David Blanchflower: Forget the Full Monty – unemployment isn't funny, Chancellor

Economic Outlook: George Osborne's comment that the UK had "run out of money" is completely and utterly untrue

I recall watching the film The Full Monty with some American friends who thought it was hilarious, but I just found it deeply sad. Unemployment had driven a bunch of men during the 1980s recession in Sheffield to such a low point that the only hope they had left was to strip in public. The bottom line was that there simply were no jobs available, so they did anything they could to survive.

There is little evidence to support the contention that the unemployed, then or now, are a bunch of lazy bastards. Unemployment in fact tends to be involuntary rather than voluntary, lowering the well-being of both the individual and the society at large.

Thatcher's 1980s recession took its heaviest toll on middle-aged male manual workers who were members of trade unions and lived in the north: many never worked again. The unemployment rate was 5.3 per cent in July 1979, rising to a high of 11.9 per cent in March-May 1984, with much higher rates in the North. It didn't return to its starting level until June 2000, 21 years later, under a Labour government.

The Tories squandered North Sea oil revenues paying for unemployment: the Norwegians used their oil revenues to set up a sovereign wealth fund larger than Saudi Arabia's worth over half a trillion dollars and around 1 per cent of global equity markets.

Chancellor George Osborne harmed UK economic prospects still further last week by his damaging and ill-considered comment that the UK had "run out of money" – which is completely and utterly untrue. Imagine the consequences if the CEO of a major corporation or even of a major bank said such a thing, whether it was true or not. Inevitably, the share price would tumble and he or she would be out of a job fast. Once again, Mr Osborne put narrow political gain ahead of the national interest, the consequence of which will be to hit confidence and slow a flatlining economy even further. Contrary to both Mr Osborne's and the Prime Minister's frequent assertions, the UK is also not comparable to either Greece or Portugal, who are stuck in monetary union.

The UK has its own central bank that can print money; the government has access to the capital markets and can borrow at negative real interest rates. So we have not come close to and will not run out of money in a year of Thursdays. The inference I draw from such comments is that Mr Osborne, just like most other Tory chancellors, could not care less about the unemployed.

A question worth addressing is why has unemployment in the UK in this Great Recession not reached such devastatingly high levels as occurred in the 1930s or even in 1980s? It has already hit depression levels of over 20 per cent in Greece and Spain, but in the UK the unemployment rate to this point has not reached double digits. Unemployment hit 10 per cent in the United States in 2009 despite the fact that they had a much smaller drop in output, 3.7 per cent from peak to trough compared with 7.4 per cent for the UK – all of which the US has now recovered compared with less than half in the UK. Unemployment is rising again over here, up by around 180,000 this year, whereas it is falling in the US. For the first time since the spring of 2008, the US now has the lower rate (8.3 per cent and 8.4 per cent respectively). It may just be too early to gloat as unemployment heads inexorably to the three million mark.

One explanation why the unemployment response to the shock in the UK has been less than I expected, is the increased flexibility of the workforce in the face of global pressures. Firms have been able to reduce hours rather than fire workers who are unable to resist because they are concerned about job security and worry that their employers could move production to China.

Unions have been weak and have been unable to resist nominal cuts in pay packets because of the fear of unemployment. There has, consequently, been a rapid growth in the number of people who would like to work more hours, and would like permanent jobs but are stuck in temporary ones. This has helped to prevent firm closures or mass lay-offs on anywhere near the scale that occurred in the 1980s.

Firms in the UK hoarded labour in expectation that the good times would return fairly quickly. But as they haven't, a shake-out of labour may be imminent. As austerity bites harder, watch out for plant closures as firms downsize and an increase in bankruptcies, not just in retailing. Meanwhile, hiring freezes in both the public and private sectors have hit the young especially hard. Today more than a million youngsters under the age of 25 are unemployed, a quarter of them for at least a year.

In part, this is because the size of the youth cohort is large and will decline quickly for a decade. Youth unemployment under the Labour government fell sharply, largely as a result of the now abolished Future Jobs Fund and the Educational Maintenance Allowance. These schemes met with widespread public support in part because they were financed by a bankers' bonus tax – and they worked. It's a distinct contrast to the public opprobrium the coalition has received for making youngsters work for nothing in supermarkets under threat that if they quit they will lose their benefits.

The coalition's Work Programme isn't popular and isn't working.

Worryingly, Mr Osborne appears not have the slightest clue what to do to turn the economy around. Instead of giving it the "full monty", his only strategy right now seems to be to cross his fingers and hope for the best. He had better be right for all our sakes.

David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee

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