Labour Market Statistics (Again)

In her recent reiteration of surprise at employment figures the BBC's  Stephanie Flanders expressed the general confusion on the small downward movement in unemployment reported in the ONS August Labour Market Stats. 

"The unemployment rate was 8.0 per cent of the economically active population, down 0.2 on the quarter. There were 2.56 million unemployed people, down 46,000 on the quarter." (ONS)

According to convention economic theory when GDP is shrinking employment should also shrink. Why is it not? Flanders proposes several possible reasons without much conviction that they explain the situation.

• GDP estimates might be wrong
• Rise in part-time work
• Rise in self-employment
• Pay not keeping pace with inflation (i.e. lower real wages)
• Retention of staff
• Olympics

"Finally we're left with the explanation favoured by Britain's finest economic detectives at the moment (not to mention senior policy makers): it's a mixture of all of these possible factors, plus, maybe "something else"."

Some members of the public, commenting on this story provide further insights:

"We're replacing full-time jobs with 2 or 3 part-time jobs or zero-hour contracts."

"The answer is simple. Having worked in the welfare to work sector as a manager for many years I eventually walked out in disgust at the manipulation of the unemployment figures by pushing the unemployed through training courses, work experience programs and by backdating and projecting the period of training. The real unemployment figures are much higher than stated, it's all smoke and mirrors."

"They move you from one set of statistics to another: I was on JSA, got moved to an outside Agency (responsible for me for the next two years) and was persuaded to become self employed. Instead of income support I now get tax credits."

My own doubts go the margin of error in these figures which are obtained by sampling and statistical manipulation. Such figures should always be stated with a margin of error, but they never are, not even by the ONS. I have written to ask about the margin of error on these figures in particular and will publish the result. All of these government statistics are estimates with built in error from sampling and statistical method, the magnitude of which we don't know. The statistics have an historical accuracy that is not stated. They're quoted to one decimal place but we have no idea if this reflects the precision or is simply rounded up or down. Most of these estimates are subsequently revised over the longer term. The message is that we can't really treat these figures as absolute in the way that commentators do.More caution is required.

I don't go in for conspiracy theories, but it does seem credible that Job Centre staff under considerable pressure from Whitehall are scrambling to find creative ways to meet their targets. This is what bureaucrats do when faced with impossible demands. Remember when hospitals cancelled all operations and made patients reschedule to achieve their waiting list targets? (Not every one remembers that the man who came up with waiting list targets, Alain Enthoven, is also credited with the 'body count' as an efficiency measure for the Vietnam war).

Many employers do see staff merely as a cost on the bottom line; a cost to be minimised. They look for ways around labour protection laws, ways not to pay overtime, sick and annual leave, etc. The zero hour contract is how employers get around laws intended to prevent the casualization of the workforce.

What's also interesting is that the fall is not even. Unemployment in the North is rising, not falling. This lends credence to the Olympics as a significant factor mainly being felt in London. It will be interesting to see what happens to the figures after Christmas. In the mean time business will be hiring in preparation for the Christmas rush (let's not forget that wholesalers and suppliers have to crank up their operations a few months ahead of the retail Christmas).

UPDATE: Just seen another view from the Prime think tank: UK economy: there is no puzzle – just more work on lower pay.

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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.