OECD sounds warning on lost generation

Economics Editor,Sean O'Grady
Thursday 21 April 2011 00:00 BST

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Persistently high unemployment "could eventually result in discouragement and permanent withdrawal from the labour force", especially among younger and less skilled workers. The stark warnings about a permanently higher level of unemployment comes from the Organisation for Economic Co-operation and Development, the "club" comprising all the world's developing economies, including the UK.

Britain is one of a number of countries identified as being at particular risk of seeing the present high levels of youth unemployment – standing at almost 1 million 16 to 24-year-olds – turning permanent. The reason, the OECD said, is that alienation of the workforce and a failure to acquire and keep skills through up-to-date on-the-job training, will mean some people in effect leaving the labour force.

The OECD said: "Concerns about unemployment persistence are particularly pronounced in countries that have experienced large increases in long-term unemployment.

"The longer individuals remain unemployed, the more difficult it becomes for them to find a job and the less they may try. In at least 10 countries (eg the United Kingdom) the share of long-term unemployment has risen significantly during the crisis, pointing to a significant risk." This phenomenon is called "hysteresis" in economic jargon, or, more graphically, "scarring".

Western governments should promote training schemes and protect them from cuts as budget defects are reduced, the OECD said, "so as to help unemployed to preserve work ethics and limit skills erosion". They should also strive to make resources available to jobcentres for the same reasons, the organisation said.

Ministers will be encouraged by the OECD's implied endorsement of their cancellation of a planned rise in employers' national insurance contributions, as well as the efforts to move people off disability and invalidity benefits. This, though, may become more difficult as long-term unemployment takes hold. "In a number of countries, unemployment peaks associated with recessions have tended to be followed by spikes in disability rates about two years later. Such a pattern is particularly visible in the US, but some evidence can also be seen in UK," the OECD said.

Recently, the National Institute for Economic and Social Research estimated that structural unemployment will be higher by 320,000 because of this "scarring" effect. Overall, some 840,000 have been jobless in the UK for more than a year, and 362,000 of those for two years. They say that more than one in five 16 to 24-year-olds are neither working nor studying full time.

No wage inflation pressure, so no change likely at this rate

The Bank of England will leave interest rates on hold in May, City economists believe, based on the latest evidence to emerge from Threadneedle Street.

The absence of any serious pressures on wage inflation and thus of a domestically generated inflationary spiral seems to be the key factor in the Bank's mind. The long-expected turn in the interest rate cycle may not arrive until August or even November.

The latest minutes of the Monetary Policy Committee show that there has been little hardening of opinion, with the vote on 7 April to leave rates at their historic low of 0.5 per cent again passed by 6 to 3. Views on the MPC are split four ways, with one "dove" wanting a further loosening of policy via a £50bn extension of "quantitative easing". Of the three "hawks", two voted for a 0.25 percentage-points rise; Andrew Sentance, who attends his final MPC on 5 May, argued for a 0.5 per cent rise.

The majority on the MPC, including the Governor, Mervyn King, argue that: "The risk that increased inflation expectations might become entrenched in wage- and price-setting was material, but there was no evidence yet of that crystallising."

Key will be the preliminary estimate of GDP growth in the first quarter, published on 27 April.

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