Economists - to me!

[Sheilbh]

I'm confused. The UK is in recession, the public sector's shedding workers, but unemployment's decreasing (and withdrawing from the labour force apparently isn't enough to explain it). In the US they've just revised previous growth estimates down, the public sector's been shrinking but the BLS today said they underestimated employment growth by 20%.

How does this all fit, especially the more extreme UK case?

[Admiral Yi]

Your question seems to be based on the false assumption that unemployment is purely a function of GDP growth.  The long term trend is one of growth, yet at previous, lower levels of GDP the labor market still managed to clear.  The fact that unemployment is decreasing in the UK while the economy is contracting suggests to me that job seekers are in the process of adjusting their wage expectations downward.  I suspect that in the US part of the explanation lies in the elimination of open-ended unemployment benefits.

[CountDeMoney]

I suspect that in the US part of the explanation lies in the elimination of open-ended unemployment benefits.

Isn't unemployment shrinkage different than employment growth?  People leaving the work force permanently doesn't address employment growth underestimates.

[Admiral Yi]

Isn't unemployment shrinkage different than employment growth?  People leaving the work force permanently doesn't address employment growth underestimates.

Different but related.  Employment growth can only have three sources: people joining the work force finding a job, unemployed people finding a job, and immigrants finding a job.

[MadImmortalMan]

Unemployed people starting businesses.

I don't know where that fits in the statistics.

[Admiral Yi]

Unemployed people starting businesses.

I don't know where that fits in the statistics.

Employed, subcategory self-employed as a wild, stab in the dark guess.

[Razgovory]

Is being self-employed as a "wild, stab in the dark" like being a serial killer or something?

[Admiral Yi]

No.

[mongers]

I'm confused. The UK is in recession, the public sector's shedding workers, but unemployment's decreasing (and withdrawing from the labour force apparently isn't enough to explain it). In the US they've just revised previous growth estimates down, the public sector's been shrinking but the BLS today said they underestimated employment growth by 20%.

How does this all fit, especially the more extreme UK case?

Tories fiddling the figures, again.

[Richard Hakluyt]

I'm confused. The UK is in recession, the public sector's shedding workers, but unemployment's decreasing (and withdrawing from the labour force apparently isn't enough to explain it). In the US they've just revised previous growth estimates down, the public sector's been shrinking but the BLS today said they underestimated employment growth by 20%.

How does this all fit, especially the more extreme UK case?

In an inspiring act of solidarity British workers have lowered their productivity and accepted real pay decreases, that way the pain of the economy being in the doldrums is spread throughout the workforce instead of being concentrated on a small percentage of unfortunates 

The problem is, though, that it is important to improve productivity once the good times return.

[Phillip V]

You don't need economists. You just need information.

[Sheilbh]

Your question seems to be based on the false assumption that unemployment is purely a function of GDP growth.  The long term trend is one of growth, yet at previous, lower levels of GDP the labor market still managed to clear.  The fact that unemployment is decreasing in the UK while the economy is contracting suggests to me that job seekers are in the process of adjusting their wage expectations downward.  I suspect that in the US part of the explanation lies in the elimination of open-ended unemployment benefits.

I was thinking about it after seeing the US figures.  Here's a blog from the BBC Economics Correspondent on the question - your suggestion is considered to be part of it, but not enough:

UK jobs: The plot thickens
COMMENTS (997)

Analysts are still looking for a definitive reason why employment is rising while the economy shrinks

Here's the statistic that Britain's finest economic brains simply cannot explain: the number of people in work in the UK has risen by 201,000 in the three months to June, a period in which our national output is supposed to have shrunk, by 0.7%.

It's good news that there are more people in work, and that unemployment has fallen by 46,000 in those months as well. But it's not necessarily good news that collectively, as a nation, we seem to be needing to hire a lot more people, to make less stuff.

I have discussed this many times before, because it's a puzzle that has been with us for a long time (see, for example, this article from June 2011).

You might ask why it's so important to get to the bottom of this. If there's one part of the economy that's producing some good news - why not just sit back, and enjoy the novelty? The trouble is that the longer the puzzle continues, the more potentially worrying it becomes, because it becomes less and less likely that simple measurement error explains it.

It is quite possible that the economy is stronger than the official statistics suggest: in fact, we already know that construction and industrial output were stronger in June than the ONS expected when they came up with their first estimate for the change in GDP in the second quarter. Other things equal, that could see them revise up their numbers later this month, to show the economy shrinking by 0.5%, instead of 0.7%.

But that's a pretty small revision. Even if the extra Bank Holiday also pulled down the numbers temporarily, we'd still be looking at a flat economy, which somehow produced more than 200,000 jobs.

And, to state the obvious, it's not just the past few months that needs explaining. The latest figures suggest there were 501,000 more people in work in the UK in the second quarter of 2012 than there were two years earlier, when our economy is supposed to have been slightly larger than it is now.

To get rid of that longer term mystery, the ONS would have to decide that everything it had said about GDP in the past two years was wildly wrong -that instead of being flat, we actually grew by more than 2%.

That is possible. But implausible, even to those - like the Bank of England - who believe the ONS does tend to understate growth. You don't find that amount of missing output behind the sofa.

Of course, there is the other possible explanation, that the jobs figures are actually worse than they look. It is true that about a quarter of the rise in private sector employment in the past two years has been part-time work. Today we saw the number of people reporting they were in part-time work because they couldn't get a full-time job reach another record high.

More than 1 in 4 of the new private sector jobs created in that time were self-employed. Here at the BBC we have interviewed many self-employed people in recent months, including for tonight's piece for the television bulletins. Many say they are barely working at all - certainly a lot less than they would like. There are some who look and feel like budding entrepreneurs. But quite a lot of them would not describe themselves in this way at all.

Still, that leaves a roughly 280,000 increase in the number of people working full-time for a private sector employer during the past two years, when the economy has been weak, at best.

Pay may be part of it: today's figures show average earnings are still not keeping up with inflation. Wages for most workers have been falling, in real terms, for several years. That has made it easier for companies to keep people on or hire more workers to do the same job. But again, it can't be the whole story.

Some say the simplest explanation is also the right one. There is no puzzle. We're just a lot less productive than we were before the crisis, because we've ended up shrinking our highly productive sectors, and expanding our less productive ones. But, as the Bank of England points out in its latest Inflation Report, the figures don't really support this explanation either. About two-thirds of the increase in private sector employment has been in high-skilled occupations.



Another common explanation is that companies have been "hoarding" staff, taking a hit during the slump for fear of not being able to re-hire good people when the economy picks up. But the latest figures don't really back that up either: figures from the Labour Force Survey don't show any fall in the number of people leaving their jobs, relative to the years before the crunch. Quite the contrary.

Finally we're left with the explanation favoured by Britain's finest economic detectives at the moment (not to mention senior policy makers): it's a mixture of all of these possible factors, plus, maybe "something else".

That's a pretty unsatisfying conclusion. If it were the last page of a detective novel, you'd be asking for your money back. But this isn't a novel. Economic mysteries usually get solved, eventually, you just have to "let the data run long enough". That's economist-speak for waiting to see what happens.

We know that the Olympics and other one-offs have distorted the recent figures: London accounts for nearly half the rise in employment. In Yorkshire, Midlands and Northern Ireland - unemployment actually went up last month.

Many analysts think the rest of the country will also see unemployment tick up again in the next few months: the latest private surveys of employers have been pretty gloomy. But the curious case of the UK labour market that wouldn't quit is likely to keep Britain's economic minds enthralled for some time to come.

Here's another blog from a week or so ago on the potential productivity problem:

The UK productivity puzzle (cont'd)
COMMENTS (182)

We found out this week that British workers, on average, were 20% less productive than the G7 average in 2011, and nearly 40% less productive than the average US worker.

That's the biggest gap since they started measuring it, in 1990.

We shouldn't be surprised by this number - and perhaps we shouldn't be too depressed by it, either (see below). But if we're entering a slightly calmer period for the UK economy, it is going to be very important for policy makers to work out what is driving this shortfall.

Ben Broadbent, from the Bank of England's Monetary Policy Committee, has a good go at this in his latest speech.

First, a bit of explanation. All that those productivity numbers are really telling us is that Britain has been better at creating jobs over the past five years than at raising national output.

If we're making less stuff, but employing more people to do it, our productivity - output per head - has to have gone down. It's a simple matter of arithmetic.

'Jobs-free growth'
Of course, we'd rather that jobs, productivity and output were all going up, as they usually do. But if you're stuck, as we have been, with the slowest economic recovery in modern memory, most people would probably say it was better for the long-term health of the country to have more people working, less productively, than to have rising productivity but also higher unemployment.

In effect, that is what you have had in the US, where output per worker has jumped by five percentage points since 2007, at the same time as national output (GDP) has risen by only one percentage point. That has only been possible because the number of people in work has fallen by four percentage points in that time, the number of hours worked has fallen even more.

By contrast, British GDP fell 2.4 percentage points between 2007 and 2011, while employment actually rose, by 0.3%. Amazingly, the UK created almost as many jobs as the US did in the three months to July, even though America's economy is seven times larger.

I suspect many Americans would be happy to swap their higher productivity for a few more jobs.

On the campaign trail both the main US presidential candidates are under pressure to say how they would create more employment. As far as I know, President Obama does NOT go round telling voters that high unemployment is a "small price to pay" for a historic rise in productivity.

But, even if we prefer "growth-free jobs" to the other available alternatives, it's important for the Bank of England to understand why employment has grown recently, while output has not.

Why? Because, in the end, we can only get richer - raise our national income per head - if we can create more economic value with the same number of workers. That, too, is a matter of basic arithmetic.

It matters, therefore, whether this is a short-term blip - due to labour-hoarding by employers, for example, coupled with a shortage of demand - or whether something more fundamental has been happening to the "supply side" of our economy, which is systematically preventing us from growing out of the crisis as quickly as we had hoped.

I went through some of the possible explanations in a blog last month. But Ben Broadbent thinks it is increasingly hard to put it all down to a shortage of demand. Something bad must also have happened to our productive potential.

This gets some support, as it happens, from the new figures on international productivity levels which I cited at the start.

When you measure productivity in terms of output per hour worked, instead of output per worker, these ONS numbers show that our productivity growth has not been very different from other European countries. Even though countries like France and Germany have had stronger recoveries than us and a different set of government policies. (See chart below from Credit Suisse).



So - whatever has been hurting Britain's productivity, it seems to have hit the likes of France and Germany as well. Put it another way, they have had "surprising" growth in employment as well. (Though the output per worker comparison shows you they haven't had quite the puzzle that we have had.)

What might that shock be? Ben Broadbent's explanation is worth reading in full. But in essence he thinks that you can explain quite a lot of what has happened if you assume (a) that some parts of the economy have been much worse affected by the crisis than others, and (b) our damaged financial system has not been doing a good job of pulling capital out of the poorly performing sectors and channelling it to the growing ones.

Put those two together, you get companies in the fast-growing sectors taking on workers to meet rising demand, because they can't get a loan from the bank, and companies in the hard-hit companies holding on to workers, hoping something will turn up. Employment goes up, even if overall output is flat.

In more normal times, the slow-growth companies might go bust - and produce a lot of job losses in the process. But in an environment of super-low interest rates, it's possible that a lot of them have been able to stagger on, and some lenders, at least, have been unwilling to pull the plug.

In its Financial Stability Report last December, the Financial Services Authority reported that a third of commercial property loans were in "forbearance".

How does this explanation fit the facts? The debate will run and run. But Mr Broadbent pulls together some striking evidence in support, including this wild and wacky chart (below) which looks like an electrical experiment gone wrong, but actually shows the movement of output across 81 sectors of the economy since the late 1990s. Each of the coloured lines represents the output of one sector.



What this chart shows is that the various parts of the economy grew at broadly similar rates for most of the first years of the 21st Century, but since the start of the crisis they've sharply diverged. Some parts of the economy really are doing a LOT better than others.

He also points out that the rate of both corporate failures and start-ups has remained relatively low - far lower, for example, than in the late 1980s or early 1990s. That also backs up the idea that new companies are being held back by a lack of finance while quite a lot of failing companies are somehow surviving, despite very weak demand.

The fact that there is a lot more variation than usual in the rate of return you can earn investing in different parts of the economy also backs up his case. With a well-functioning financial system, you would expect those differences to get ironed out, because people would be getting out of the low-return sectors to invest in the more lucrative ones.

Employment focus
So far, so interesting. If Mr Broadbent's story is true, what does it mean for the future?

Eventually, he thinks things will have to get back to normal, and productivity will start to grow at a decent rate again. If that comes mainly from the high-growth sectors finally getting capital, employment could carry on growing, or at least remain stable.

But if it's from money finally being sucked out of the weak sectors, that's going to show up in lost jobs and even slower economic growth. In that case, the Bank might need to unleash yet another round of quantitative easing.

Whatever happens, Mr Broadbent thinks the Bank of England's Monetary Policy Committee should focus more on employment, which does have a reliable link to inflation, and a bit less on short-term changes in GDP.

That sounds sensible. Politically attractive, even. But politicians might not like the practical consequences.

In effect, Mr Broadbent is suggesting that the MPC should tighten policy if employment growth continues to be strong, in order to meet the inflation target - even if the pace of the recovery is still weak.

[DGuller]

Is being self-employed as a "wild, stab in the dark" like being a serial killer or something?

Raz, you don't have to reply to every post Yi makes.

[Admiral Yi]

I just realized my answer makes no sense Shelf.

[Sheilbh]

I just realized my answer makes no sense Shelf.

Expand - give Raz the joy