Unemployment & the Recession

Today we get a better explanation of why, in the face of falling production & shrinking GDP, that unemployment has been going down. Employers, like the government, have been unable to believe that the recession will continue for much longer. They are holding onto staff. As the BBC reports it today:

"Chartered Institute of Personnel and Development (CIPD) showed that a third of private sector employers had kept on more staff than they needed to avoid losing skills."

Business don't see the causes of the recession--mainly private sector debt--so they don't understand the dynamics of the situation. The whole of the mainstream of the economics profession is treating this like a blip rather than a major economic crisis. After five years of forecasting a return to business as usual, the Bank of England is just now seeing that something is terribly wrong. What's wrong is that the mega-debt built up by a frenzy of reckless lending and financial speculation is going to take time to dissipate. More especially so since no one is attending to it. Debt to the tune of 450% of GDP does not get paid off in a year or two in a time of shrinking incomes.

In Neo-classical Economics Land recessions simply don't last 5 years. Unless of course we look at the Japanese recession 1990-2005. But contrary to everything they tell us, this recession is not over by a long shot. As James Mackintosh said in the FT over the weekend: "The world is halfway through a lost decade".

However at the time that Japan was turning things around it did not have it's major trading partners going through exactly the same process, and making all the same mistakes. And Europe was not about to implode with many of the member states insolvent. So it seems that a lost decade could well be an optimistic view.

Meanwhile the private sector is busy trying to pay down debt. Banks are lending at very high rates of interest, while they themselves borrow at almost no interest, and pay less than inflation on savings. Without the ability to invest on a large scale the economy is stalling. Demand will remain low while private debt remains high. There is an employment bubble that will burst soon, and bankruptcies are creeping up. Meanwhile government policy remains focussed on austerity spending cuts which exacerbate everything.

We run the risk of being caught in a vicious cycle. So far no one in government (or in opposition I might add) shows any signs at all of understanding this or moving to address it.

Note 14 Aug: The latest stats from ONS show that real wages fell by 1.7% over last year, while jobs increased 0.8% - so slightly more jobs for slightly less money. Meanwhile RPI is +3.2% so less money going less far. GDP shrinkage is only part of the story.