Wednesday, March 17, 2010

Unemployment - What's Really Going On?


...although they have got better at fudging the numbers

Does anyone understand what's really going on with the unemployment numbers? Today's shock ONS stats showing that the number of unemployed claiming benefits has gone down seems frankly incredible. And yet the ONS are not liars, so what's happening?

The first thing to remember is that not everyone who is unemployed claims benefits, or even registers with a JobCentre. Tyler personally knows one unemployed City type who has been jobless for a year but has not registered for anything - it wouldn't help him, so why should he bother? And from what we can see, many of the newly unemployed middle class feel exactly the same way. The claimant count numbers are highly misleading.

So rather than looking at the headline claimant count, let's concentrate on the ONS stats for the total jobless, whether claiming benefits or not. And let's put them in the context of the growth of the overall population of working age.

Now, the ONS distinguishes between those it says are unemployed (whether claiming benefits or not) and those who are of working age but are economically inactive. But what does that mean exactly? Here's how the ONS explains it:

"Economically inactive: People who are neither in employment nor unemployed. This includes those who want a job but have not been seeking work in the last four weeks, those who want a job and are seeking work but not available to start work, and those who do not want a job."
In contrast, the unemployed are defined as those who are:
"without a job, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks or;
out of work, have found a job and are waiting to start it in the next two weeks."
So what does that mean for Tyler's City acquaintance exactly? He most certainly considers himself economically active, but he's sitting on a reasonable pile of cash, and he's not scrabbling round applying for any old job that happens to come up in a given four week period.

So in ONS terms, is he unemployed or economically inactive? Or does he flip between the two, depending on whether during the last four weeks he's had a chat with some contact about a possible job working for a Maltese hedge fund?

The ONS probably won't have a view on that, if only because they've never asked him. And if they did, he'd probably tell them to... er... push off.

Which highlights another important point about the ONS figures - they're based on an entirely voluntary survey, and unsurprisingly, the response rate has been falling through the recession. It's now standing at just over 50%, which means an awful lot of potential non-respondent bias, especially from people like Tyler's acquaintance.

With that in mind, how do the figures actually stack up?

The latest ONS stats are published as a moving three month average, and the latest relate to the 3 month period November 2009 to January 2010. Comparing them to the corresponding figures from 12 months ago gives us the following picture:

So as we can see, over the last year, employment has fallen by nearly 500,000. And it would have fallen by much more if the public sector had not gone on a hiring binge. Between autumn 2008 and autumn 2009, 70,000 joined the public sector payroll, while private sector employment shrank by 600,000.

On the technical ONS definition set out above, unemployment has risen by just under 400,000. But at the same time, the working age population has grown by 200,000. Consequently, the ranks of the so-called economically inactive have swollen by 370,000. And while that may have nothing to do with the collapse of employment opportunities, a much more likely explanation is that most of these newly inactive are in the same boat as Tyler's ex-City acquaintance - ie unemployed in the normal meaning of the word.

Which means that real unemployment has risen by 750,000 - virtually double what the headline number says.

Of course, another factor holding down declared unemployment is that the government runs a multitude of scams schemes to get people off the unemployment register and into some kind of disguised unemployment training programme. But while that reduces the number of official unemployed, in terms of the stats we're unclear how many of them show up as "employed" and how many as economically inactive - we'll try to find out.

Conclusion? The next time some government minister or apologist spouts all that stuff about how brilliantly they've managed to stop unemployment rising in this recession, you need to remember two key points:
  1. Unemployment has been artificially held down by a 70,000 recruitment binge in the public sector - a binge that will have to be reversed after the election.
  2. Real unemployment - including the 370,000 growth in the number of so-called economically inactive - has increased by 750,000 in the last year.

Footnote 1: When you scratch beneath the surface of the ONS stats you find a bit of a mess. In particular, their numbers for employment and unemployment - but not economic inactivity - include those over state pension age. Still, that doesn't affect our conclusions here - if anything, it means we are understating the real rise in unemployment because we are excluding the increased number of unemployed pensioners who would take a job if one was available but haven't actively searched for one in the last 4 weeks.

Footnote 2: Apologies - the initial version of this quoted an incorrect figure for the growth of public sector employment. We had forgotten to adjust it for the redesignation of Lloyds and RBS as public sector employers. It's now corrected, and it doesn't affect our figure for the real growth of unemployment (HTP a number of correspondents).

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