The Chancellor has announced that the economy is healing and certainly the latest figures suggest some signs of growth across the whole economy.
This does not necessarily translate into actual jobs. In recent years we have seen the phenomenon of ‘jobless growth’ through efficiency or increasing the workload of existing workers. Certainly in the wake of changes to working tax credits employers have been seeking to increase the hours of part time staff to twenty hours or more each week to help them qualify for what is effectively a wage subsidy funded by taxes.
Improvement in the economy might be expected to produce an increase in employment, though with a “time lag”. This lag might be expected to vary from sector to sector with construction and perhaps also some export industries leading the way.
What about unemployment ?
The following is part précis of an article by Stephanie Flanders, Economic Editor at the BBC and part my thoughts on the implications for the labour market, society and Government of NAIRU.
What does Britain's unemployment rate tell you about the state of the economy ?
Governments have always been concerned with getting people into work. But in the 1960s and 1970s they learned to temper that enthusiasm for higher growth with a concern for inflation. In the long run, economists decided, fast growth couldn't deliver full employment, if the economy didn't have the underlying productive potential to match.
That's where the concept of the Natural, or Non-Accelerating Inflation Rate of Unemployment comes from - or NAIRU.
Economists first started to talk about it, 30-40 years ago, the concept that there might be a "natural" rate of joblessness.
Long-term, governments like to think they can lower that natural rate, by raising skills levels, for example. But like most "structural" improvements to the economy, it's not quick.
Short term, the Bank of England is supposed to take the natural rate as fixed, and assume that the economy is getting close to full capacity when the rate of joblessness approaches that level.
The Office for Budget Responsibility reckons Britain's "natural" rate is now about 5.4% (the rate of unemployment just before the economy peaked), others like the OECD think it's higher.
Because of the lag between growth in the economy and growth in employment, central banks focus more on the economy and less on unemployment because what was happening to the economy now was likely to tell you quite a lot about what was going to happen to unemployment later.
Currently this anticipated link between growth and employment is not just operating "with a lag", it's not really operating at all. It has been noted that employment has been rising, even when the economy was not growing.
At first this was put down to “labour-hoarding" by employers, and a rise in self-employment and part-time work. The idea was that unemployment had not really ‘fallen’, it was merely being hidden by reductions in hours and new "jobs" that were not really jobs.
But as Kevin Daly explains in recent research for Goldman Sachs, average hours worked have actually been quite high during this period.
In the UK, people are joining the active labour force, not leaving it. And self-employment is not rising any faster now than in the years before the crisis, when the standard link between output and employment was still working pretty well.
What is driving the rise in employment ?
The falling relative cost of labour; real wages have declined, re-entrants to the workforce from unemployment are either accepting lower pay for similar jobs or settling for jobs below their skill and former pay levels.
If rising employer demand for labour was driving the rise in numbers in work, you'd expect that higher demand would push up wages. In fact, the reverse has happened: employment has risen, as real wages have continued to fall.
According to Daly there are several reasons for this, the biggest being a shift towards later retirement which has accelerated in the past few years, perhaps partly due to legal changes like phasing out compulsory retirement and changing the state pension age for women.
If there is a lot of hidden unemployment and / or the UK really has suffered big permanent damage to its productive capacity as a result of the crisis then growth may be unsustainable. This is still possible. But the Daly view of what's happening with the labour market suggests that, whatever is going on, the rate of unemployment might well be as good a guide to the amount of spare capacity in the UK economy as the Bank of England is likely to find and to when interest rates should change. If unemployment remains higher than expected because demand is weak, the Bank would probably want to keep interest rates lower for longer.
The implications of NAIRU are that Government must accept that there will always be some unemployment. The questions raised by this are who, for how long and what provision should be made for them ?
Currently Government ‘policy’ is not to accept that there will be some unemployment, that the unemployed must be persuaded into work rather than allowed to become comfortable recipients of benefits and that appropriate provision is to assist them to pursue the jobs that are provided by ‘market forces’.
Who
The NAIRU means there will always be a significant number of people in the 16 to 67 age range who will be unemployed. Currently unemployment is higher among those under 25 and over 50. Unless this changes then today’s workers and learners should be factoring this into their career planning.
For How Long
Much unemployment is frictional, e.g. a relatively brief gap between periods of employment. Ideally all unemployment should be frictional, but these gaps between periods of employment tend to be longer for more highly qualified and experienced workers. Employers tend to assume that these will not wish to settle into jobs where they are underemployed and / or under-challenged and will use their jobs as transitional. There may also be some age prejudice here, despite age discrimination legislation. Jobs appropriate to the qualifications and experience of these older workers may not exist and employers’ recruitment practices may overlook potential and transferable skills in favour of matched experience for a ‘quick fix’.
An extended period of unemployment may be very damaging to a younger worker, both to their career prospects and their ‘personal growth’. The need for work may mean that they also have to settle for work where they are under-challenged and / or underemployed. A variety of employment and experience and taking care to identify skills and experience gained can be of use in attempting to progress to more desirable work. It has been noted that while entry level employment can for young men lead to progress to higher positions, for young women it can result in their being stuck at entry level.
Today’s workers and learners should again be factoring this into their career planning.
What Provision
Current conditions suggest that rather than making the same provision for all, perhaps support should vary with age, also perhaps with qualifications and experience. Those in the 25 to 50 age range are more likely to re-enter employment quickly, those over 50 with high levels of experience and qualifications, but perhaps limited to a particular area of work or under 25 and lacking experience with less ease.
If economic policy is to create a reserve labour pool the Government could at least acknowledge this, show those in the reserve labour pool the respect due to citizens and plan to use that labour reserve strategically.
In the recent past the Government has intended to use ‘work experience’ as a means of giving young people an opportunity to evidence basic work skills; punctuality, reliability and fulfilling basic functions like shelf filling; though sometimes their agents have sought to impose this experience on young people who can already evidence these from previous experience. Perhaps rather than basic skills for all they could seek to supported work experience / internships appropriate to the qualifications and experience of the individual young person, rather than having 'internships' as the preserve of those with parents able to support them through this experience.
In an ageing population and with a labour market with a significant number of ‘difficult to fill / skill shortage’ vacancies older workers’ experience and transferable skills are over-looked and targeted support could be given to re-training at higher levels for appropriate candidates.
At the moment re-training is left to ‘market forces’, but driven by supply rather than demand. Suppliers of training offer training to those who can afford to pay, selling the hope that there is demand for that qualification and that possession will make the difference between unemployment and employment. This may in fact generate more employment for trainers than address the real skill requirements of the economy. Strategic planning and deployment of funding at least for some sectors should at least be attempted.
That great neo-liberal advocate of ‘market forces’ Milton Friedman advocated a guaranteed minimum income for all. Currently funding for the unemployed is portrayed as benefit dependency for scroungers rather than support for future returners to employment.
