An Economic Miracle Worth Shouting About

With modern media reporting a multitude of economic statistics almost every day, it is easy to become statistic fatigued but it is worth reminding ourselves of what is surely the single most important economic statistic. The one that probably comes to mind is gross domestic product which measures the amount of income generated by a country. Indeed, the release of UK GDP data is usually one of the more significant dates in the economic calendar. 

But surely the most important statistic is unemployment. Wages across the UK are 2.9% up on a year ago, ahead of inflation and the unemployment rate is 4%, A 42 YEAR LOW. The PMI manufacturing index registered 54 in August, with readings above 50 indicating growth—it’s 24th successive month of expansion since the June 2016 referendum on EU membership.

Back then, economists predicted a jobs bloodbath if the UK voted for Brexit but despite HM Treasury pointing to an “immediate and profound economic shock” employment has ballooned.

Politicians have been keeping a close eye on the number of people out of work for centuries because of all the different episodes that can occur in someone’s life, losing a job is one of the most damaging. It leaves a permanent scar. It is a simple fact that the longer someone is out of work, the greater the chances are of them never returning to the labour market. This is why economists, and politicians, are so fearful of recessions, the human damage persists long after GDP has bounced back. 

In the end it is unemployment that really matters and specifically the proportion of people out of work for more than a year. This lesson, one of the most important findings from economic literature in recent decades, is now being recognised in wider circles. Indeed, it played a crucial role in the way the Bank of England behaved during the financial crisis. 

In 2008 it was clear the world was heading for recession, that advanced economies had been living beyond their means and would have to endure a cut in their living standards. Some pain was inevitable and the real question was how best to deliver it. Should the Bank of England keep interest rates high pushing up business costs and triggering more job losses? Or should it cut rates to zero to keep unemployment lower but possibly at the cost of higher inflation which could rise well above wages making workers considerably worse off? Which bitter pill was more palatable: Jobs or Wages? 

The central bankers turned to studies about the scarring effects of unemployment. Of all the different species of economic pain, long term unemployment is the worst. So Central Banks throughout the world chose the red pill, slashing interest rates and taking the lid off inflation. The squeeze on living standards was longer and deeper than expected but what happened to unemployment was beyond their wildest dreams, particularly in the UK. Today the jobless rate is at a multi decade low and it is one of the most extraordinary achievements in modern day economics. 

Looking closely at the statistics reveals something even more remarkable. During the recessions of the 1980s, nearly half of all unemployed Britons were jobless for more than a year. In other words, unemployment scarring was rife. In the 1990s recession that proportion dropped to just over 45%. In the last recession, the proportion of long term unemployment (more than 12 months) peaked at 36% and it is now less than 25%; lower than at any point in either the 1980s or 1990s. 

And even more interesting is the fact that this improving trend is UK specific. In every other G7 country the share of long term unemployed people flatlined or rose in the decades since the early 1980s.The long-term share of unemployment in France, for instance, is 44%. In Italy it is 58%, more than double Britain’s level, and in Greece it is a staggering 65% and rising. By contrast the long-term improvement in Britain’s labour market is astoundingly low. 

Some say this ultimately comes back to the Thatcherite reforms that liberalised labour regulations and made it easier to hire and fire. Others say there is something endemic in the UK labour market that encourages job mobility. Either way it represents one of the great unsung achievements of the U.K. economy. And it presents us with a paradox. 

The conventional wisdom is that Britain’s economic prospects post Brexit remain uniquely bleak but now that real wages are rising again there is an exciting prospect. Perhaps the prize promised by economists, and politicians, a genuine recovery, stronger than after previous recessions, might finally be about to arrive. Perhaps the elusive feature of previous recoveries, the feel-good factor, could be about to return if indeed it hasn’t so done already. 

There are however plenty of risks not least the fact that the labour market is only one ingredient in a recovery. It is possible that while we have avoided the scarring effects of mass, long term unemployment, other labour trends, for instance, precarious employment and the gig economy, may illicit their own scars. Economists are only scratching the surface of this topic. Then of course there is Brexit, debt and the housing market, poor infrastructure and all sorts of other forces that might have an impact on productivity. 

All the same there is at least some room for optimism beyond the gloom. Yes, productivity may well be in the midst of its weakest decade since the 18th Century but it is at least starting to rise. Inequality is still too high but far from skyrocketing, and it actually fell during the financial crisis. 

There are plenty of reasons to criticise economics, economists and politicians but every so often against all expectations they do get the odd thing right and the current unemployment statistics are something of which Britain should be proud.

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