Today’s bad unemployment figures led to Ed Miliband claiming that the government’s economic plan is not working. True or not, this misses a bigger point - that mass unemployment is here to stay, pretty much regardless of what policy-makers do.
Let’s do some sums. There are just over six million un- or under-employed: 2.56m jobless, 1.27m working part-time who’d like a full-time job, and 2.22m out of the labour force who’d like a job. What would it take to reduce this to three million?
We’d have to create more than three million jobs, because population growth adds around 150,000 to the workforce each year. Over five years, then, we’d need something like 3.75m extra jobs. This represents employment growth of 12.9%.
To generate this, GDP would have to rise by more than this, to account for two things. One is “normal” productivity growth; this has been just under one per cent a year in the last 10 years, implying that the economy can grow almost one per cent a year without creating jobs. The other is that the level of productivity is below its trend now thanks to labour hoarding: output per job was 4.2% lower in Q2 than it was in 2007Q4. This suggests that GDP could grow quite a lot without generating any extra jobs, as firms respond by increasing the utilization of existing labour.
If we put all this together, employment growth of 12.9% over the next five years probably requires a rise in GDP of over 20%. That’s 3.7% a year.
This sort of growth has only rarely been achieved in the past - the five years to 1989 being the last time - and compares to the OBR’s estimate of trend growth of around 2.1% a year.
So, what can policy-makers do to raise GDP growth by 1.6 percentage points a year?
Very little, even on an optimistic reading. Put it this way. The Bank of England has estimated (pdf) that its first £200bn of QE added around £50bn to money GDP. This implies that to add 1.6 percentage points a year to real GDP growth for five years would require £500bn of QE - even on the grotesquely optimistic assumption that the aggregate supply curve is flat and so none of this money creation adds to inflation.
What I’m saying here is that, unless everyone gets very surprised, mass unemployment is here to stay. Politicians who pretend it can be eliminated by policy measures are just making prats of themselves.
The policy questions should not be merely how to create jobs - important as this is - but rather how to deal with the inequality, unhappiness and potential social tensions that prolonged mass unemployment will cause. And politicians of both parties are showing few signs of answering these.