Wednesday, December 2, 2009

Why is UK Unemployment Not Higher?

A curious feature of this recession, is that despite its depth and length, unemployment has not risen further.

UK recession of 2009 compared to 1991 and 1981

Source: ONS

As this graph shows, the current recession has seen the largest fall in GDP - a fall of 6% in the past 6 quarters.
Also, in the other recessions, the economy recovered quite quickly. This speed of recovery is not predicted in 2010.

Unemployment in Recessions of 1981, 1991 and 2009

source: ONS

This shows that despite a rapid fall in GDP in 2009, the rise in unemployment has been relatively modest. Given previous recessions, we could have expected a higher unemployment rate.

Why is unemployment not higher?

I think there are a few possible explanations:
  • Official statistics underestimate true level of unemployment. Government changes have made it more difficult to claim benefits. Therefore, official unemployment is underestimating the true level of full time employment. Another way of considering unemployment is the employment rate. For example, currently 72.5% of the working age population is in active employment. ONS It would be interesting to find the statistic for employment rates in 1991 and 1981.
  • This time, the recession has hit the financial services sector more than previous recessions Financial services could be relatively less labour intensive than manufacturing .
  • Firms have sought to avoid unemployment by cutting back on hours or strict pay deals.
  • An increase in young people going to higher education to avoid a very difficult labour market. Or an increase in older workers taking early retirement
  • Labour Market protection. Unemployment in the US has risen more quickly than in Europe. Many suggest this is because labour markets in US are more flexible. In other words it is easier to hire and fire workers. This makes US unemployment more volatile. European unemployment rates rise slower in a recession, but, also fall more slowly during recovery. However, I am uncertain the extent of labour market protection for UK workers.
These factors suggest, future unemployment may decline slowly. Unfortunately, we are more likely to experience an unemployment rate like the 1980s, than the 1990s when it fell quite quickly.



Antonia - Beauty Health Finance and Green Issues Editor said...

Well, the true level of unemployment is not known because there are many people who are unemployed but not claiming benefits of any kind.

Therefore, the ONS cannot reflect the true statistics of what is really going on in this recession.

Many Graduates I know are out of work and not claiming the flimsy unemployment benefits that the Government hands out, additionally it is demoralising and the people working in the jobcentres are rude anyway. We need better paying Graduate jobs, not £60 a week that can't feed a cat!

Jo Jordan said...

You might use employment tax revenues or NI contributions as a better proxy of hours worked.

Do we know where GDP shrank? It seems important to understand what aspects of the economy have fallen away.

Anonymous said...

Unemployment in the UK is much higher than the official figures proclaim.

As the article rightly states, unemployment is a lagging indicator of any recession.

Unemployment has tripled or quadrupled in many places since early 2008, youth unemployment affecting graduates and school leaves eg those aged 16 to 24 is now the second highest if not the highest in the EEC.

The real reason why unemployment isn't higher at this stage of the recession is the use of short time working, people working part time to enable them to avoid unemployment and this is illustrated by a rapid rise in part time employment and corresponding fall of 3/4 of a million in full time employment and on top of that many people have given up looking for work, younger people are going to university hence the rise in applications and others are brushing up on their skills in the hope of getting work.

Finally, JSA (Job Seekers Allowance) is means tested those people with more than 8k in savings or living with a partner that works cannot qualify for JSA and are not counted as unemployed even if they really are

So the true UK unemployment figure is around 5 million including those on Employment Support Allowance the new benefit that replaced Incapacity Benefit, so don't be fooled by low unemployment stats they are dire around 1 in 5 of the uk workforce is affected by either unemployment, inactivity or underemployment, these are the key words any incoming government needs to address

Unemployment will rise in 2010 why , VAT increasing, a need by government to get the public deficit down and expected big cuts in the public sector by a tory government or labour government, interest rate rises to tackle rising inflationary pressures which sucks more money out of the uk economy. In all honesty this is a perfect storm and one the UK won't recover from unless or until the banks are made to pay the money back they had from bail outs.

One way of doing that is to break the banks up - make RBS sell NatWest and Lloyds sell HBOS.