It’s been a while since I delved into an economics theory book to understand why the supply curve slopes upwards. I’m no longer examined on why Ricardo didn’t simply live in a country with less rain rather then obsess with its comparable advantage in producing a certain good or service (perhaps we unconsciously choose rain and misery?). At school I recall that the beloved texts of Richard Lipsey were best used to help keep the windows open so that we could smoke out of them. However, following this morning’s GDP figures, it occurs to me later in life that there is a clear reason why productivity in the UK labour market is not picking up with falling unemployment and that Q4 GDP growth is only 0.7% (as expected). It’s actually a shame that Mark (Carney) the new Canadian boss at The Bank of England recently abandoned linking interest rate policy with unemployment (because the rate moved back up to 7.2% – marginally away from the previously key 7% level) but for me, 3 of the key features of last week’s ONS employment stats were as follows:
1) There are now 580,000 unfilled jobs in the UK economy, levels not seen since 2008.
2) 4.3 million of us are now self employed, a figure that has grown 15% since 2008-9.
3) Youth Unemployment (16-25 year olds) dropped 48,000 from the previous quarter to 917,000 – moving further away from the worrying 1m+ figures at the depth of the recession – but most worryingly, 250,000 of them have been out of work for longer than a year.
I don’t currently have the time or inclination (old excuses die harder than memory) to delve into figures and theory much further (perhaps you do in which case we welcome your comments) but there is a view emerging that there is an explanation for a recent economic paradox.
Economists warn us that, ceteris paribus (how I miss using those 2 words), productivity (output per unit of input) weakness (0.6% this year versus 5.6% in 2009) and spare capacity (factors of production not being used to their fullest capacity – think of a drooping sail) in the economy will lead to higher (wage) inflation (too much money chasing too few goods) which would mean interest rates (the price of money) will have to go up sooner than we thought (in time for the next election in Q2 2015 as the markets suggest). An interpretation becoming more common though is that the relationship between productivity and ‘unemployment’ has broken down for structural reasons. More and more people are self employed (as many as 38% of net job adds in the last 12 months) and underemployed (89% of those who have become self employed since the recession work – or generate pay to work – less than 30 hours a week). So perhaps there is room for the economy to grow without a risk of (excessive) inflation. This is substantiated by looking at the space we know best: an ONS report on Graduates in the UK Labour Market in November 2013 suggested that 47% of graduates who had completed a degree in the last 5 years were working in non-graduate roles. Many are also working in paid or unpaid internships. Underemployed graduates should start to earn bigger wage packets but we continually quote a stat that every £1 invested responsibly in graduates generates a Return On Investment of 530% over 3 years – now that’s productivity. UK inflation figures came in below the Bank Of England target of 2% last week and many still worry about deflation but wage inflation is a real concern (though National Minimum Wage rising to £7 an hour is more than necessary).
The government’s focus on entrepreneurialism (an easy way to wash their hands of the ‘lost generation’) has only exaggerated the productivity problems to date. Underemployment of UK graduates and the proliferation of part time and self employment masks the harsh reality of an economy that looks stronger on the face of it than it actually is and employment figures that are actually worse. I used to work at the same bank as the respected economist Stephen King (not that one but it is a horror story of sorts) who warns in his book ‘When The Money Runs Out‘ that the irresponsible flooding of the economy with cheap money in recent years will soon come home to roost (when the punch bowl gets taken away and the hangover commences) and turmoil will result. When rates do eventually rise (as sterling strength of 10% in the last year implies) given a booming housing market and at least the threat of inflation, then trouble could loom. But real unemployment or underemployment is still high and inflation is still (relatively) low so interest rates could arguably remain low for a while longer yet. The government has done well to stick to its knitting and stimulate economic growth (6 year highs and some of the strongest in the Western world) but it is still below pre-recession levels and perhaps obsessing with supply side solutions (Ricardo himself explained why the supply curve slopes upwards – because producers choose to supply more when the price is higher) isn’t the only solution. Keynesian thought suggests that we should not be obsessing with cutting borrowing and flooding the economy with cheap money (King might agree); rather we should be using demand side tools including increased government expenditure (and not just on HS2) to address structural issues in an ever changing economy, help the lost generation to find itself and boost productivity. Our calls for more subsidised internships (first made in 2010) remain.
Robin Kennedy, WEXO Co-founder