Mass unemployment: here to stay

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.

Comments

[Luis Enrique]

[This point makes no real difference to the substance of your post: is it quite right to portray population growth as an additional hurdle? Would you also argue that immigration makes reducing unemployment harder? potentially not - new people create demand too.]

[Ralph Musgrave]

Chris, Re the increase in GDP required to raise employment, I think you’ve left out the fact that the unemployed are less productive than those already employed. Thus the necessary increase in GDP could be less than you estimate.

The increase in GDP per extra job can be further reduced by subsidising extra jobs. See:

http://ralphanomics.blogspot.com/2011/09/marginal-product-of-labour_7816.html

[Prateek Buch]

FLEXICURITY.

ahem

[Gareth]

"mass unemployment is here to stay"

policy defeatism: defined.

Change the inflation target to 4%. Now what happens?

Massive devaluation of Sterling a la the SNB. Now what happens?

[chris]

@ Gareth - exports aren't very price-elastic, and are only around 1/3rd of GDP. These two facts mean a devaluation won't create many jobs.

[Blissex]

«This sort of growth has only rarely been achieved in the past - the five years to 1989 being the last time»

Curiously enough that was when the biggest surge in North Sea oil exports happened:

http://mazamascience.com/OilExport/output_en/Exports_BP_2011_oil_mtoe_GB_MZM_NONE_auto__.png

[Rob]

War is the answer, as so often in history. We should seize back Normandy for the British crown.

[gastro george]

Better to send the gunboats to Jersey, Guernsey and the Cayman Islands.

Mass unemployment is certainly here to stay if current economic orthodoxy is followed.

[Keith]

Well Rob surely we should invade Bordeaux for the wine rather than Normandy? Why not retake the USA Australia and canada too? Then full employment is quite assured!

Your little sums Chris show how puny our political class are today. In the 1980s Marxist professors of economics would produce plans to abolish unemployment by having 4 or 5 percent growth each year of a Parliament. But then they also had a method to allow National economic planning: leave the Capitalist EU, control capital flows and Nationalise the commanding heights with Investment targets for the new state run firms; and substantial spending increases by the state, earlier retirement and higher welfare benefits with a crash programme of council house construction. I remember it well. Now if we took down our old Professors dusty plans from the shelf and put them into effect full employment would be a realistic goal rather than a pipe dream. Instead the political class are committed to managing neo liberal economic decline. With Tory bankers allowed to tell elected Governments what to do via "Independent Central Banks". Independent of who? The Democratic legislature. And the people they are supposed to serve. Welcome to the era of economic slavery.

[Chris Hadrill]

I sometimes wonder whether Keith's a spoof poster. I hope he is - he's funny.

[pablopatito]

Chris, unemployment was only 1.5m in 2006 and GDP was similar to what it is today. Why do we need so much growth to bring down unemployment. Why can't we just return to 2006 levels?

[Lewis MacKenzie]

There is at least one option: the government could institute a job guarantee/employer of last resort scheme. Under such a scheme, anyone willing and able to work, who walked into the job centre looking for employment would be given a job. Workers would be paid minimum wage, with benefits, and could be put to work in urban or environmental renewal projects, care and community work, etc. The spending involved in employing them would provide part of the stimulus required to get the economy moving again. Moreover, that stimulus would ebb and flow in a manner directly linked to the movement of the business cycle (ie. would act in the same way as the automatic stabilisers). At the same time the programme would establish a wage floor for the economy and help to control inflation. And since we would be using an employed buffer-stock for that purpose, rather than the unemployed buffer-stock that we use at present, those workers would be much more able to find private sector employment during the upswing of the cycle. So I disagree that there are no policy tools available to governments to eliminate unemployment - indeed, as I see it, the government CHOOSES the level of unemployment. It's just that doing something about the problem would require the government to realise the full range of policy tools at its disposal. Eliminating unemployment is not all that complicated at all - you just need to give people a bloody job.

[CahalMoran]

Gee, how about repeating what we did the last time we had massive austerity and needed job creation: reducing short and long term interest rates down to 2-3%. Unemployment didn't even budge post WW2.

[Mcfuckingduff]

It's not about jobs, Lewis. It's about money. A "job" is an abstract thing used by politicians to deal with flows of relative prosperity in an artificially quantifiable form. We created 400 jobs. We lost 300 jobs. Jobs jobs jobs. The term becomes essentially meaningless once you realise that a part time cleaner is just as much of a "job" as the CEO of an oil company.

If you want to use the systems of the state to do something good, you don't want it to create "welfare jobs". You want to use it to redistribute the wealth in society, by taxing rich people and giving it to other people, either in the form of services or in the form of actual cold hard cash.

One of the real problems, of course, is that we've got a lot more unemployed people than we could ever possibly meaningfully employ. We're already mostly out of meaningful jobs and have had to start making jobs up in order to ensure "growth". It might be time to reassess this whole "growth" thing, in the light of those facts.

[gastro george]

"We're already mostly out of meaningful jobs."

Oh, I don't know about that. You could start with childcare - availability is scandalously poor and expensive. Then more teaching assistants (without jeopardising teacher posts). And there's plenty of construction/road work that could be done.

[adam]

Two things,

Firstly, our GDP is depressed because of low employment, not the other way round. Clearly, someone has to be employed to produce something that contributes to GDP. That means saying that GDP 'would have to rise' to restore full employment is misleading. Employment is unsually low, so if it rises back to usual levels, GDP growth will be unsual - but these are unsual times.

You seem to be postulating a kind of backwards Okun's law.

Secondly, the level of our GDp

[Bialik]

We are mostly out of meaningful jobs. The fact that more childcare is required doesn't negate that.

[fake]

You might want to ask "why" childcare is so short in supply and expensive.

And when you have followed the trail of red tape to government, ask if more government is the solution.

And take this further. There are private childcare agency, if the government funds the wages of childcare workers, how will the private sector compete with "free".

the problem with job guarantee schemes is they never think "what jobs" people will do, they can't be jobs that compete with the private sector, they can't be jobs that provide services, because only so many services are needed (before again conflicting with private supply).

Unworkable.

[Gareth]

"@ Gareth - exports aren't very price-elastic, and are only around 1/3rd of GDP. These two facts mean a devaluation won't create many jobs."

Reality begs to differ. Over to the Swiss:

http://blogs.wsj.com/source/2011/10/20/snb-needs-to-act-now/

"On Thursday, trade figures for September showed that exports rose 9.5% in September helping to boost the country’s trade surplus, with watch exports alone rising 21% as overseas buyers took advantage of the cheaper franc."

[Gareth]

... and, WHAT? Exports are *only 1/3 of GDP*, so we shouldn't boost exports? We definitely shouldn't do any capital spending then, because that's a TINY proportion of GDP.

I'd bet a lot of the benefit from devaluation would be to substitute imports for domestic production.