The Jobless Crisis: Unemployment forecast to peak at 3.5 million: The jobless total looks set to continue rising and stay high for years to come. Robert Chote reports
Friday 19 February 1993
Worryingly for the Government, the political fall-out may not subside even when unemployment finally begins to fall. Jobless rates around the country are expected to diverge as the national total declines, re-opening the 'North-South divide'.
The Employment Policy Institute predicts that the jobless total will peak well into next year, at between 3.25 and 3.5 million. This is well above the previous post-war record of 3,124,000 in the summer of 1986.
Some City economists are even more pessimistic. Bill Martin, of UBS Phillips and Drew, believes the jobless total will be over 3.5 million by the end of 1994, although Keith Skeoch, of James Capel, expects 2.7 million.
Unemployment has now risen for 33 consecutive months, increasing by 1.4 million. The number of people employed has dropped even more dramatically, by nearly 2 million from a peak of 27 million in June 1990. Employment collapsed by 400,000 in the third quarter of 1992 alone, as the latest dashing of recovery hopes prompted a wave of redundancies.
Unemployment will not start falling until well after the economy begins to recover. After the last recession, the jobless total did not peak until five years after production began to revive.
Most economists believe the economy needs to grow by over 2 per cent a year before many new jobs are created - slower growth can be achieved as existing employees work more efficiently. But the EPI worries that the British economy may not be able to sustain growth this strong for very long, because of rising inflation and a widening trade gap.
Although labour costs are now very subdued, inflation may be boosted by rising long-term unemployment - around 1 million people have now been without work for a year or more. The long-term jobless become demoralised and unattractive to employers, so they put less downward pressure on other workers' pay and inflation. Excluding the long-term jobless, unemployment has been almost flat since the middle of 1991.
The rise in unemployment since 1990 has been eased by a 700,000 contraction in the workforce, partly as disenchanted job-seekers have given up looking for work. The EPI expects the workforce to grow by 600,000 by the end of the decade, much less than in the same period after the last recession. This means that 2 million new jobs need to be created just to pull unemployment back to its pre-recession level of 1.6 million.
But the EPI suspects that a feeble recovery will create only a quarter that amount, some of which will be taken by new labour market entrants rather than the existing unemployed. The EPI thus expects around 3 million jobless at the end of the decade.
The troughs to which unemployment falls during economic recoveries have been growing steadily since the war, from under 500,000 in the 1950s and 1960s to more than 1.5 million in the 1980s. New technology and competition from developing countries have reduced the demand for traditional unskilled male labour, at least at wage levels which make it worth leaving the dole.
Unemployment has risen most rapidly in those regions where it was lowest to start with. Since the jobless total stopped falling in 1990, unemployment has risen by 247 per cent in the South-east, but by only 41 per cent in the North.
Unemployment rates in different parts of the country have thus converged. At its low in 1990, the unemployment rate in the South- east was 35 per cent below the national average and well under half the rate in the North. Last month unemployment in the South-east was equal to the national average - around one in 10 - and only 15 per cent below the North.
According to the latest Cambridge Economic Review, up to half this convergence is a typical feature of recessions since the mid-1970s. The North-South divide always narrows in downturns and widens in recoveries.
But the effect has been reinforced in this recession. The South has been hit hard because of the consumer and mortgage debt burden built up in the 1980s. High interest rates and falling house prices have had more impact. Distribution, hotels, catering, financial and business services have suffered particularly badly.
To the extent that the recovery results from falling interest rates, the South should benefit most in terms of employment. Relieving the southern debt burden will be of particular help to small services businesses, among which job creation is usually quickest. But sterling's devaluation will offset this effect. The falling pound benefits companies that sell their goods abroad. They are more likely to be in manufacturing, and be found in the North or the Midlands.
It is this interaction between interest rates, sterling's level and normal cyclical changes which will shape Britain's employment map in the rest of the 1990s.
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