Show Hide image

Here’s why unemployment has fallen and why it will rise again soon

The month-by-month figures show that the labour market is weaker than commonly thought.

One of the biggest puzzles economists are dealing with in relation to the Great Recession is why it is that the United States had approximately twice the increase in unemployment or decrease in employment compared to the UK for approximately half the fall in output. In the recovery phase, US output has surpassed pre-recession levels while less than half of UK GDP has been restored. In contrast, employment in the US is below what it was at the start of the recession in January 2008, while in the UK employment is up slightly, from 29,482,000 in January 2008 to 29,560,000 in August 2012.

The two measures used to calculate employment in the US, based on a household survey and a firm survey, show slightly different amounts still to be restored. In the case of the former, civilian employment is down 2.3 per cent, while in the latter, non-farm employment is down 3.3 per cent.

Commuter traffic

The most unexpected figures recently were the big drops in the UK’s headline unemployment number and rate. However, the way the Office for National Statistics (ONS) reports the numbers – as three-month rolling averages – doesn’t really help us understand what is happening.
It turns out that this occurs because of concerns about the variability of sample estimates that arise because the survey from which the numbers are extracted – the labour force survey (LFS) – is underfunded and sample sizes are so small that there is a lot of month-to-month variation.

If, for example, you go to the latest data release on unemployment rates from Eurostat, the statistical agency for the EU, you find that there are unemployment rates for August for 22 EU countries, including even tiny Cyprus and Malta; Hungary has data up to July, while Estonia, Greece, Latvia and the UK have data through to June only. It’s time to fix this, Mr Cameron; it’s embarrassing.

Monthly data is available, however, on the ONS website, even though it is not designated as what we call “national statistics”, which are used to calculate the rolling averages. The table illustrates the problem. The headline numbers were that the unemployment rate was 7.9 per cent, down from 8.1 per cent, and unemployment was 2,528,000, down from 2,577,000, marked in red in the table. These are derived as rolling averages, so the 7.9 per cent is the average of June to August, while the 8.1 per cent is the average of March through May, and similarly for the unemployment numbers as well as the employment and inactivity rates.

What does stand out is that the drop in unemployment in August to 2,421,000 (from 2,633,000 in July) looks like an outlier, not
least because of the huge increase in inactivity of 280,000 and a fall in employment of 32,000. Something strange appears to be going on. Note that employment fell in the past two months, from a June peak that is probably distorted by the Olympics, as well as by young people who may not be entering education, in part because of the increase in tuition fees. So the unemployment rate is likely to rise; the Bank of England agents in their October report suggested that there would be “little job creation” in the private sector over the next six months and their past predictions have been reliable.

Why hasn’t employment been as weak in the UK as in the US? I have two plausible explanations. The first relates to eastern Europeans and the other to interest rates. In contrast to other EU countries, in 2004 the UK, along with Ireland and Sweden, opened its borders to workers from the “A8” accession countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia). But the UK
restricted access to state benefits. On 1 January 2007, Bulgaria and Romania joined the EU; workers from these two countries were given much less open access to the UK labour market than those from the A8. (I refer to the group of ten eastern European countries as the “A10”.) Approximately a million workers from these countries registered to work in the UK and signed up for National Insurance numbers. The vast proportion of these workers, when interviewed at the borders, said they had no intention of staying permanently.

This represents a problem because they were not picked up in the LFS or in the population weights used to generate national estimates,
although their consumption would have been picked up. These folks from the A10 were, in essence, commuters – once the economy collapsed, they returned home and either did not work at all in the UK or severely restricted the numbers of days they worked. This would be picked up by a drop in GDP.

Mea culpa

By way of illustration, suppose there were a million A10 workers in the UK in 2008 who worked ten three-week spells. Assuming 50 weeks a year for simplicity, that is the equivalent of 600,000 workers who weren’t counted in 2008. In 2012, there are only 800,000 workers who show up; on average they work three spells of two weeks. That is equivalent to a drop in employment of about half a million. So the drop in employment since then has been understated, although by how much is unclear because we don’t have precise estimates.

Another contributing explanation is that wages have become more flexible in the UK, because of the high proportion of homeowners who have variable-rate mortgages in this country compared to those in the US. In the US, those with fixed-rate mortgages could refinance as interest rates fell but, as credit conditions tightened for most people, that option was off the table. In the UK, workers were less resistant to reductions in hours and pay freezes than they might have been if they hadn’t had big reductions in monthly payments on their mortgages. As a result, any increase in interest rates before growth is fully restored would have a major downward impact on consumption and GDP.

I was wrong on the latest figures, to the delight of some of my Twitter followers, but I suspect unemployment will rise sharply again, and soon.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 29 October 2012 issue of the New Statesman, Something Rotten

Photo: Getty Images
Show Hide image

It's time for the government to think again about Hinkley Point

The government's new nuclear power station is a white elephant that we simply don't need.

Today I will welcome Denis Baupin, Vice President of the French Assembly, to Hinkley.

His own choice to come and visit the site of the proposed new nuclear power station reflects his strong desire to prevent the UK disappearing up a dangerous dark alley in terms of energy policy. It also takes place as France takes a totally different path, with the French government recently adopting a law which will reduce nuclear energy in the country.

Greens have opposed Hinkley ever since the government announced its nuclear strategy. Hinkley, with its state aid and an agreed strike price of £92.50 per megawatt, has always been financially and legally suspect but it is now reaching the level of farce. So much so that George Osborne is required to be economical with the truth in front of a House of Lords committee because he cannot find anything honest to say about why this is a good deal for the British people.

Mr Baupin and I will join hundreds of protestors – and a white elephant – to stand in solidarity against this terrible project. The demonstration is taking place under a banner of the triple risks of Hinkley. 

First, there are the safety and technological risks. It is clear that the Pressurised Water nuclear reactor (EPR) – the design proposed for Hinkley C – simply does not work. France’s nuclear safety watchdog has found multiple malfunctioning valves that could cause meltdown, in a similar scenario to the 1979 Three Mile Island nuclear accident in the US.  The steel reactor vessel, which houses the plant’s nuclear fuel and confines its radioactivity, was also found to have serious anomalies that increase the risk of it cracking. Apart from the obvious safety risks, the problems experienced by the EPR reactors being built at Flammanvile in France and Olkiluoto in Finland have pushed the projects years behind schedule.

Secondly, Hinkley poses risks to our energy security. Hinkley is supposed to produce 7% of the UK's energy. But we now know there will be no electricity from the new nuclear plant until at least 2023. This makes power blackouts over the next decade increasingly likely and the only way to avoid them is to rapidly invest in renewable energy, particularly onshore wind. Earlier this week Bloomberg produced a report showing that onshore wind is now the cheapest way to generate electricity in both the UK and Germany. But instead of supporting onshore wind this government is undermining it by attacking subsidies to renewables and destroying jobs in the sector. 

Thirdly, there is the risk of Chinese finance. In a globalised world we are expected to consider the option of allowing foreign companies and governments to control our essential infrastructure. But it is clear that in bequeathing our infrastructure we lose the political control that strengthens our security. The Chinese companies who will be part of the deal are part owned by the Chinese government and therefore controlled by the Chinese Communist Party. What a toppy-turvy world globalisation has created, where our Conservative British government is inviting the Chinese Communist party to control our energy infrastructure. It also seems that China National Nuclear Company is responsible for the manufacture of Chinese nuclear weapons.

Of course it is the Chinese people who suffer most, being at the hands of an oppressive government and uncontrolled companies which show little respect for employment rights or environmental standards. By offering money to such companies from British consumers through their energy bills our government is forcing us to collude in the low human rights and environmental standards seen in China.  

Research I commissioned earlier this year concluded we can transform the South West, not with nuclear, but with renewables. We can generate 100 per cent of our energy needs from renewables within the next 20-30 years and create 122,000 new quality jobs and boost the regional economy by over £4bn a year.

The white elephant of Hinkley looks increasingly shaky on its feet. Only the government’s deeply risky ideological crusade against renewables and in favour of nuclear keeps it standing. It’s time for it to fall and for communities in the South West to create in its place a renewable energy revolution, which will lead to our own Western Powerhouse. 

Molly Scott Cato is Green MEP for the southwest of England, elected in May 2014. She has published widely, particularly on issues related to green economics. Molly was formerly Professor of Strategy and Sustainability at the University of Roehampton.