I have very little spare time to write my blog today so this will truly be brief. Amidst all the riots in Athens as the Eurozone farce descents further into the mire, the UK Labour Force data came out yesterday (June 15, 2011). There are some who are saying that the data presents good news. A closer examination reveals nothing of the sort. Others are claiming that there isn’t really a problem of unemployment in Britain because the unemployed are largely unemployable. That is a familiar refrain after a deep recession as the labour market struggles to keep pace with the underlying population growth. The conservatives always try to redefine what we might call full employment and claim that a much higher unemployment rate is now indicative of full capacity. The same game is being played out in Australia where despite unemployment and underemployment totally 12.2 per cent at present the Reserve Bank governor had the audacity to claim there were not that many spare labour resources (like 1.3 million odd workers don’t count any more).
Just for the record I note that yesterday, the Eurozone crisis is now firmly capturing front page headlines of the UK Guardian (June 15, 2011 edition) having snuck out of the business and economics pages.
I will write about the Eurozone again soon – after many readers have asked me to explain the Target2 system. My assessment remains the same – Greece should default and exit the EMU as soon as possible. Their budget deficit is rising (for all the wrong reasons) and the adjustment they are seeking to follow – under the bullying of the Euro bosses and the IMF etc is an impossible task.
The UK Labour Force data for February to April 2011 quarter were released yesterday by the British Office of National Statistics.
The headline news seized on by the press was that employment grew by 80,000 and unemployment dropped
The UK Guardian responded to the data release with this headline – UK unemployment falling at fastest pace in a decade – but failed to mention that participation rate was also falling.
Yes, unemployment fell by 88,000 in the three months to April 2011 (all population over 16 years) and there was some employment growth although barely enough to keep pace with underlying population growth. So we have a scaling up effect but not a solid improvement in the data as it stands.
But all is not what it seems.
The ONS data is always poorly presented in my view compared say to the way the Australian Bureau of Statistics or the US Bureau of Labor Statistics presents the labour market statistics.
For example, in Summary Table 1 of the ONS publication they mix and match the categories “All aged 16 & over” with “All aged 16 to 64” so that you cannot immediately compare like with like. A bit of re-arranging using the Labour Force definitions (Working Age Population = Labour Force + Not in the Labour Force = Employment + Unemployment + Not participating etc) allows one to assemble a coherent set of results for the 16-64 year cohort from that Table.
The following Table presents the British data in that form with some additional information calculated from the data itself.
To make any sense of this you have to dig deeper into the data. The current government was elected in May 2010 so I added a comparison between the latest data and the state of the labour market they inherited.
Since the May-July 2010 quarter, the employment-population ratio has fallen by 0.1 points the participation rate has fallen by 0.2 points. How should we consider that given that the press is focusing on the drop in unemployment which over that same period is now 22 thousand lower.
Is that a good outcome? Answer: definitely not.
The actual labour force (16-64 years) in the February-April 2011 quarter was 30,765 thousand. If the participation rate had have remained at the level found at the time of the election (May-July 2010 quarter), that is, at 76.8 per cent the labour force would have been (given population growth) 30,835.2 thousand.
That is, 70 thousand workers exited the labour force since the election which has the effect of reducing the unemployment level and rate.
If the employment growth remained the same but all these “hidden unemployed” workers had have remained active (that is, staying within the statistically-defined labour force) then unemployment would have been 2,501 thousand rather than 2,431 thousand in the February-April 2011 quarter.
The unemployment rate would be 8.1 per cent rather than 7.9 per cent meaning that since the election the unemployment situation for 16-64 years olds has deteriorated not improved.
And worse is to come.
There are three very negative portents in the data.
1. Claimant count rises
The claimant count measure of unemployment (that is, the number of people claiming Jobseeker’s Allowance) rose by 19.6 thousand in May (so it represents more recent data than the quarterly Labour Force data). The claimant count is now 5.2 thousand higher than a year ago (May 2010 when the election was held. The British labour market clearly benefited from the vestiges of the fiscal stimulus introduced by the last government but that is now being pushed aside by the increasingly harsh spending cuts.
The claimant count has been rising since February 2011 which is a very bad sign.
A rising claimant counts is what economists call a “leading indicator” – it gives an early warning sign of further deterioration in the coming months. We know that GDP growth is poor and that will drive a rising unemployment rate in the second half of 2011.
2. Vacancies are falling
The vacancy ratio (the ratio of vacancies per 100 employee jobs) fell in May 2011 and total vacancies fell by 8,000. Since the election in May 2010, total vacancies have fallen by 20,000. The level of vacancies is a good indicator of labour demand. The evidence is that labour demand is softening.
3. Public sector employment falling
Since the election in May 2010, there have been 143 thousand jobs cut from the public sector (24 thousand in the last quarter) and the pace of job loss is increasing.
The data hides the fact that if you add in the temporary staff who worked on the recent census then the job loss rises to 39 thousand in the March 2011 quarter and the total job loss in the public sector since the election rises to 158 thousand.
How should we judge that? When the British Office for Budget Responsibility (OBR) provided forecasts for public employment losses in the June 2010 emergency budget (HERE they were much more optimistic than the reality that is now emerging.
Public sector employment growth has fallen by more than twice their forecast already and the situation will get worse in the next 12 months.
The point is that the losses (mostly confined to local government at this stage) will intensify over the next year.
4. Massive real wage cuts over last year
Wage growth in Britain was very weak – 1.8 per cent annualised. With inflation running at nearly 4 per cent, this means that over the last year British workers have taken a very harsh real wage cut which will lead to further weakness in aggregate demand. The business lobby like to concentrate on the cost side and ignore the demand side. Mainstream economic models would predict that a declining real wage would be a good thing for employment growth at the macroeconomic level.
But that is because they assume that aggregate demand will be constant and so the real wage cut shifts aggregate supply out. This is the famous fallacy of composition that Keynes (and Marx before him) identified.
This fallacy of composition exposes the poverty of the mainstream approach to unemployment. Macroeconomics emerged out of the failure of mainstream economics to conceptualise economy-wide problems – in particular, the problem of mass unemployment. Please read my blog – What causes mass unemployment? – for more discussion on this point.
Marx had already worked this out and you might like to read Theories of Surplus value where he discusses the problem of realisation when there is unemployment. In my view, Marx was the first to really understand the notion of effective demand – in his distinction between a notional demand for a good (a desire) and an effective demand (one that is backed with cash).
This distinction, of-course, was the basis of Keynes’ work and later debates in the 1960s where Clower and Axel Leijonhufvud demolished mainstream attempts to undermine the contribution of Keynes by advancing a sophisticated monetary understanding of the General Theory.
The point is that prior to this the mainstream failed to understand that what might happen at an individual level will not happen if all individuals do the same thing. In terms of their solutions to unemployment, they believed that one firm might be able to cut costs by lowering wages for their workforce and because their demand will not be affected they might increase their hiring.
However, they failed to see that if all firms did the same thing, total spending would fall dramatically and employment would also drop. Again, trying to reason the system-wide level on the basis of individual experience generally fails.
Wages are both a cost and an income. The mainstream ignored the income side of the wage deal. The technical issue comes down to the flawed assumption that aggregate supply and aggregate demand relationships are independent. This is a standard assumption of mainstream economics and it is clearly false.
Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labour force. And the reason lies in there being insufficient aggregate spending of which the net spending by government is one source.
The erronous mainstream response to the persistent unemployment that has beleaguered most economies for the last three decades is to invoke supply-side measures – wage cutting, stricter activity tests for welfare entitlements, relentless training programs. But this policy approach, which has dominated over the neo-liberal period, and reflects their emphasis on the individual falls foul of the fallacy of composition problem.
They mistake a systemic failure for an individual failure. You cannot search for jobs that are not there. The main reason that the supply-side approach is flawed is because it fails to recognise that unemployment arises when there are not enough jobs created to match the preferences of the willing labour supply. The research evidence is clear – churning people through training programs divorced from the context of the paid-work environment is a waste of time and resources and demoralises the victims of the process – the unemployed.
So with unemployment already a deflationary force, the real wage cuts are likely to exacerbate the recovery hopes.
The UK Telegraph carried the story yesterday (June 15, 2011) that – The real problem is the rise in unemployables.
The journalist – who is denoted the “Head of Business” whatever that means – presumably an indicator of self-importance – said:
… despite relatively high levels of unemployment, companies are struggling to fill vacancies …
A large pool of the unemployed are unemployable, a problem that will get worse as the economy restructures towards value added, higher skilled work. Low skilled jobs are increasingly being exported to low cost economies.
In this situation, the traditional impact of high unemployment depressing wage costs no longer holds true – another blow to the doves on the Monetary Policy Committee (MPC).
Funny that vacancies are falling and real wages growth collapsed over the last year.
This is a complex topic and relates to how we view skills etc.
There is a long-standing argument that long-term unemployment has strong irreversibility properties? That is, that full employment should be redefined to occur at much higher unemployment rates than in the past because the workers are unemployable and require supply-side policies to help them develop work capacity.
However, Michael Piore (1979: 10) reminder is worth remembering always:
Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment. (emphasis in original)
(Reference: Piore, Michael J. (ed.) (1979) Unemployment and Inflation, Institutionalist and Structuralist Views, M.E. Sharpe, Inc.: White Plains.)
The orthodox approach, however, has been to consider long-term unemployment to be a (linear) constraint on a person’s chances of getting a job. The so-called negative duration effects are meant to play out through loss of search effectiveness or demand side stigmatisation of the long-term unemployed. That is, they become lazy and stop trying to find work and employers know that and decline to hire them. Over this period, skill atrophy is also claimed to occur.
So it has been common for mainstream economists and policy makers to postulate that there is a formal link between unemployment persistence, on one hand and so-called “negative dependence duration” and long-term unemployment, on the other hand. Although negative dependence duration (which suggests that the long-term unemployed exhibit a lower re-employment probability than short-term jobless) is frequently asserted as an explanation for persistently high levels of unemployment, no formal link that is credible has ever been established.
However, despite the lack of evidence, the entire logic of the 1994 OECD Jobs Study which marked the beginning of the so-called supply-side agenda defined by active labour market programs was based on this idea.
This agenda has seen the privatisation of public employment services in various nations and an obsession with training programs divorced from a paid-work context and the raft of pernicious welfare-to-work regulations. All have largely failed to achieve their aims.
Once you examine the dynamics of the data you quickly realise that short-term unemployment rates do not behave differently to long-term unemployment rates. The irreversibility hypothesis is unfounded.
Please read my blog – Long-term unemployment – stats and myths – for more discussion on this point.
To argue that long-term unemployment is a constraint on growth and therefore needs supply-side programs rather than direct job creation, you would have to find that even during growth periods, long-term unemployment was resistant to decline.
The evidence in all countries is that long-term unemployment moves closely with the official unemployment rate as the business cycle improves. There does not appear to be any strong indication of hysteresis operating. Hysteresis, in this context,is the notion that long-term unemployment is resistant to the aggregate growth cycle, perhaps because skill atrophy requires retraining before the person is able to work.
The bottom line is that if there is sufficient employment growth and firms offer appropriate training packages then workers can be absorbed back into the employed labour force.
I have run out of time today to expand on that evidence.
The fiscal austerity in Britain will accelerate this labour market deterioration.
I could write more about the data release but have other commitments.
So that is enough for today (it has to be!)