UK Economic Growth v Unemployment
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If the economy is growing, why is total unemployment remaining stubbornly unchanged?
Economists refer to the jobless total, in terms of identifying economic growth, as being a ‘lagging indicator’. Put simply, it is the last thing to improve as a result of more activity in the economy.
In the UK, the economy has got to grow above 2% before the number of jobs created exceeds the number of jobs lost*[1]. This must happen before there is a significant difference to the jobless total. This 2% rule of thumb has been around for many years. It seems to be holding good for this recession too. It results from business efficiency improvements leading to the increased productivity of the existing workforce. Therefore, unless the economy grows by more than 2%, there is little pressure to recruit.
Previously the economy bounced back quickly
Following the early 1980's recession, the UK economy bounced back very quickly. Lots of jobs were created which culminated in the 'loads of money' late 80's. Within a few short years new money filtered down through the economy. Suddenly, occupations such as plumbers and plasterers that were linked to the growing construction sector, began to attract significant rates of pay. Outside of areas still dominated by struggling traditional industries, there was a genuine feeling that Britain was booming.
Even the early 90's recession, also accompanied by a property price crash, soon saw employment rising again as the economy got back into gear. Banks and the service sector became huge, tax revenues poured in and there were 14 years of growing prosperity until the world financial crisis brought this to a sudden end in 2008.
Different this time
In our latest recession, everyone to varying degrees accepted the consequences. They understood why there were job losses and the reason for public spending cuts. There was a consensus that bloated salaries, unproductive functions and un-necessary layers of Public Sector management would have to be cut back to save money. Although economic pain for all was promised, it was also generally expected that things would start improving again after two years.
But the perception of the British public in this, the third year after the crash, is that any recovery has stalled. Far from a feel good factor because the economy is growing, inflation is gnawing away at disposable income and people are spending less. The latest description by commentators is to refer to the recovery as being 'patchy'. The UK is barely able to create enough jobs to replace those still being lost and this is at a point when the shake out of Public Sector jobs has barely begun.
There are also one in five young people out of work. This includes graduates still kicking their heels a year after leaving university. They are about to be joined by yet more as another academic year draws to a close. So what has happened to the 'bounce back' of the economy much talked about by politicians on all sides prior to the last general election?
Unprecedented
There are two aspects to this recession that is distinctly different from what happened before.
Firstly, realising we could replay the Great Depression of the 1920's, western Governments decided to spend billions to prop up the banks, so the true horror of a crash was avoided. Though we came pretty close, the show was kept on the road.
Secondly, employers did not just sack staff when orders dried up. In fact we saw unprecedented cooperation between employers and staff with wage cuts, reduced hours, temporary shut downs and a strong sense of mutual interest prevailed to keep businesses afloat. In short, for what seems to have been the first time in modern British industrial history, employers did their best to keep their staff in work and employees responded with unprecedented flexibility to enable them to do so.
Consequently fears of 3.5 million unemployed, predicted on the basis of previous recessions, simply did not happen. Although as a result, there are now countless thousands reduced to part time working looking to get back to full time work and restore their earnings. Equally, employees are willing to put in serious overtime to restore their finances, pay off debts and generally cope with the increased cost of living. Both of these factors mean employers are not looking for new staff in anything like the numbers the Government had hoped. This slack in the jobs market will have to be taken up before we see a measurable drop in the unemployment total.
Older people working longer
One overlooked consequence of the fallout from the current recession is that older people are working longer. The future increase in the retirement age is a minor factor compared to the damage done to pension finds in the recession and the inability of cash savings to keep up with inflation. The crumbling of an assumption that early retirement could be funded by ever rising property prices, healthy pension funds and dividend rich share portfolios, has acted as a wakeup call for the over 50's. Property, once seen as a hedge against runaway inflation, keeps going down in value, whereas retail price inflation is up to around 5%.
The final nail in the 'retire at 55' coffin has been the demise of the final salary pension scheme. Suddenly the baby boomers are looking like the only people who will be able to enjoy a golden early retirement. Everyone else, at least those in the private sector, will be lucky to afford to retire before they are 65. All of these factors mean that older workers are more likely to hold on to their jobs, rather than move over for younger workers to take their place.
Some businesses cannot hold on
There is another job numbers time bomb that has been quietly ticking away almost unheard. Perhaps encouraged by their experience in past recessions, there are far too many businesses that thought they could hold on and survive until the anticipated upturn. With a static economy and their costs rising, many firms simply cannot afford to remain open and further redundancies are inevitable.
The economy has a long way to go before there are significant numbers of new jobs created. This is likely to take several years as there are predictions of poor growth and the potential for even further rises in unemployment for some time ahead*[2]. Anyone made redundant will struggle to get work during this time and it is vital they have enough money to get by between jobs.
Responsibility
The fear of the consequences of being thrown out of work has been heightened by a noteworthy scaling back of State benefits. The message sent out from Government has been loud and clear; state help will be focussed on only the most disadvantaged and vulnerable in society. There is a higher expectation that people should be self reliant and not look to the State for hand outs.
It is also the declared policy of the British Government to support a rebalancing of the economy away from the Public Sector and financial services toward manufacturing industry. Hence it is inevitable that there will continue to be job losses from this restructuring. There are going to be a lot of people made redundant over the next few years.
Current thinking is that the Public Sector, particularly large local authorities will suffer the brunt of budget cuts and will shed jobs. However, service businesses and retailers outside of the South East are also heading for trouble. The prospects are poor for any region where the majority of the money spent in the shops is by people employed in the public sector. In Wales, for example, it is estimated that two out of every three pounds in the economy come from the public purse.*[3]
Longer gap between jobs
Rebalancing the economy also means that the new jobs that are created often require skills not possessed by the people losing their jobs. For example, 10 years in local government administration with a strong emphasis of distributing funds and services following prescribed regulations could be seen as a barrier to another career. Contrast this to skills needed for handling high tech industrial machinery, or what the management of a fast moving restaurant would be looking for.
Gaps between jobs will be longer. This is not just because of the sheer competition brought about through there being 2.5 million unemployed. Employers will not be so charitable as to take on people who do not have the experience they need. It is generally expected there will be more people than ever before undertaking retraining in their own time and possibly taking on part time work until they find a new career.
For individuals and families the requirement to survive financially between jobs could not be greater. Inflation is pushing up living costs. People who previously thought their savings would see them through 6 months unemployment are now realising this may not be enough. Worse still, since the recession started, there has been an increase in the average time out of work. Mortgage Payment Protection specialist i:protect Insurance report this has increased by 2 months since 2008 and is now close to 8 months.
It is important to understand this is an average figure. Many really struggle for much longer. Other than leading to an individual steadily losing their confidence, employers begin to wonder if someone out of work for more than 6 months has an employability issue.”If 40 other firms have turned them down, there must be a problem.” This is the reason the long term unemployed find they become stigmatised. Consequently, it can take up to a year to get back into work.
Surviving Redundancy
The economy will grow but the rate of growth remains uncertain. Those with skills in demand will find work far more easily. However, many who previously took their regular salary for granted, may find the competition for another job very tough indeed. This is not going to change for many years. Therefore it is more important than ever for individuals, especially those with families, to know how they will cope financially during periods of unemployment.
Clearly the use of savings to pay the bills for up to a year would be the preferred. But building up a nest egg is very hard with so many other every day financial pressures. The alternative is to take out a short term Income Protection Insurance, also known as Lifestyle Protection Insurance. This covers the individual for up to a year if they are unable to work due to accident, sickness or unemployment.
The cost of the cover varies significantly. However there are some highly competitive products on line and premiums from most providers are very competitive for people up until their late forties, thereafter it can get progressively more expensive. Income Protection Expert Dennis Haggerty commented “People take out cover to pay their most important bills such as their mortgage and other household expenses. The typical monthly premium for a policy paying a person £1,000 a month if they cannot work, is between £25 to £45 per month. Specialist providers offer the best deals and I unequivocally support the FSA’s recommendation to shop around on line.”
[1] Okun’s Law
[2] OECD UK Projections May 2011
[3] International survey 2009 Centre for Economic and Business Research said that 64.3% of the national income of Wales is accounted for by public expenditure