Undercover Economist

October 18, 2013 4:22 pm

Unemployment stats aren’t working

‘The unemployment rate is the result of millions of individual stories of finding and losing jobs’
Unemployment illustration by Raymond Biesinger©Raymond Biesinger

The unemployment rate seems a thoroughly straightforward economic statistic. It’s currently 7.7 per cent in the UK – which means that for every 12 lucky souls with a job, there’s an unlucky 13th looking for one.

The reality of the labour market is a little more complex. There are, for example, three times as many “economically inactive” people of working age (defined archaically as 16-64) as there are unemployed people. These are people who do not have jobs and, in principle, do not want them. If you’d like to understand the distinction between them and the unemployed, the unemployed are both available for work and actively looking for it; the economically inactive are not. It is not a distinction that can easily be observed by a government statistician.

Consider a 20-year-old undergraduate en route to a solid engineering degree. She’s actively looking for part-time work in a bar or restaurant to help keep her debt under control; she can’t find that kind of work, so is relying on student loans to pay the bills. Meanwhile the 50-year-old former coal miner with health problems is on incapacity benefit: he wants a job but with little optimism that he will find one, he has stopped pretending to look. Common sense suggests that the middle-aged man is unemployed, and the young woman is not. The Office for National Statistics would reach the opposite conclusion.

Perhaps the strangest thing about the unemployment rate is the impression it gives of stability. Over the course of the recent severe recession and subsequent doldrums, the number of unemployed people rose by more than a million. But the number of jobs that have been lost is approaching 20 million – not far off the size of the entire British labour force.

What’s going on? Churn. In a typical three-month period in the UK, about one employed person in 80 leaves or loses his or her job. (That is an understatement: it does not include people who immediately step into new jobs.) Over the same period, one in three or four unemployed people finds a job. Even a severe recession only has a modest effect on these numbers: the quarterly job-loss rate briefly hit one in 50 at the depth of the 2009 recession; during the years of flatlining that followed, it was one in 70. The job-finding rate has sunk somewhat, but gently.

The odd truth is that almost all of the people who lost jobs during any particular quarter of the recession would have lost them anyway. Michael Blastland and David Spiegelhalter, in their recent book about risk, The Norm Chronicles, put the additional risk of unemployment every three months during the no-growth years as one extra person in 500.

The recession is no illusion, of course – if the chances of losing a job rise a little and the chances of finding a new one fall a little, over time the ranks of the unemployed will swell alarmingly. What is an illusion is the idea that economic booms provide substantially greater job security than recessions. They do not.

The unemployment rate is the result of millions of individual stories of finding and losing jobs. There is more than one way, then, to get the unemployment rate down: reduce the rate at which old jobs disappear, or increase the rate at which new ones are created. It isn’t hard to see which of these two options is likely to go hand in hand with a more dynamic, creative and higher-growth economy. Nor is it hard to see why so many workers naturally value protecting the job they already have, rather than some abstract promise of a new job in the future.

Creating jobs is not the same thing as making people feel secure in their jobs – not the same thing at all.

‘The Undercover Economist Strikes Back’, by Tim Harford, is published by Little, Brown

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