So far, so good…
Some years ago, a man fell off the top of the Empire State Building. Eyewitnesses in offices on the way down said he had a strangely complacent smile on his face; as he hurtled past, some heard his last words:
“So far, so good, so far, so good, so far…”
Employment statistics are notoriously a ‘lagging indicator’ of what is happening to an economy. Even so, quite a few economists are surprised at the contrast between the growth figures that have dwindled to zero and the figures for the labour market, which continue to show record employment levels and employment rates still just short of 75 per cent – very high, by European standards.
Why haven’t the employment figures started to reflect the downturn that is already affecting sales and investment?
One possibility is that employers have been engaged in ‘labour hoarding’ – holding on to workers for fear of being unable to cope with a revival of demand. This means that, even as sales fall, businesses are reluctant to let workers go, but we may be at a turning point.
There have been small increases in unemployment for several months now and indicators of a slackening labour market, notably a decline in temporary employment, an increase in the level of redundancies and an increase in the number of economically inactive people who say they want jobs. It is significant that the increase in redundancies has been in finance (unsurprisingly), construction and retail/hotels and restaurants – the sectors which tend to be first to feel the adverse winds of an economic slowdown.
It looks increasingly likely that that unemployment will grow and employment will shrink in 2009 (and probably in 2010 as well). David Blanchflower, in an interview with Reuters yesterday, forecast a 330,000 increase in unemployment by the end of the year. This would take ‘claimant count’ unemployment (the numbers getting Jobseeker’s Allowance) well over a million and the number unemployed using the internationally agreed ILO definition from the current level of one and two-thirds million to just over two million.
Not everyone is as pessimistic as Prof Blanchflower, but disagreements are a matter of scale, not about the general direction. If last month’s unemployment figures (an increase of 60,000 between Jan-Mar and Apr-Jun) are the start of a trend, rather than a blip, then we can expect a cumulative contraction in the order of 120,000 by the end of the year.
At the same time the Government is engaged in a welfare reform programme that will force many people off inactive benefits and onto the claimant count, further exacerbating this problem. Starting in October, lone parents whose youngest child is over seven years old will have to claim JSA if they want to go on getting benefit, and the new tougher eligibility test for disabled people’s benefits is designed to force more onto Jobseeker’s Allowance
If that is all that happens, of course, all we will see is a blip in the claimant count that won’t tell us anything about unemployment. But if forcing people onto a new benefit changes behaviour (which is what the reforms are designed to do) we can expect a real increase in unemployment, and the incoming stream of people newly made redundant will find that they have extra competition for the jobs that are available.
These trends may be offset by negative flows of migration as some migrant workers from other EU Member States return to their home countries, but even with deliberately cautious assumptions an increase in the claimant count to well over 1 million is almost certain by 2009, and ILO unemployment rising to over 2 million by 2010 seems likely.
I’m not as pessimistic as Prof Blanchflower – yet. But the difference is really a matter of timing, and the policy response is very similar. The longer it puts off interest rate cuts, the longer the Monetary Policy Committee risks extending the ‘growth recession’. In addition, the case for a fiscal policy package to raise demand is now overwhelming, and unions will be looking to the Government for bold and determined action.