The consequences for communities of rising unemployment David Blanchflower

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1 The consequences for communities of rising unemployment David Blanchflower Employment peaked in April 2008; since then we have lost 540,000 jobs. ILO unemployment was also at its low point in April 2008 and since then has increased by 750,000 while the unemployment rate increased from 5.4% to 7.6%. The fact that unemployment has increased more than employment has fallen is because firms have stopped hiring, which particularly impacts the young. The number of employees has fallen especially rapidly. In contrast the number of selfemployed has increased, mostly on a part-time basis. These are likely to be low-paying jobs. Wage pressure is benign. This recession started in the spring of We have already experienced four quarters of negative growth with more to come. The talk of public spending cuts and a possible reversal of quantitative easing by the Bank of England or raising interest rates any time soon suggest the possibility that unemployment could get as high as four million. Currently unemployment is at 2,381,000 with a workforce of 31,379,000 giving an unemployment rate of 7.6%. Assuming the same size workforce, four million unemployed would imply an unemployment rate of 12.7%, which is not beyond the realms of possibility. In my view there is little likelihood that unemployment will start to fall before House prices will likely fall around 35% from peak to trough and there will be over three million households in negative equity. The interaction between negative equity and unemployment in some communities is of particular concern. That combination of increasing unemployment and further rises in negative equity is worrying, not least for the banks holding the mortgages. It also remains uncertain whether the banking system can lend enough to fuel the recovery, especially when many institutions have withdrawn from the market. In other words, we are faced with a toxic cocktail: sliding house prices, rising negative equity, inadequate levels of credit; soaring unemployment and zero, or even negative, wage growth. In such circumstances, it is almost academic to try to pinpoint whether economic growth is returning. The simple fact remains that we have yet to realise just how painful the coming years are likely to be. Youth unemployment is also a special problem. By the autumn of 2009 there will be at least a million unemployed under the age of 25 and that will not be the end of it. The unemployment rate for those under 25 is currently 19.1%, compared with 6.0% for year olds and 4.3% for those 50 and over. Youth unemployment is especially high among minorities and those with the least education and among living in the North East or the West Midlands. This is going to only get worse when the Class of 2009 leave school and try to enter the labour market. There are two main reasons why this has happened. 1

2 First, our newly flexible labour market has meant that wages are more flexible downwards than they were in the in the past. The possibility that jobs could be given to workers from the A10 Accession countries or, that employers could move production abroad has raised the fear of unemployment, which has kept wage pressure down especially in the private sector. Hence firms have not been firing as much as in the past, they have simply stopped hiring. Applications for every graduate level job have skyrocketed. Second, the size of the youth cohort peaked this year. This can be seen in the attached figure, which plots the numbers of people by age in So in 2009 there are 847,000 twenty three year olds. This is over 110,000 more than both the number of 31 year olds and the number of 11 year olds. So these numbers will fall rapidly. For example, in ten years time there will be 15% fewer 23 year olds than there are today. There are simply many more young people than in the recent past. Applications to the armed forces are up as they are for teacher training. UCAS has just announced that the number of applicants to UK universities and colleges is up by nearly 10% on this time last year. Applications are up by 17% for people aged The decline in alternative opportunities means that the cost of studying falls, as unemployment rises. So college applications rise in a recession. The only problem here is that there is likely to be a shortfall of nearly 50,000 university places because government is restricting the number of places. This makes no sense. It is better to have young people in education than on the street. In my view everyone under the age of eighteen should be in full-time education or training. That would free up jobs for those aged The Lisbon target is that at least 85 per cent of 22 year olds should complete the equivalent of upper secondary school by The UK, currently achieves around 78 per cent, putting it significantly short of the target. It is unsurprising then that the OECD (1997) shows that UK performance in improving skills after the age of 15 is significantly worse than that of other countries. Between the ages of 16 and 25, the International Adult Literacy Survey showed UK skill levels to be significantly lower than those of other European countries such as Germany and Switzerland. The major reasons why we should care about unemployment are as follows (see Bell and Blanchflower, 2009 for references). In particular because of the lost output involved. During a long period of unemployment, workers can lose their skills, causing a loss of human capital. Unemployment is a stressful life event that makes people unhappy. Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression. The psychological imprint of joblessness persists. Increases in the 2

3 unemployment rate also tend to be associated with increases in the suicide rate. The unemployed appear to have a higher propensity to commit suicide. Unemployment increases the probability of poor physical health outcomes such as heart attacks in later life. The unemployed have higher blood pressure and pulse rates. Being unemployed can also reduce life expectancy. The long-term unemployed are at a major disadvantage trying to find work. The effects of unemployment appear to depend a lot on how long the person has been unemployed for. People's morale sinks as the duration of unemployment rises. Long-term unemployment is especially harmful. "The long-term unemployed have largely given up hope," (Layard, 1986, p.96). Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes (Ellwood, 1982). For the young a spell of unemployment does not end with that spell; it raises the probability of being unemployed in later years and has a wage penalty. These effects are much larger than for older people. As unemployment rates increase, crime rates tend to rise, especially property crime. Indeed, there is some recent evidence that property crime has now started to increase in the UK. According to the British Crime Survey for the period July to September 2008, police recorded domestic burglaries rose by four per cent. Carmichael and Ward (2001) found in Great Britain that youth unemployment and adult unemployment are both significantly, and positively related to burglary, theft, fraud and forgery and total crime rates. Increases in the unemployment rate, lowers the happiness of everyone, not just the unemployed. Individual wellbeing seems to be related to aggregate macroeconomic variables such as the unemployment rate, inflation, and the interest rate. This literature suggests that a one percentage point increase in unemployment reduces overall happiness twice as much as an equivalent one percentage point increase in inflation - the so-called misery index. Moreover, increases in aggregate unemployment seems to indirectly reduce the wellbeing of not just the unemployed but also that of the employed and those out of the labour force such as students, the retired and those looking after the home. It also turns out that the fear of becoming unemployed in the future also lowers a person s subjective wellbeing (Blanchflower and Shadforth, 2009). So rising unemployment is bad for every community. What should be done? The MPC needs to keep interest rates at 0.5% for the foreseeable future and dramatically expand its programme of quantitative easing. In such circumstances public spending cuts make absolutely no sense. The government should be increasing spending and by a lot: not least because it can borrow at such a low long run rate of interest. Investing in the infrastructure and in education in such circumstances are smart investments in all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place. Tightening policy too soon would be bad. 3

4 We need to solve unemployment as a priority, and at least for now not worry about inflation. Don t believe the doomsayers who tell you about the dire consequences of doing this. The economic models that were used, suggesting that an independent central bank targeting inflation and basically ignoring unemployment would guarantee long run stability, have been discredited. The intellectual basis for inflation targeting has collapsed. The monetary and fiscal authorities should focus now on lowering unemployment and stimulating the economy further. In my view it would not be so bad to even have a few years of moderate inflation. I for one am hard pressed to come up with any significant costs of a little inflation. Anyway the consequences are much less than a lot of unemployment. That would solve some of the problem of negative equity. And there is no evidence that low levels of inflation, say around four or five per cent, will subsequently jump to something astronomic. Deflation is a bigger concern right now. Voters care about jobs. David Blanchflower is a labour economist and Professor of Economics at Dartmouth College, USA and a visiting professor at the University of Stirling. He is a Research Associate at IZA and NBER. He was a member of the Monetary Policy Committee at the Bank of England from June 2006-May words 4

5 References Bell, D.N.F. and D.G. Blanchflower (2009), What to do about rising unemployment in the UK, SCOTECON working paper. Blanchflower, D.G. and C. Shadforth (2009), 'Fear, unemployment and migration', The Economic Journal, 119(535), February, pp. F136-F182. Carmichael, F. and R. Ward (2001), Male unemployment and crime in England and Wales, Economics Letters, 73, pp Ellwood, D. (1982), 'Teenage unemployment: permanent scars or temporary blemishes?' in The Youth Labor Market Problem: Its Nature, Causes and Consequences, edited by Richard B. Freeman and David A. Wise, pp Chicago: University of Chicago Press, 1982 Layard, R. (1986), How to beat unemployment, Oxford University Press. OECD (1997), Literacy skills for the knowledge society: further results from the International Adult Literacy Survey, Table 1.6, Paris, France 5

6 Figure 1. Total number of people in the UK by single year of age,

Youth & The UK Labour Market. March 15th. Jonathan Wadsworth. Royal Holloway College, CEP LSE, CREAM UCL, MAC and IZA Bonn

Youth & The UK Labour Market. March 15th. Jonathan Wadsworth. Royal Holloway College, CEP LSE, CREAM UCL, MAC and IZA Bonn 1 Youth & The UK Labour Market March 15th Jonathan Wadsworth Royal Holloway College, CEP LSE, CREAM UCL, MAC and IZA Bonn 2 Labour Market Performance of Young Adults Young people are typically always at