UK: Economic truths, David Smith - Nirvana is not so unattainable - The UK's jobless figures are about to ...

UK: Economic truths, David Smith - Nirvana is not so unattainable - The UK's jobless figures are about to ... - Economic truths, David Smith - Nirvana is not so unattainable - The UK's jobless figures are about to rise, say the pessimists, and if they do

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Last Updated: 31 Aug 2010

Economic truths, David Smith - Nirvana is not so unattainable - The UK's jobless figures are about to rise, say the pessimists, and if they don't, wage inflation is bound to kick in. They could be wrong on both counts.

About 15 years ago I took part in one of those residential conferences where movers and shakers, and a few others, gather to discuss the big issues. At one point, the question came up: Would we see full employment again in Britain in our lifetimes?

The movers and shakers, who included top business people, trade union general secretaries, politicians and senior civil servants, all shook their heads gravely. I, as one of the 'others', suggested tentatively that this was too gloomy a view and that when the unfavourable demographic factors unwound (baby-boomers entering the workforce), the picture might be transformed.

I say this not to boast of any forecasting triumph but merely to underline the depth of gloom into which it was all too easy to fall regarding unemployment.

For a while, it looked as if my optimism would be vindicated. Between 1986 and early 1990, unemployment virtually halved to 1.6 million and talk even turned to labour shortages in the 1990s. It was not to be.

The recession of 1990-92 intervened to push the jobless total up to within a whisker of three million, and the gloomy view seemed justified once more. In the first half of the 1990s, job insecurity was again in vogue.

Now, however, it is possible to be optimistic again. Although the economy skirted recession last winter, unemployment has continued to fall. There are 1.2 million claimant unemployed and the unemployment rate is 4.5%.

Since full employment is reckoned by economists to occur at an unemployment rate of 2% -3% (there is always some frictional - people moving between jobs - and seasonal unemployment), Britain is within sight of it. So too is the US, where the rate is a shade over 4%.

Europe, by some distance, is not - average EU unemployment is still in double figures. And Japan, which until recently had full employment, is moving away from it.

There are caveats to be applied to Britain's current condition of near full employment. On the other measure of unemployment produced by the Government, based on the Labour Force Survey, the jobless rate is more than 6%, and some argue that true unemployment, based on all those who say they would like a job, is between four million and five million. I take the latter with a sack of salt, and I have my doubts about the LFS measure. Just as many arguments can be used to say that even the lower claimant count overstates true unemployment - not least the fact that many unemployed people apparently melt away when faced with, for example, a New Deal interview.

Amore telling argument is that the unemployment figures have been massaged down by early retirement and rising numbers on sickness and disability benefits. But the fastest-growing employment age group in the 1990s has been the over-fifties, and only partly because of rising numbers of people in this age group. Meanwhile, the labour market has had to cope in the 1990s with something as dramatic as the coming of the baby-boomers in the 1980s - a sharp rise in female participation.

Compared with the golden age of the 1950s and '60s, when the workforce was largely made up of men and pre-childbirth women, employment has reached out hugely to parts of the population for whom the norm was to stay at home.

Can this last, and what will be the consequences if it does? There is, as in the late 1980s, a sticky patch to go through before we can be said to have reached full employment nirvana. The surprise so far is that the economy's slowdown has produced no significant rise in unemployment. That doesn't mean it will not - unemployment is a lagging indicator. There is also the small matter of what happens to Britain and the rest of the global economy if, or when, the US economic bubble bursts.

If these hurdles can be overcome, and the pattern of strongly rising service-sector employment more than offsetting falling manufacturing jobs persists, would a move towards full employment bring with it an end to the present benign inflation environment? After all, 3% unemployment would be significantly below what the Bank of England, Treasury and most economists believe to be Britain's natural rate. When unemployment falls below that rate, inflation tends to rise as the wage-price spiral kicks in.

It would certainly be a test, so why am I optimistic about both unemployment and inflation? For two reasons. The first is that there are a few examples, even in Britain's chequered economic history, of a tight labour market triggering higher inflation on its own. Only in combination with other inflation-boosting factors has this happened. Second, I believe we have seen a fundamental change in inflationary psychology and, because of that, in wage behaviour.

Full employment, however, throws up new challenges, not least in raising skills levels to minimise labour shortages, and avoiding mismatches between jobs and the people capable of filling them. Like old age, however, full employment is far better than the alternative.

David Smith is economics editor of the Sunday Times.

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