Help wanted
Talk of green shoots is all very well, but it’s small comfort for young people across the UK faced with the threat of joblessness. As unemployment figures continue to rise, David Blanchflower calls for an immediate response from government
Employment peaked in the UK in April 2008; since then we have lost 617,000 jobs. According to figures from the Office of National Statistics, UK unemployment was also at its low point in April 2008 and has since increased by 860,000, taking the unemployment rate from 5.2 percent to 7.9 percent. Unemployment has increased more than employment has fallen because firms have stopped hiring, with the young being hit hardest. While the number of employees has fallen rapidly, more people than ever are self-employed, mostly on a part-time basis in low-paying jobs. Wage pressure is benign.
Based on output, employment and unemployment measures, this recession started in the spring of 2008. We have seen four consecutive quarters of negative growth. Talk of public spending cuts and the possibility that the Bank of England may raise interest rates or reverse quantitative easing suggests that unemployment could reach four million. Assuming the workforce remains the same size (currently 31 million), this would imply an unemployment rate of 12.9 percent – a scenario not beyond the realms of possibility.
In my view, unemployment will probably not start to fall before 2011. House prices are likely to fall by about 35 percent from peak to trough and more than three million households will be in negative equity. The interaction between negative equity and unemployment in some communities is particularly concerning, not least for the banks holding the mortgages. It remains uncertain whether the banking system can lend enough to fuel recovery, especially when many institutions have withdrawn from the market. We are faced with a toxic cocktail: sliding house prices, rising negative equity, inadequate levels of credit, soaring unemployment and zero – or even negative – wage growth. In such circumstances, it is academic to try to pinpoint whether economic growth is returning. We have yet to realise just how painful the coming years are likely to be.
Youth unemployment is a special problem. The unemployment rate for those under 25 is currently 19.7 percent, compared with 6.3 percent for those aged 25 to 49 and 4.4 percent for those 50 and over. There will soon be one million under-25s unemployed. Youth unemployment is especially high among ethnic minorities, those with the least education and those in the North East or West Midlands.
There are two main reasons why this has happened. First, our newly flexible labour market has meant that wages can be more easily adjusted downwards. The possibility that jobs could be given to workers from the new EU member states or that employers could move production abroad has raised the fear of unemployment, which has kept wage pressure down, especially in the private sector. Hence, firms have not been firing as much as in the past; they have simply stopped hiring. Applications for every graduate-level job have skyrocketed.
Second, the size of the youth cohort peaked this year. This can be seen in the graph overleaf, which plots the population by age. In 2009 there are 847,000 23-year-olds, which is at least 110,000 more than those aged both 31 and 11. These numbers will fall again; in 10 years’ time there will be 15 percent fewer 23-year-olds than there are today. There are simply many more young people today than in the recent past.
The unemployment time bomb
Graph: Total number of people in the UK by single year of age (2009)
Applications to the armed forces are up, as are those for teacher training. UCAS announced that the number of applicants to UK universities and colleges is up by nearly 10 percent on last year, and by 17 percent for people aged 21 to 24. The decline in alternative opportunities means that the cost of studying falls as unemployment rises, so college applications rise in a recession. The only problem here is that there is likely to be a shortfall of nearly 50,000 university places due to government restrictions. This makes no sense: surely it is better to have young people in education than on the street?
In my view, everyone under 18 should be in full-time education or training, freeing up jobs for 18-24-year-olds. The ‘Lisbon strategy’ target is for at least 85 percent of 22-year-olds to have completed the equivalent of upper secondary school by 2010. The UK currently achieves about 78 percent, putting it significantly short of the target.
It is not surprising, then, that the Organisation for Economic Co-operation and Development shows that the UK’s performance in improving skills after the age of 15 is significantly worse than that of other European countries. The International Adult Literacy Survey showed that Britons aged 16 to 25 had lower skill levels than those in countries such as Germany and Switzerland.
Why should we care about unemployment? In particular, because of the lost output involved. During a long period of unemployment, workers can lose their skills. Unemployment is a stressful life event that tends to increase susceptibility to malnutrition, illness, mental stress and loss of self-esteem, leading to depression. It can increase the probability of poor physical health outcomes such as high blood pressure, raised pulse rates and heart attacks in later life; it can even reduce life expectancy. And increases in the unemployment rate tend to be associated with increases in the suicide rate.
The long-term unemployed are at a major disadvantage when trying to find work. The effects of unemployment appear to depend greatly on the length of time for which the person has been unemployed: morale sinks as the duration of unemployment rises. The experience of unemployment while young, especially long-term unemployment, causes permanent scars rather than temporary blemishes. For the young, a spell of unemployment does not end with that spell; it raises the probability of being unemployed in later years and carries with it a wage penalty. The consequences of unemployment are thus more far-reaching than for older people.
As unemployment rates rise, so do crime rates, especially for property crime. Indeed, recent evidence suggests that property crime has now started to increase in the UK. According to the British Crime Survey, police recorded a 4 percent increase in domestic burglaries in the period from July to September 2008. Youth unemployment and adult unemployment in Great Britain are both closely related to burglary, theft, fraud, forgery and total crime rates.
Increases in the unemployment rate lower the happiness of the whole community, not just that of the unemployed. Individual wellbeing seems to be related to aggregate macroeconomic variables, such as the unemployment rate, inflation and the interest rate. Literature suggests that a one percentage point increase in unemployment reduces overall happiness by twice as much as an equivalent one percentage point increase in inflation – the so-called misery index. Increases in aggregate unemployment seem indirectly to reduce the wellbeing of the employed and those outside the labour force, such as students, the retired and those looking after the home. Moreover, it has been shown that the fear of becoming unemployed in the future tends to lower people’s subjective wellbeing.
So rising unemployment is bad for every community – but what should be done? The Monetary Policy Committee needs to keep interest rates at 0.5 percent for the foreseeable future and dramatically expand its programme of quantitative easing. In such circumstances, public spending cuts make no sense. The government should be increasing spending as far as possible, not least because it can borrow at such a low long-run rate of interest. Putting money into infrastructure and education would be a smart investment in all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place. Tightening policy too soon would be a mistake.
We need to solve unemployment as a priority and not worry about inflation, at least for now. Don’t believe the doomsayers who tell you the dire consequences of doing this. The economic models used to suggest that an independent central bank targeting inflation and basically ignoring unemployment would guarantee long-term stability have been discredited. The intellectual basis for inflation-targeting has collapsed.
The monetary and fiscal authorities should now focus on lowering unemployment and further stimulating the economy. It would not be so bad even to have a few years of moderate inflation. I, for one, am hard pressed to come up with any significant costs of a little inflation. Anyway, the consequences would be far less serious than those of unemployment, besides helping to prevent the problem of negative equity. There is no evidence that low levels of inflation, say around four or five per cent, will subsequently jump to something astronomic – right now, deflation is a much greater concern. The time has come for governments to recognise that voters care about jobs.
David Blanchflower is professor of economics at Dartmouth College in the US and was a member of the Monetary Policy Committee at the Bank of England from June 2006 to May 2009.
Related article - Confidence tricks by Rowland Manthorpe
Q&A: David Blanchflower
Want to join in the debate? Please submit your questions for David Blanchflower and we will publish his answers online in the coming weeks.
Read Matthew Taylor's blog on youth unemployment or see details of the RSA event The lost generation: recession and the young
Share