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The interesting UK labour market story

    Health warning: the stats used in this blog are all taken from the ONS’s monthly Labour Market Statistics November 2013 release and are the figures for 16-64 year olds. The release also presents figures for all over 16, which would include the increasingly significant number of people who work into their retirement. All over 16 would be the direct comparison with US Bureau of Labor Statistics I’ve cited before, but the trends are largely similar.

    1)      The Government is right, more people are in employment than ever before (28.91 million)….

    2)      But that’s mainly because the 16-64 population is bigger than ever before….

    3)      Therefore, when politicians use phrases like “more people than ever before” which sound impressive, one should take them with a pinch of salt. What is far more interesting and worthwhile is to consider “rates”.

    4)      The rate the media most cares about is the unemployment rate. The UK unemployment rate for 16-64 year olds (seasonally adjusted) for July-September 2013 was 7.8%. This has fallen from a peak of 8.6% seen in September-November 2011. Nevertheless, the unemployment rate is still way above the pre-crash low of 5.2% seen in Mar-May 2008. In fact, to get down to that rate, unemployment would have to be 815,000 people lower given the current number of active people in the labour market (remember, unemployment is the proportion of active people in the labour market out of work).

    5)      However, looking at unemployment alone is a far from perfect way from examining the health of the labour market. That’s because unemployment measures the proportion of the active population without a job. At some stages in the past few years in America, for example, the unemployment rate has actually fallen simply because people have become inactive in the labour market – giving up looking for work altogether. This is not a sign of labour market strength.

    6)      In contrast, in the UK the economic inactivity rate is actually falling, meaning a higher proportion of people are becoming “active” in the labour market. Thus, the fact that the unemployment rate has been falling only slowly must be seen in the context of more people becoming active in the labour force. It’s not entirely clear what’s been driving this phenomenon over the past 2 years, though one potential explanation may be the government’s welfare reform programme.

    7)      The best measure of the health of the labour market then is the employment rate – that is the proportion of the 16-64 year old population who are in work. This fell significantly in the years after the crash, but has been rising significantly over the past two years. To get back to the employment rate seen just before the crash, however, would require an extra 493,000 people to be employed right now.

    8)      How does this compare with others? The chart below (using slightly different 16 and over stats) shows that in absolute and relative terms, the UK employment rate has held up remarkably well compared to that of the US. The US started from a higher base, but saw a spectacular collapse in its employment rate, which has flat-lined ever since. The UK also saw a dip during the recession, but the employment rate does now seem to be increasing.

    9)      Some economists explain that in the US changes to regulations and access to welfare are such that much of the employment rate fall is now structural – i.e. the US will now have a permanently lower employment rate. Though the UK’s seems to be recovering, albeit slowly, further supply-side reforms in terms of tax reform, welfare reform and deregulation could help improve the labour market further.

    10)  This is why much of the Chancellor’s speech at the Telegraph Festival of Business, calling for simpler taxes, lighter employment legislation and more steps to deregulate was welcome. The CPS will in the coming weeks outline further steps that could be taken on employment law reform, whilst you can read our ideas on tax simplification and deregulation in reports here and here.

    11)  It’s a cliché but although things are moving in the right direction, there’s much more to do.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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