Christopher Johnson: Government number crunching disguises true unemployment

The claimant count has parted company with any common sense concept of unemployment

The claimant count has parted company with any common sense concept of unemployment

The number of unemployed claiming related benefits, the "claimant count", has just fallen below one million. Tony Blair hailed this as a triumph at a ceremony yesterday at the Industrial Society and the news could not have been better timed for a May general election. He must be praying that foot-and-mouth disease is stamped out before the unemployment figures start rising again.

Yet we are told that the Government's preferred measure is unemployment on the International Labour Organisation (ILO) definition. This is 1,535,000, 54 per cent higher than the claimant count. It is 5.2 per cent of economically active people, as opposed to 3.4 per cent on the claimant count. It is "preferred" only in the sense that National Statistics (NS) headlines it. NS values its reputation for objectivity. But when ministers are playing politics, they prefer the lower figure.

The two figures have never diverged more widely than now. The claimant count includes, and the ILO excludes, people who get benefits but are not looking for work. The ILO includes, and the claimant count excludes, the much larger number of people who do not get benefits but are looking for work. They include people who have voluntarily left their job, those not entitled to benefit because their spouses work, sickness benefit claimants, men of 60-65, 16 to 18-year-olds and students.

An even wider definition of unemployment includes so-called discouraged workers. These are people of working age who are not getting benefits, and not looking for work because they think there are no jobs. They are thus not counted in the ILO measure, but they would like a job if there was one. They numbered 2.03 million at the last survey three years ago. Even if some of them have moved into the labour market as the economy has expanded, it is fair to assume that there are still some 1.5 million. So unemployment could be as high as 3 million - three times the claimant count.

The claimant count is more accurate and up-to-date than ILO unemployment, which is quarterly, not monthly, and suffers from a sampling error of about 3 per cent. The remedy is in the Government's hands, yet just over three years ago they refused to spend the extra money needed to make the ILO figures monthly and use a bigger sample. This is a false economy when dealing with a statistic as central to economic and monetary policy as unemployment. It is better to be roughly right than precisely wrong.

The claimant count was introduced in 1982 by the Thatcher government, which was then able to reduce unemployment by 190,000 at a statistical stroke. Yet claimant count unemployment has sometimes been higher than ILO unemployment. When there was an overlap and the two figures were not very different, it did not matter so much which was used. Now it matters a lot, for the simple reason that the claimant count has parted company with any common sense concept of unemployment.

It is convenient for the Government to minimise the problem of unemployment by using the lower of the two figures. It is also easy for it to fiddle the figures by refusing unemployment-related benefit to claimants, or putting them on different kinds of benefit. The reduction of the number of benefit claimants is a policy objective in order to get more people into work and to cut social security spending. That makes it anything but an objective measure of the fall in unemployment.

The Government should drop the claimant count as a criterion for unemployment, and spend some of its war chest on a monthly version of the ILO figures. The claimant count numbers should be seen as social security, not labour statistics. This would enhance the Government's reputation for honesty about its achievements. There is no doubt that unemployment has fallen; the argument is about the level, not the change. The exclusive use of the ILO figure would have other major policy consequences.

The UK would see that, as the OECD points out, it has the seventh lowest, not the lowest unemployment rate in the European Union. Both the US and Japan have lower rates. British ministers would no longer be able to lecture their Continental counterparts about the marvels of the UK labour market. They would see that there is still some way to go in tackling unemployment in a second term. The hawks on the Bank of England's Monetary Policy Committee would not be able to use the low claimant count figure to argue that interest rates should remain high because the labour market was tight, and earnings were going to rise so fast as to bring back the danger of inflation.

The 2 million or so workers who are unemployed and not getting benefit are a better defence against earnings inflation than the 1 million or so who are unemployed but getting benefit. The former have no benefits to lose by taking jobs, while the latter are bound to look for jobs bringing a better return than their benefits.

The lack of skills among the unemployed is no reason to worry about the effect of skill shortages on earnings inflation. The majority of jobs becoming available require low or no skills. If skilled workers need to be paid more, this will show up as a change in relative earnings between skilled and unskilled, not as generalised inflation.

The Bank of England could, therefore, cut its interest rate by stages from 5.75 per cent to the euro rate of 4.75 per cent without fears of renewed inflation, if the Treasury gave it a steer by focussing on a more accurate measure of unemployment. The British economy could then continue on last year's course of 3 per cent growth. The Bank of England and the Treasury would have to agree that the euro interest rate was, at last, right for Britain and the improvement in the prospects for joining the euro would in its turn feed back into higher and more stable economic growth.

Christopher Johnson is UK adviser to the Association for the Monetary Union of Europe.