Jobs and US economy offer road maps to duration of the boom
There could be a sharp downturn next year, particularly with a strong pound. But markets have not priced much potential bad news into expectations
Tuesday 12 August 1997
A handful of commentators are showing awareness, at least, of the possibility of a sharp downturn next year particularly if sterling remains relatively strong. But the markets have not priced much of such potential bad news into their expectations. Are there any road maps?
Well, there is one. This is the performance of the US economy. Not only is it in a more advanced position in the cycle - its recovery started about a year earlier- but the strength of the currency has been sustained for longer and unemployment has fallen further. Looking at the US is by no means a perfect proxy for the UK, for a number of unconnected reasons. Nevertheless it can give some pointers.
Perhaps the most useful one is unemployment. The lower that can be driven without wage inflation the longer the boom can continue, and in the UK more than the US (because of our more substantial welfare payments) the quicker public finances can come back to balance.
In the US, unemployment has been below 6 per cent for three years. This year it has fallen from 5.4 per cent in January to 5.0 per cent now. It may - and this is the really interesting bit - drop to 4 per cent in the next year, raising the possibility that the new "trading range" for unemployment in the US will be 4-6 per cent through the economic cycle, levels in effect back to those of the 1950s and 1960s.
Why so low? Some work by the economics team at HSBC focuses on the relationship between the unemployment count and participation rates. As you can see from the graph, participation rates rose pretty steadily right through the economic cycles of the last 12 years, pausing in the early 1990s when unemployment rose, but resuming its rise once unemployment began to fall again.
However this overall rise has entirely been the result of more women in the workforce. The participation rate for women in the early 1980s was around 52 per cent; now it is 60 per cent. Meanwhile the rate for men has fallen from 78 to 75 per cent. The labour force has been expanding - but mainly because strong demand for labour has pulled many more women into work.
This rise has been particularly noticeable in the past year. HSBC points out that had female participation rates remained at the level of June 1996, unemployment would already be down to 4 per cent, and presumably the economy would be under more strain. This raises the obvious question: how high can female participation rates rise before they hit a natural ceiling?
Anyone who has been to the US in recent months (or is zipping over for a holiday now) will be aware of how hard Americans are working.
A lot of the people in the service industries - behind counters on airline desks, on checkouts at supermarkets - seem to be past normal retirement age. Demand for labour has pulled many retirees back into work, perhaps part-time.
And there are self-evidently many women in the workforce: the UK has high female participation rates by continental European standards, but not as high as the States.
But there must be some limit to the rise in female participation. The question then is whether there is an impact on male participation, reversing the trend of the last 15 years. There ought to be, but it has not shown in the figures. If there is not, then at some point soon the US hits the level at which employers bid up the price to get people, interest rates go up, and the cycle is reversed. The danger here would be that once wage rates do start to move up, they could move up sharply: the rise in wage rates would be the precursor not just to higher interest rates, but perhaps to recession too.
That is all in the future. Whate are the lessons for the UK? We have the advantage over the US that we can learn from their experience.
Intuitively I would expect there to be just as much potential here for a rise in participation rates as in the US, indeed perhaps more so, for a number of reasons.
For a start, despite recent growth in the workforce, the number of people in jobs now is roughly a million lower than it was at the height of the 1980s boom. True, that was unsustainable. Nevertheless continued economic growth ought to be able to suck more people back into jobs. Remember that our participation rates are lower than theirs.
Next, we have learnt a lot during the last decade about employing part- time labour: how to train it, how to use it efficiently, how to make it attractive. In fact we have incorporated into our labour practices many of the lessons learnt from the US.
Perhaps most important of all, there seems to be a change in the climate of opinion about the "normality" of having a job. This follows a change in the structure of unemployment. The very high regional unemployment rates of the 1980s economic cycle seemed to condemn many people who happened to live in the wrong part of the country to a lifetime of unemployment.
In the early 1990s cycle, while overall unemployment levels were nearly as high, at least the pain was more evenly spread. And now some areas (like Scotland) which have historically had relatively high unemployment, are below the national average.
Serious pockets of unemployment still exist, but they seem more localised now than they did in the previous cycle. Long-term unemployment remains a grave problem; but it is being tackled.
All this is hopeful, for quite suddenly, if US experience is any guide, there is the possibility of getting unemployment down quite close to the levels of the 1960s - or rather at US 1960s levels, not UK. The more that the workforce expands, the slower the fall in unemployment for any given level of economic activity. Still, before the unemployment cycle turns up again, it is at least plausible that it could dip below 5 per cent, something that would have seemed a remarkable achievement five years ago.
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