000. All but 2,000 of that rise was among full-time students.

The second bit of good news was in the broader job-market picture revealed by the latest figures. It has been clear for some months that the underlying unemployment picture has been improving. The claimant count, which rose by 500,000 between October and April, then slowed to show monthly increases of between 20,000 and 25,000; last month's rise was 20,800.

Some of us thought it was only a matter of time before this showed in the wider Labour Force Survey measure and it has.

Unemployment in the June-August period rose by 88,000 to 2.469m, less than a third of its 281,000 rise in the March-May period. The latest figure was marginally lower than the 2.47m recorded as the May-July average, so if you wanted to push it you would say unemployment is falling, as some newspapers reported, though the margins of error in the data are large.

The picture for employment was even better, a drop of only 45,000 in June-August, compared with 269,000 over the previous three months. The figures are probably robust enough to conclude that employment has ticked higher the June-August average was 61,000 above May-July.

We should celebrate the fact that something extraordinary has happened in the UK labour market. Compared with a 5.6% fall in gross domestic product, employment has dropped only 1.6%, in contrast with America, where GDP is down less than 4% but employment, depending on the measure, has slumped by 5% or more. America's unemployment rate has doubled.

I have written before about the flexibility the job market has shown workers have accepted pay freezes and cuts in working hours.

Some credit, perhaps quite a lot, should also be given to policymakers. Nearly a year ago, Alistair Darling committed 5 billion to labour-market measures training and help to get the unemployed back into work.

The Bank of England, through aggressive interest-rate reductions and quantitative easing, has also helped, though we will probably never know by how much.

Where next? There are three ways unemployment could go from here. One is that this is a false dawn and that this winter will see an unemployment shake-out every bit as bad as last, taking us scooting up to 3m and beyond.

Some people worry that the trigger will be public-sector cuts. I think this is misplaced. Less than a third of the rise in total employment from 1997 to 2008 was in the public sector. From 1991 to 1998, public-sector employment fell 816,000 but overall employment rose more than 600,000. Public-sector jobs will not be cut overnight.

The most likely prospect is that unemployment will continue to rise but at a progressively slower rate. Logically, the jobless total should increase more slowly as the economy recovers but not stop rising until the economy is growing at or above its trend rate. That will take a while but should keep the peak below 3m.

The most optimistic outcome of all would be that unemployment is close to its peak. Under this scenario employers, fearing something worse than has happened, have found themselves short of workers and could have begun to hire again. Maybe the economy did bottom out in the spring, as some of the surveys suggested.

We are unlikely to have seen the peak in unemployment in all probability it still has significantly further to rise. But the fact that it is even worth thinking about shows how far we have come from the all-pervading gloom of a few months ago.

PS: I'm getting a bit worried about markets. My former colleague John Cassidy has written a book How Markets Fail, out next month. Roger Bootle, founder and head of Capital Economics, has just pipped him with The Trouble With Markets, out last Thursday. We shared a platform the other day to talk about it.

What he calls the Great Implosion was, he says, "the result of a financial sector grown too big, too greedy, too easily drawn to the fabrication of illusory wealth and too devoted to the distribution of the proceeds, rather than the financing of wealth creation".

While confessing he is longer on analysis than solutions, Bootle has some recommendations. Central bankers should focus on achieving inflation targets in the medium term, not all the time, allowing them to burst asset bubbles. Governments should aim for debt of no more than 20% of GDP in good times, as insurance against the fiscal effects of crises.

One way of preventing financial markets from inflicting short-termism on corporate behaviour would be to bar short-term shareholders from receiving dividends. As for making the City safer, he is drawn to the era before the Big Bang of 1986. Partners then were careful not to bet the company by taking excessive risks because it was their own money at stake. Happy days.

From The Sunday Times, October 18 2009