Tag: lagging indicators

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Don’t blame the eurozone for Britain’s rise in unemployment
(at least, not yet!)

UK unemployment is rising. According to figures released by the Office for National Statistics, in the third quarter of 2011 the unemployment rate was 8.3%, the highest since 1986. The number unemployed was 2.62 million, up 129,000 on the previous quarter.

The figures for those aged from 16 to 24 are particularly worrying. If you include those in full-time education but who are looking for employment and are available for work, the unemployment rate in this age group was 23.3%. If you exclude those in full-time education, the rate was 20.6% (up 1.8 percentage points since the previous quarter).

The government was quick to blame the eurozone crisis for the rise in unemployment. The Minister of State for Employment, Chris Grayling, said, “What we are seeing are the consequences of the crisis in the eurozone.”

But is this true? Unemployment is a lagging indicator. In other words, it takes time for unemployment to respond to changing economic circumstances. Thus the rise in unemployment from quarter 2 to quarter 3 2011 was the result of the economic conditions at the beginning of 2011 and earlier – a time when growth in the eurozone was faster than that in the UK. The eurozone economy grew by 2.4% in the 12 months to 2011Q1, whereas the UK economy grew by only 1.6% over the same period. Even taking the 12 months up to 2011Q3, the eurozone economy grew by 1.4%, whereas the UK economy grew by only 0.5%.

Of course, if the crisis in the eurozone leads to another recession, then this will almost certainly lead to a rise in unemployment. But that’s to come, not what’s happened.

The following articles look at the rise in unemployment and especially that of young people. They examine its causes and consider possible solutions at a time when governments in the UK and around the world are concerned to reduce public-sector deficits and debt.

Articles
Youth unemployment breaks 1m mark Independent, Alan Jones (16/11/11)
UK unemployment increases to 2.62m BBC News (16/11/11)
Youth unemployment reaches 1986 levels The Telegraph, Donna Bowater (16/11/11)
Over a million young people are jobless BBC News, Hugh Pym (16/11/11)
Unemployment figures rise ‘related to eurozone crisis’ BBC News, Employment minister Chris Grayling (16/11/11)
Labour’s Liam Byrne: Young jobless paying ‘brutal price’ BBC News, Shadow Secretary for Work and Pensions Liam Byrne (16/11/11)
UK unemployment ‘nothing to do with eurozone’ BBC News, Lord Oakeshott (16/11/11)
Coalition sheds crocodile tears over young jobless Guardian, Larry Elliott (16/11/11)
Is youth unemployment really rising because of the eurozone crisis? Guardian, Polly Curtis (16/11/11)
Eurozone and the UK: A tale of two crises BBC News, Stephanie Flanders (15/11/11)

Data
Latest on the labour market – November 2011 ONS on YouTube (16/10/11)
Labour Market Statistics, November 2011 ONS (16/10/11)
Harmonised unemployment levels and rates for OECD countries (annual, quarterly and monthly) OECD StatExtracts
Economic Data freely available online Economics Network

Questions

  1. What are the causes of the UK’s rise in unemployment in quarter 3 of 2011?
  2. Why is unemployment particularly high for the 16 to 24 year old age group?
  3. Find out the unemployment rates for the 16 to 24 age group for other European countries for both females and males. How does the UK rate compare with the rest of Europe?
  4. What are meant by a ‘lagging indicator’ and a ‘leading indicator’? Why is unemployment a lagging indicator?
  5. Identify some other lagging indicators and some leading indicators and explain why they lag or lead the level of economic activity.
  6. What solutions are there to high unemployment of young people (a) in the short run; (b) in the long run?
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Unemployment rises as growth resumes!

According to labour market data released by Office for National Statistics on 16 September, unemployment has risen to a 14-year high. The Labour Force Survey figures show a rise in unemployment from 2.26 million (7.2%) in the three months to April 2009 to 2.47 million (7.9%) in the three months to July 2009. The data also show a 12,000 rise in the claimant count between July and August.

However, there are signs that the UK economy is growing again. This was underlined by evidence given to the House of Commons Treasury Select Committee on 15 September by the Governor of the Bank of England. So does this mean that businesses will take on more labour and that unemployment will fall?

The problem is that unemployment is a lagging indicator of economic activity. The reason is that many firms are reluctant to shed labour in recession and simply take up the slack as the economy recovers, without taking on extra labour. Even if they are short of labour, they may prefer to offer overtime to existing staff rather than employing new staff for fear that the upturn may be short-lived.

So what is likely to happen to unemployment over the coming months? Will it slowly fall or will it go on rising and, if so, for how long? Read the articles and then attempt the questions.

UK unemployment at 14 year high (video) BBC News (16/9/09)
UK jobless rate hits 14-year high Telegraph (17/9/09)
Unemployment crisis creates divide between private and public sector Telegraph (16/9/09)
Record one in five young people out of work (including video) Times Online (16/9/09)
Unemployment hits highest since 1995 Guardian (16/9/09)
Rising UK unemployment (charts of UK unemployment from 1984 to the present day) Guardian (16/9/09)
Unemployment at highest level since 1995 (including video) Channel 4 News (16/9/09)

Questions

  1. What is meant by the terms ‘leading indicators’ and ‘lagging indicators’? Give some examples of each.
  2. What determines the length of lag between a rise in output and (a) a rise in employment and (b) a fall in unemployment?
  3. Is unemployment a good measure of the excess supply of labour in the labour market? What other evidence might you need in order to assess the degree of slack in individual labour markets?
  4. If labour becomes more flexible in terms of the hours that people are prepared to work, will the unemployment lag increase or decrease? Explain.
  5. Under what circumstances does obtaining a university degree improve your job prospects?
  6. To what extent would reforming the benefits system, so as to reduce the poverty trap and give people a greater incentive to work, reduce unemployment (a) during a recession and (b) over the long term? What type of unemployment would be affected?