Home > Uncategorized > English unemployment: decreasingly defying gravity ?

English unemployment: decreasingly defying gravity ?

I was wrong about English unemployment. Considering demographics, the lousy performance of the English economy and our 200 years of experience with ‘modern economic growth’ I expected English unemployment to be 11 or 12% at the moment. But it is not even 8%. How can that be?

1. I can be excused for being wrong. The behavior of english productivity was, considering the history of the British economy, very a-typical (graph). We could have expected productivity to be 3% higher at the moment than it was back in 2007. But it is about 5% lower. For math wonks: the trend line is based on a polynomial of degree six, which however shows only one serious inflection point. Even the ‘winter of discontent’ caused, compared with the shift in 2008, only a barely perceptible productivity blip. This shift is beyond reasonable 2007 expectations.

aaauk

2. However, I can’t be excused when I do not take this change serious. So, what might have happened?

3. Old school modern economic growth. Is this change consistent with received economic wisdom after all? As a student I grew up under the shadow of growth economist Angus Maddison. Growth was understood to be a kind of one way road: technological advances in combination with investments of companies, governments and households and profit instead of rent seeking behavior caused a relentless and large rise of production and productivity in an ever-increasing number of countries. Ever more and cheaper products show up as economic growth and increased consumption and investment. To quite some extent this increase is based upon plundering the planet – but even than the sheer magnitude of this plunder is impressing. We are able to deplete the oceans, wow (but have not yet learned how to cope with this)! I do however not see how a six-year decrease of productivity is consistent with this traditional ´modern economic growth´ pattern. It´s not consistent with the received wisdom of economics. However, the pattern of growth might have changed, as we increasingly do not pay for new stuff anymore but do pay lots of money for the change of ownership of existing financial and real products…

4. New ideas about the estimation of growth. New production is considered to be ‘production’ in the national accounts. The mere change of ownership of existing stuff is not considered to be production. However, all kinds of fees connected with such changes are (for non-trivial reasons!) considered to be income. Think of the fees of real estate brokers, the massive fees of investment banks, insurance companies, the fees earned by banks when they trade shares or futures or the interest earned by banks when they lend freshly printed money which props up prices of existing houses. Hundreds of billions of euro’s and dollars are nowadays paid for the mere act of changing ownership! And it might well be that such (high productivity) incomes declined dramatically in the UK post 2008 (insurers new single premium long-term business alone declined with 50 billions, or over 50%), showing up as a decline in income and productivity not connected to any decline in the amount of stuff available for investments and consumption. The rent tax of the fire sector declined… This was, in my view, important.

5. Composition effects. There can be other reasons for the a-typical behavior of average productivity and employment. Production in industry is declining in the UK while productivity in services is increasing (slightly). As industry has higher productivity than services, this leads to lower average productivity. This did happen in the UK.

6. Cameron style devolution But maybe Cameron is right, too. As I understand it, the Cameron position is more or less that when you cut wages and entitlements people will accept crappy low productivity jobs and will be off the unemployment rolls even when total nominal demand declines. There is, as wages are an incredible important determinant of ‘aggregate demand’, a macro-economic problem with this: cutting wages will cause nominal demand to decline, which means that you have to cut wages which, as wages are an incredible…- you probably get the idea. But aside from this, the data are simply not consistent with devolution. Productivity in english industry is declining (quite a feat, in fact) but productivity in the growth sector, services, is increasing. On average (!) there do not seem to be an extra-ordinary increase of crappy low productivity jobs.

As I see it, it is especially about 4. and 5. which are temporary effects. Which means that productivity increases will resume. Which means that, unless growth picks up or labor sharing increases, unemployment will increase. Prediction: `Okun´s revenge´ will happen within the next two years.

  1. June 29, 2013 at 5:46 pm

    cite “I do however not see how a six-year decrease of productivity is consistent with this traditional ´modern economic growth´ pattern. It´s not consistent with the received wisdom of economics…”

    Well indeed. The reason why is that the classical growth theory doesn’t include the back coupling of to much assets to the real economy by its interests and compound interests. We described it in short in http://www.paecon.net/PAEReview/issue57/PeetzGenreith57.pdf how to compute it. Crisis is intrinsic to a capital driven economy.

  2. Peter Reed
    July 2, 2013 at 10:56 am

    No, You are not wrong. Sheffield Hallam University have recently calculated the real level of UK unemployment as nearly 3.5 million – almost a million more than the highest official estimate and two million more than the number claiming Jobseeker’s Allowance.

    Your only “mistake” is not to take account of the sheer scale of the figure “massaging” going on in the UK.

  3. Souvarine
    July 3, 2013 at 10:19 am
    • merijnknibbe
      July 3, 2013 at 11:04 am

      Thank you, this is a very good piece indeed. A cogent, focused and extremely well informed blogpost on what I call ‘Cameron devolution’: “What emerges is a picture of mainly older and less able people forced back into the workforce, doing insecure, low-paid and low-skill work and managing to survive on starvation levels of remuneration only because of a generous system of tax credits.” I completely agree with this. However – I do think that at the other side of the spectrum things are happening, too. Look for instance at graph 7 of this article, which shows that labor productivity in the financial sector, measured from the output side, increased with leaps and bounds because fees and the like increased. The amount of income generated per worker increased a lot. An increase of monoply rent incomes showing as an increase of productivity. Productivity measured from the input side (labor, volume of products disregarding the increase of fees per product) increased much less! The amount of products produced per worker did not increase that much. Compare it with miners who expect to find lead – but find an equal weight of gold instead (or at least something which they are able to sell as gold): http://www.cbs.nl/NR/rdonlyres/44B7156B-C831-4B80-B4C7-25D13C738770/0/2007094p30pubs.pdf This process might have turned around, a little, too.

      • Souvarine
        July 3, 2013 at 1:55 pm

        It’s certainly partly due to low interest rates. That’s what financial analysts really mean when they cry about rates manipulated by the Fed or BoE : low interest rates aren’t good for renters.
        In a sense, talking about financial sector productivity is weird if we consider that it doesn’t really produce anything. Having said that, i doesn’t mean financial sector is socialy useless, but we need to back it down to more reasonable proportions. When we hear that financial sector weigh 10% within a country’s GDP, it takes those 10% rather than producing them. Just for moving some money around.

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