It was the 12th May 2010 and George Osborne’s first day as the UK’s new Chancellor of the Exchequer. His arrival at HM Treasury coincided with the latest ONS labour market release. Just in case you were rather distracted by political events, we take the opportunity here to trawl through some of the latest labour market numbers, focusing, in particular, on those that may pose real challenges for George Osborne and the new coalition government.
From the ONS release we observe that in the three months to March the total number of economically active individuals in the UK was 31.340 million. Of these, 28.829 million were employed while 2.510 million were unemployed (but actively seeking work). The number of people employed fell by 76,000 over the quarter (and by 341,000 over the year) while the number unemployed rose by 53,000 (279,000 over the year).
Now we consider the rate of unemployment. The unemployment rate expresses the total number unemployed as a percentage of those economically active. Over the first quarter of 2010 the unemployment rate rose to 8.0%, a rise of 0.2 percentage points on the previous quarter and a rise of 0.9 percentage points from a year earlier. It is the highest quarterly unemployment rate since the 8.1% recorded in Q3 1996.
Next, consider unemployment and gender. Of those unemployed in the first quarter of the year, 61.6% were male and 38.4% were female. The increase in the male unemployment rate during the economic slowdown has been especially marked. The male unemployment rate in Q1 2010 rose to 9.2%, up from 7.9% a year ago and 5.6% two years ago. The female unemployment rate has increased to 6.7% in Q1 2010 from 6.1% in Q1 2009 and 4.8% in Q1 2008. Therefore, over the past two years the male unemployment rate has risen by 3.6 percentage points while the female rate has increased by 2.1 percentage points.
Another troubling issue is unemployment amongst the young. The unemployment rate amongst those aged 18-24 is considerably higher than the overall rate. In the three months to March the unemployment rate for this age group was 17.9% compared with the overall rate of 8%. But, more than this, the current rate of unemployment amongst those aged 18-24 is actually higher than during the early 1990s when it peaked at 17.8% in Q1 1993. The male unemployment rate amongst this age group is especially high having risen to 20.7% in the first quarter of the year, up 2 percentage points on the year and up from 14.2% in Q1 2008. The female rate amongst this age group is 14.6%, up 1.3 percentage points on the year and up from 9.8% in Q1 2008.
Another issue that emerges out of the statistics is the rise in long-term unemployment. The number of people unemployed for more than one year rose to 757,000 in the first quarter, up from 509,000 a year ago and 397,000 two years ago. Perhaps, it is easier to see the magnitude of this problem when we note that 30.2% of those unemployed have been unemployed for at least one year – this is up from 24.5% in Q1 2008. Amongst females, 25% of those unemployed have been without work for at least one year, but amongst males this rises to 33.4%. In other words, one-quarter of unemployed females and one-third of unemployed males are now regarded as being long-term unemployed.
As troubling as these numbers are, the issue of long-term unemployment is one that, over the past two decades, has never really gone away. On average since 1992, 29.4% of those unemployed have been without work for at least one year (34.2% amongst men and 21.6% amongst women).
And now to our final observation: the historically high number of economically inactive individuals of working age. In the first quarter of 2010, 8.166 million of those of working age were economically inactive, up by 86,000 over the year. As a proportion of the working population, this equates to 21.5%, which is not in itself a record high – during 1983 it reached 23.2% – but it is, nonetheless, up from 20.7% a year ago. The inactivity rate amongst those of working age is highest amongst females at 25.9% (up from 25.7% a year ago) compared with 17.4% amongst men (up from 16.1% a year ago).
One factor that helps to explain the overall rise in inactivity is the 43,000 increase in the number of students who have become economically inactive over the past year. But, we also note upward pressures on inactivity over the past year from the increase of 37,000 in the number of people who are ‘long-term sick’ and from the 13,000 increase in the number who feel ‘discouraged’ from seeking work. These pressures highlight some of the many costs that arise from unemployment and potentially raise some tricky policy challenges for the new government.
Articles
UK unemployment rises in first quarter Investment Week, Hannah Smith (12/5/10)
UK unemployment climbs to a 16-year high Irish Independent, Svenja O’Donnell Brian Groom (13/5/10)
UK unemployment increases to 2.51 million BBC News (12/5/10)
Unemployment: what the experts say Guardian (12/5/10)
UK unemployment hits highest since 1994 The Times, Robert Lindsay (12/5/10)
Jobs recovery still fragile, ‘dire’ data shows Financial Times, Brian Groom (12/5/10)
Scottish unemployment rises by 10,000 in three months BBC News (12/5/10)
Unemployment rises to highest level since 1994, ONS says inthenews.co.uk, Sarah Garrod (12/5/10)
Data
Latest on employment and unemployment Office for National Statistics (12/5/10)
Labour Market Statistics, May 2010 Office for National Statistics (12/5/10)
Labour market statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What is meant by somebody being economically active? Do they have to be in a job to be economically active?
- Using the figures in the commentary, calculate the number of economically active people in Q1 2009 and so the change up to Q1 2010.
- If the number of people unemployed rises does this mean the rate of unemployment rises? Explain your answer.
- What factors might explain the persistent problem of long-term unemployment? What policy prescriptions would you offer the new coalition government in attempting to tackle this problem?
- Looking back through the commentary, pick out some of the notable gender differences. What factors might help to explain these?
- Are there any factors identified in the commentary that may be affecting the economy’s potential output?
The latest inflation release from the Office for National Statistics shows the annual rate of CPI inflation for April at 3.7%, up from 3.4% in March. In other words, the average price of a basket of consumer goods – the Consumer Price Index – was 3.7% higher in April than in the same month last year. In three of the last four months, the rate of inflation has been in letter-writing territory, i.e. more than 1 percentage point away from the government’s central inflation rate target of 2%. Of course, this time it was George Osborne, the new Chancellor of the Exchequer, who was the recipient of the obligatory explanatory letter from Mervyn King, the Governor of the Bank of England.
Over the past six months the average annual rate of rate of consumer price inflation in the UK has been 3.1%. It is, therefore, no surprise that there is considerable debate amongst commentators about the need for the Bank to raise interest rates. Part of the debate concerns the extent to which the Bank is right to argue that the current inflationary pressures are essentially short term and, according to May’s letter from the Governor to the Chancellor ‘are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy’.
The Bank points to the impact on the inflation figures of what we might term ‘one-off effects’. These include, for instance, the restoration in January of the standard rate of VAT to 17½% and the raising in the Budget in March of certain excise duties (commodity taxes), such as those on alcoholic beverages and on petrol. The Bank also points to the effects from the weakening of Sterling, specifically on the prices of imports, and from the increase over the past year in the price of oil because of higher demand on the back of the global economic recovery. Again, the Bank continues to argue that these pressures should weaken over the next 12 months.
As you might expect of the economics profession, there are others who argue that the Bank is being somewhat complacent over the prospects for inflation. Of course, these are incredibly uncertain times. In effect, the Bank is having to assess, on the one hand, the significance of cost pressures, such as those emanating from oil and other commodity prices, and, on the other hand, the future strength of aggregate demand, particularly in response to the likely fiscal tightening, not only in the UK, but in many other parts of the world too.
While economists will always hold divergent views on the prospects for inflation and, more generally, the economy, we may see another debate reignited in the months ahead: the debate over the extent to which the government’s powers over both fiscal and monetary policy are constrained.
Since 1997, the Bank of England has had a clear mandate to target the rate of inflation. But, to what extent might this mandate cause tensions between fiscal and monetary policy in the months ahead given the government’s plans for fiscal consolidation? In particular, with a tightening of fiscal policy, so as to reduce the size of the government’s budget deficit, will the Bank of England be able to maintain low interest rates and thereby help to sustain aggregate demand? This will, of course, depend on the path of inflation and, importantly, the sources of inflation. Nonetheless, it will be interesting to see whether the clear, if limited, remit of the Bank of England places pressure on the UK’s macroeconomic policy framework in these difficult economic times.
Articles
UK inflation hits 17 month-high BBC News (18/5/10)
A tale of two zones BBC News blogs: Stephanomics, Stephanie Flanders (18/5/10)
Shock rise in inflation risks higher rates and unemployment Independent, Sean O’Grady (19/5/10)
Q&A: Unpleasant surprise for Threadneedle St Financial Times, Chris Giles (18/5/10)
Inflation rise see King rebuked Financial Times, Chris Giles (19/5/10)
UK inflation fears Financial Times (18/5/10)
Inflation: mercury rising Guardian (19/5/10)
The elephant in the room just got bigger Times Online, David Wighton (19/5/10)
Weak pound and tax rises lift inflation to a 17-month high (including video) Times Online, Grainne Gilmore (19/5/10)
Data
Latest on inflation Office for National Statistics (18/5/10)
Consumer Price Indices, Statistical Bulletin, April 2010 Office for National Statistics (18/5/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Questions
- What do you understand by cost-push and demand-pull inflation? To what extent are each of these significant in explaining the current rise in the rate of inflation?
- Outline the potential advantages and disadvantages of granting the Bank of England independence to set interest rates in meeting an inflation rate target.
- If the Bank of England’s remit were relaxed, say to include targeting output growth too, how might this affect its response to rising cost-push inflation? What about rising demand-pull inflation?
- Distinguish between a rise in the level of consumer prices and a rise in the rate of consumer price inflation.
- Describe the likely impact of an increase in the standard rate of VAT on the average consumer price level and on the annual rate of consumer price inflation both in the short term and in the longer term.
According to political business cycle theory, incoming governments tend to take harsh measures at first, when they can blame the cuts on the ‘mess they’ve inherited’ from their predecessors. And then two or three years later, as an election looms, they can start spending more and/or cutting taxes, hoping that the good will this creates will help them win the election.
So are we seeing the start of a new political business cycle with the start of the new Coalition government? The following two articles look at the issue.
Coalition will inflict cuts now and spend later to win a second term Guardian, Larry Elliott (17/5/10)
If you get all the bad news out at once, the only way left to go will be up. Or will it? Independent, Sean O’Grady (18/5/10)
Questions
- Explain what is meant by the ‘political business cycle’.
- Would the existence of a political dimension to the business cycle amplify or dampen the cycle, or could it do either depending on the circumstances? Explain.
- Does the existence of an independent central bank eliminate the political business cycle?
- Will the new Office for Budget Responsibility (see Nipping it in the Budd: Enhancing fiscal credibility?) help to eliminate the political business cycle? Explain your answer.
The economic sentiment indicator for April 2010 published by the European Commission continues to show confidence in the UK economy rising. The UK experience mirrors that across the European Union. The increase in the level of confidence in the UK economy seen in April, as measured by responses to questions posed to businesses and consumers, was the fifth consecutive monthly rise in sentiment.
There is, however, something of a divergence between the moods of UK businesses and consumers. Consumer confidence fell very slightly in April, which follows on from a small fall in March. These falls might reflect some uncertainty amongst consumers induced by the UK general election and, in particular, the extent of future fiscal tightening. In contrast, general business confidence rose in April, especially in the construction and manufacturing sectors.
Nonetheless, confidence is considerably higher across both consumers and businesses than it was a year ago. The increase has been of such magnitude that the economic sentiment indicator has now been above its long-run average for two months in a row. We would perhaps be rather naïve to expect this trend to continue, not least because of the financial rebuilding that households, banks, business and, of course, government will be pursuing. Therefore, it will be fascinating to see how enduring the current levels of confidence are and whether the slight weakening in sentiment amongst UK consumers is a sign of things to come.
Articles
Euro-zone economic sentiment rises in April MarketWatch, William Watts (29/4/10)
EU economic, business sentiment indicators ‘improving’ – poll Sofia Echo, Clive Leviev-Sawyer (29/4/10)
Euro economic sentiment up in April France24, AFP (29/4/10)
Data
Business and Consumer Surveys The Directorate General for Economic and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society
Questions
- Why might the trends in business and consumer confidence be diverging?
- What do you think economists can learn from tracking the patterns in economic sentiment?
- What factors do you think are likely to impact on the sentiment amongst consumers and businesses in the months ahead?
On 21st April the IMF published its latest World Economic Outlook. It forecasts that the output of the world economy will grow by 4.2% in 2010, following last year’s 0.6% contraction, and by a further 4.3% in 2011. However, the Foreword to the report identifies considerable economic uncertainties. In particular, it identifies ‘fiscal fragilities’ and, hence, a ‘pressing need’ for fiscal consolidation. But, it also points to the need for policies ‘to buttress lasting financial stability’.
The IMF notes that Europe has come out of the recession slower than other parts of the world. For the EU-27 it is predicting growth of 1.0% this year, following a contraction of 4.1% last year, but with growth remaining at 1% in 2011. The UK is forecast to grow by 1.3% this year, following a contraction of 4.9% last year, and by a further 2.5% in 2011. Therefore, economic growth in the UK is forecast to be stronger than that across the European Union in both 2010 and, in particular, in 2011.
If we look at the expected growth in some of the principal components of the UK’s aggregate demand we see signs of a ‘rebalancing’. Firstly, household spending, which contracted by 3.2% last year is expected to rise by 0.2% in 2010 and by 1.4% in 2011. Secondly, general government current expenditure, which grew by 2.2% last year, is forecast to grow by 1.3% this year but, as the expected fiscal consolidation kicks in, will fall by 1% in 2011. Thirdly, gross fixed capital formation (capital expenditures) which fell by some 14.9% in 2009 is forecast to fall this year by a further 2.6%, before growing by 4.7% in 2011.
Report
World Economic Outlook, April 2010 IMF
Articles
IMF Raises 2010 Growth Outlook, Says Government Debt Poses Risk Bloomberg Businessweek, Sandrine Rastello (22/4/10)
GDP figures: what the experts say Guardian (23/4/10)
IMF cuts UK forecast in blow to Gordon Brown The Telegraph, Angela Monaghan (22/4/10)
IMF maintains U.K. 2010 forecast at 1.3 per cent Bloomberg, Svenja O’Donnell (21/4/10)
Global recovery faster than expected, says IMF BBC News (21/4/10) )
IMF nudges up world GDP view; fiscal fears mount Reuters, Lesley Wroughton and Emily Kaiser (21/4/10)
Data
World Economic Outlook Reports IMF
World Economic Outlook Databases IMF
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What economic uncertainties do you think might affect the forecasts of economic growth for both the world and UK economies? Would you expect these uncertainties to be less or more significant in the UK?
- What do you understand by the term ‘fiscal consolidation’? Why do you think the IMF are highlighting this as a concern?
- Why do you think growth across Europe has been lagging behind other parts of the world? What might explain why growth in the UK is expected to be above that across Europe over the next two years?