David Blanchflower: Don’t be misled - the fall in unemployment has nothing to do with the Coalition’s welfare reforms

There are no credible empirical studies that show joblessness is being reduced by welfare changes

I have to admit, the employment performance of the UK economy under the Coalition has been much better than I had expected. Yet the downward flexibility of wages has taken the strain much more than anyone, including me, could possibly have anticipated.

There was nothing in the wage curve data, which looks at how wages respond to changes in unemployment, to suggest this was going to be the case. Moreover, there was little in the data to suggest that wages would be more flexible downwards in the UK than they are in the US. Who would have believed our labour market was more flexible than that in the land of the free?

All the estimates suggested that wage flexibility was broadly the same in both countries, with their highly flexible labour markets and low levels of job protection and union bargaining power. The OECD, for example, ranks the US second and the UK fourth in its index of countries with the lowest levels of job protection, after New Zealand in first place and Canada in third.

Here are three UK labour market facts since May 2010. First, employment is up on a seasonally adjusted basis by 1,669,000 (5.8 per cent), of whom 288,000 are 65 and over (17 per cent of the total). Second, the unemployment rate has fallen from  7.9 per cent to 6.5 per cent. Third, real weekly earnings in the private sector are down 7.4 per cent using the retail prices index measure of inflation, and 4.9 per cent using the consumer prices index.

Now here are three labour market facts from the US over roughly the same period. First, employment is up 7.1 million  (5.1 per cent), of whom 1.5 million are 65 and over (21 per cent of the total). Second, the unemployment rate is down from  9.6 per cent to 6.2 per cent. Third, private sector real wage growth is unchanged.

There are, then, broad similarities between the US and UK. The jobless rate has fallen faster in the US but employment has grown a little more quickly in the UK. The decline in the US participation rate, against a small rise in the UK, is another difference – as is the rise in under-employment in the UK, which has not been observed across the Atlantic. However, the disparity in real wages is especially pronounced, so what has changed over time and why are the UK and US so different?

Answer: the UK took in a large influx of migrants, who have pushed down on wages, and older workers were forced back to work after the collapse of their pensions, increasing the labour supply.

Since the start of 2004, the number of non-UK born workers is up by two million, including a rise of 880,000 from the 10 Eastern European accession countries of Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia and Slovakia (the A10). Since May 2010 there has been a rise of 715,000 in foreign-born workers, including 315,000 from the A10. This increase in migrant employment presumably also has zero to do with welfare reforms.

One issue worth addressing is that the number of workers from the A10 was probably hugely underestimated in the years before the recession. According to the Office for National Statistics (ONS), there were 563,000 highly skilled, mostly English-speaking, migrants from the A10 working in the UK at the start of 2008.

However, there were probably at least as many as that again in temporary jobs, who were not picked up in the ONS surveys.

Workers from these 10 countries had to register for national insurance, and these numbers are much larger. In 2002 and 2003 41,000 registered. This rose to 975,000 between 2004 and 2007. A further 565,000 were recorded between the start of 2008 and May 2010, when the Coalition took office, and 846,000 have registered since then – making a total of 2.4 million, compared with the 940,000 who the ONS says are here. Any burst of real wage growth would be matched by an increase in the flow of workers, perhaps a further 1.5 million or more, and/or the amount of work done by those already here. All of these workers buy stuff, boosting labour demand.

Unemployment is both a stock and a flow – equivalent to water in the bath where the tap is running and the plug is leaking. Indeed, flows into and from unemployment are large relative to the net change in unemployment that results. For example, in the latest data we have, for January to March this year, 817,000 moved into unemployment while 966,000 left unemployment.

The chart above plots the inflows and the outflows. It is clear that the rise in unemployment in 2008 and 2009 was largely driven by greater inflows. During 2010 and 2011 the level of unemployment stabilised, as outflows increased to offset the rising numbers of workers who moved to unemployment. Since mid-2013 the falls in unemployment are primarily the result of sharper inflows rather than because of greater outflows.

Some commentators, including Ben Broadbent, deputy governor at the Bank of England, have recently guessed that many of the improvements in the labour market are attributable to the Coalition’s welfare reforms. There are no credible empirical studies that show this. I recall similar claims being made for the Coalition’s Work Programme, which studies have subsequently shown to have had negative rates of return, worsening participants’ labour market prospects rather than improving them.

It is most improbable that the rise in the number of working people who are aged 65 and over has much, if anything, to do with welfare reforms. It appears mostly to do with unexpectedly low pension incomes. Indeed, there is evidence that these older workers would prefer to reduce their hours of work. Similarly, migration flows, especially from Eastern Europe, are clearly unrelated to Iain Duncan Smith’s reforms at the Department for Work and Pensions.

Recent reductions in unemployment also appear to be a function of reduced inflows rather than higher outflows. The latter would be seen if welfare reforms were the main driver.

The bottom line is that demand, finally, picked up and it’s still cheaper to hire people rather than invest.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee