Unemployment and the Euro-zone Crisis
Chris Grayling, the Employment minister, firmly laid the blame for the rapid rise in unemployment in yesterday’s figures on the Euro-zone crisis. This argument is so obviously bogus, it is disappointing for a minister to be using this as a line of defence. However, the labour market figures are not as bleak as the headlines suggest. The effects of the Euro-zone crisis will hit us over the next six months, not the last, and the minister should have kept his powder dry as he’ll need this excuse in the coming months.
The argument presented is; the Labour Force Survey (LFS), which is the main data source on the labour market, showed a growth in employment until June, after which it appeared to go off a cliff with employment falling 190,000 in the three months leading up to September. The problems with this argument are threefold. First, the Euro-zone crisis broke in July and the performance of the UK economy since then has been the best in a year; a point made by the latest retail sales figures which show very healthy growth in September and October. So far rather than the Euro-zone crisis damaging growth we have been doing rather well. The danger lies in the future not the recent past. Second, employment and unemployment figures are driven by decisions made by firms, and it takes about three to four months for this to be seen in the data. For example, the latest data from September 2011 reflects the state of the economy in May-June rather than prior to the crisis. Finally, the LFS is only one of four data sources about the health of the labour market. Over the big sweep of boom and bust events, these track each other well, but on the specifics of timing there can be wobbles in any one of the series; looking at the set offers a better picture. In addition, the LFS have a survey of employment from employers, a survey of current vacancies and the count of all those claiming unemployment benefits. The last two offer the most up to date picture, but the LFS and employer survey are more comprehensive. All three indicators, other than the LFS, suggest that employment started to fall and unemployment started to rise in February or March this year. The claimant count bottomed out at 1.45 million in February and has risen every month since at a steady rate of 20,000 a month or so. Vacancies currently offered by employers almost reached 500,000 in January before slipping back to 460,000 since May; a level consistent with low levels of net job losses. The employer’s survey only runs to June at the moment but says that employment peaked at 26.7 million in March and fell by 100,000 by June.
The LFS clearly looks like it mistimed the move back to job shedding by three months; this happens quite often but rarely matters much. The broader data clearly shows two things. First, that the labour market downturn precedes the Euro-crisis by some months and is totally in line with the downturn in UK economic growth, which started in November last year. Second, that the employment shedding and unemployment rise has been pretty constant since March, rather than a recent collapse. Both of these stories are clearly at odds with the Euro story. But the rub is that the evidence suggests the latest sharp rise in unemployment in the LFS is a catch up from previously understating the rise. The labour market hasn’t, yet, gone off a cliff. Indeed the healthy growth and small rise in the claimant count may say things were improving a little as the Euro-crisis broke. So the overwhelming picture is that the current sharp rise in unemployment isn’t driven by the Euro-crisis but is also not as sharp as it first appears. The Euro-crisis excuse may well be needed, and be genuine, from March next year when the picture around January starts to emerge. But for the latest figures it is entirely bogus and also misses the deeper picture.