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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: Dan Kitwood/Getty Images
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Conservative disunity is not all good news for Labour

The Tory leadership election could squeeze Labour out of the conversation, just like Blair and Brown did to the Tories.

The first test of opposition politics is relevance. Other key yardsticks - political plausibility, economic credibility, setting the agenda and developing a governing vision - all matter greatly. But making yourself a central part of the relentless cycle of daily politics, the terms of which are generally set by the governing party, is the first hurdle. It matters not whether you sign up to new politics or old: be relevant or wither. 

The issue of relevance is becoming a pressing issue for Labour. Take George Osborne’s favoured issue of the so-called national living wage.  Leave to one side the rights, wrongs and nuances of the policy and just consider the basic political dynamic it creates.  Osborne has, quite deliberately, set up a rolling five year argument over a steadily rising wage floor. On one side, is the Chancellor arguing that his policy is the right thing for Britain’s ranks of low paid workers. Pitted against him are ranks of chief executives of low-paying big business. With each impending hike they will holler at Osborne to go no further and the media will happily amplify the row. In response the Chancellor will quietly smile.

Sure, on occasions this will be uncomfortable stance for Mr Osborne (and if the economy takes a downward turn then his pledge will become incredible; there are always big risks with bold strokes).  Yet the dominant argument between the Conservatives and big business leaves Labour largely voiceless on an issue which for generations it has viewed as its own.

We may well see a similar dynamic in relation to the new national infrastructure commission – another idea that Osborne has plundered form Labour’s 2015 manifesto. It’s far too early to say what will come of its work looking at proposals for major new transport and energy projects (though those asserting it will just be a talking shop would do well not to under-estimate Andrew Adonis, its first Chair). But there is one thing we can already be confident about: the waves of argument it will generate between Osborne’s activist commissioners and various voices of conservatism. Every big infrastructure proposal will have noisy opponents, many residing on the right of British politics. On the issue of the future of the nation’s infrastructure – another touchstone theme for Labour – the opposition may struggle to get heard amid the din.

Or take the different and, for the government, highly exposing issue of cuts to tax credits. Here the emerging shape of the debate is between Osborne on one side and the Sun, Boris Johnson, various independent minded Conservative voices and economic think-tanks on the other. Labour will, of course, repeatedly and passionately condemn these cuts. But so have plenty of others and, for now at least, they are more colourful or credible (or both).  

The risk for the opposition is that a new rhythm of politics is established. Where the ideological undercurrent of the government steers it too far right, other voices not least those within the Conservative family - moderates and free-spirits emboldened by Labour’s current weakness; those with an eye on the forthcoming Tory leadership contest – get reported.  Where Osborne consciously decides to tack to the centre, the resulting rows will be between him and the generally Conservative supporting interests he upsets. Meanwhile, Labour is left struggling for air.

None of which is to say there are no paths back to relevance. There are all sorts of charges against the current government that, on the right issues, could be deployed - incompetence, complacency, inequity – by an effective opposition.  Nor is the elixir of relevance for a new opposition hard to divine: a distinct but plausible critique, forensic and timely research, and a credible and clear voice to deliver the message. But as yet we haven’t heard much of it.

Even in the best of times being in opposition is an enervating existence. Those out of power rarely get to set the terms of trade, even if they often like to tell themselves they can. Under Ed Miliband Labour had to strain – sometimes taking big risks - to establish its relevance in a novel era defined by the shifting dynamics of coalition politics. This time around Jeremy Corbyn’s Labour is up against a Chancellor willing to take risks and pick big fights: often with traditional Tory foes such as welfare claimants; but sometimes with people on his own side.  It’s also a new and challenging context. And one which Labour urgently needs to come to terms with.   

Gavin Kelly is chief executive of the Resolution Foundation