UK unemployment fell by 4000 to 2.51 million in second quarter of this year. But this was too small to have any significant effect on the unemployment rate, which remained at 7.8%.
According to the forward guidance issued by the Bank of England, Bank Rate will stay at 0.5%, barring serious unforeseen circumstances, until unemployment reaches 7%. So will this be soon?
There are good reasons to suggest that the answer is no. Reasons include the following:
(a) Many firms may choose to employ their part-time workers for more hours, rather than taking on extra staff, if the economy picks up.
(b) The recovery is being fuelled by a rise in consumption, which, in turn, is being financed by people drawing on savings or borrowing more. The household saving ratio fell from 7.4% in 2012 Q1 to 4.2% in 2013 Q1. This trend will be unsustainable over the long run, especially as the Bank of England may see a rapid rise in borrowing/decline in saving as serious enough to raise interest rates before the unemployment rate has fallen to 7%.
(c) Despite the modest recovery, people’s average real incomes are well below the levels prior to the deep recession of 2008/9.
The articles consider the outlook for the economy and unemployment
Articles
UK unemployment holds steady at 7.8pc The Telegraph, Rebecca Clancy (14/8/13)
Unemployment rate is unlikely to fall sharply The Guardian, Larry Elliott (14/8/13)
UK unemployment falls by 4,000 to 2.51 million BBC News (14/8/13)
UK wages decline among worst in Europe BBC News (11/8/13)
Squeezing the hourglass The Economist (10/8/13)
More people in work than ever before as unemployment falls Channel 4 News, Faisal Islam (14/8/13)
Data
Labour Market Statistics, August 2013 ONS
United Kingdom National Accounts, The Blue Book, 2013: Chapter 06: Households and Non-profit Institutions Serving Households (NPISH) ONS
Questions
- What factors determine the rate of unemployment?
- With reference to the ONS data in Labour Market Statistics, August 2013 above, what has happened to (a) the long-term unemployment rate; (b) the unemployment rate for 18–24 year olds?
- How would you define ‘living standards’?
- How is labour productivity relevant to the question of whether unemployment is likely to fall?
- How much have living standards fallen since 2008?
- Under what circumstances might the Bank of England raise interest rates before the rate of unemployment has fallen to 7%?
- Property prices are beginning to rise. Consider the effects of this and whether, on balance, a rise in property prices is beneficial.
Although every recession is different (for example in terms of length and magnitude), they do tend to have a few things in common. The focus of this blog is on consumer income and how it is affected in the aftermath of (or even during) a recession. According to data from the ONS, real national income per head has fallen by more than 13% since the start of 2008.
This latest data from the Office of National Statistics shows that in the aftermath of the 2008 recession, UK incomes have fallen by much more than they did in the 2 previous recessions experienced in the UK (click here for a PowerPoint of the chart). We would normally expect consumer incomes to fall during and possibly directly after a recession, as national output falls and confidence tends to be and remain low. However, the crucial thing to consider with falling consumer incomes is how it affects purchasing power. If my income is cut by 50%, but prices fall by 80%, then I’m actually better off in terms of my purchasing power.
The data from the ONS is all about purchasing power and shows how UK consumer incomes have fallen at the same time as inflation having been relatively high. It is the combination of these two variables that has been ‘eating into the value of the cash that people were earning’. Comparing the incomes in the four years after the 2008 recession with similar periods following the early 1980s and 1990s recession, the ONS has shown that this most recent recession had a much larger effect on consumer well-being. Part of this may be due to the rapid growth in incomes prior to the start of the credit crunch.
It’s not just the working population that has seen their incomes fall since 2008 – the retired population has also seen a decline in income and according to a report from the Institute for Fiscal Studies, it is the wealthiest portion of older households that have taken the largest hit since 2007. According to the IFS, the average person over 50 has experienced a fall in their gross wealth of about 10%, or close to £60,000. Of course for these older households, the concern is whether they will be able to make up this lost wealth before they retire. The concern for everyone is how long until incomes and purchasing power increase back to pre-crisis levels. The following articles consider this latest data on economic well-being and the impact the recession has had.
UK wellbeing still below financial crisis levels Guardian, Larry Elliott and Randeep Ramesh (23/10/12)
National income per head ‘down 13% in four years’ BBC Newsd (23/10/12)
Financial crisis hits UK retirement income Financial Times, Norma Cohen (23/10/12)
Over 50s ‘left £160,000 out of pocket by the financial crisis’ The Telegraph, James Kirkup (23/10/12)
Those near retirement in UK hit hard by crisis Wall Street Journal, Paul Hannon (23/10/12)
Living standards down 13pc since start of recession The Telegraph (23/10/12)
Questions
- Why is net national income per head said to be the best measure of economic well-being?
- Why is it so important to take into account inflation when measuring wellbeing?
- What explanation can be given for the larger fall in consumer incomes following the 2008 recession relative to the previous 2 recessions?
- According to data from the IFS, the richest portion of older households have suffered the most in terms of lost wealth. Why is this the case?
- What is meant by purchasing power?
- GDP has fallen by about 7%, whereas national income per head, taking inflation into account is down by over 13%. What is the explanation for these 2 different figures?
- How can recessions differ from each other? Think about the length, the magnitude of each.
- Is GDP a good measure of economic well-being? Are there any other ways we can measure it?
In the 1990s UK living standards were estimated to be 4% below those of the USA, 33% less than in Germany and 26% lower than those in France. However, faster economic growth in the past two decades has, according to Oxford Economics, led to average incomes overtaking those in the USA and rising some 8% more than those of France and Germany.
UK living standards outstrip US Times Online (6/1/08)
…but at least we’ve got one up on the Yanks Guardian (6/1/08)
Questions
| 1. |
Explain the difference that the value of sterling makes to the measure of the standard of living. |
| 2. |
“With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes”. Define what is meant by purchasing power parity (PPP). Why does the standard of living need to be measured at PPS rates? |
| 3. |
Discuss the principal factors that have led to the increase in the standard of living in the UK. |
UK unemployment fell by 4000 to 2.51 million in second quarter of this year. But this was too small to have any significant effect on the unemployment rate, which remained at 7.8%.