Amidst all the gloom surrounding global credit markets and house prices, it is easy to forget some of the strengths and developments in the UK economy.
One of the most remarkable features of the UK economy is the sustained reduction in unemployment. Falling from a peak of 3 million in 1992, the official method of unemployment is now only 813,000 – a level not seen since April 1975.
Despite the fall in unemployment wage settlements remain fairly muted, with average pay claims being settled a little above 4%.
However, if unemployment continues to fall labour shortages may push up wages and therefore prices. This would make it more difficult to cut interest rates in 2008
The continued fall in unemployment is mainly due to:
- Long Period of Economic Expansion – economic growth close to long run trend rate of 2.5%. UK has avoided boom and bust economic cycles.
- Fall in structural unemployment. e.g. economic regeneration of formerly depressed areas like the north east and South Wales. Note: at the height of the Lawson boom in the 1980s unemployment was still over 1.5 million. – a legacy of structural unemployment in certain regions.
- Greater difficulty in getting unemployment benefits. E.g. people under 18 are not eligible for benefits because they should be on training schemes.
In this post, I suggested that the UK is underestimating its true level of unemployment
Nevertheless, unemployment is significantly lower than it has been for a long time.
Update since 2007
The 2008/09 recession caused sharp rise in unemployment, but after 2012 unemployment fell quite rapidly – much faster than after previous recessions. By late 2017, Unemployment stands at approx 4.5% – the lowest level since the 1970s.
However, this fall in unemployment also reflects changes in the nature of the labour markets
- More flexible labour markets
- Rise in under-employment
- Growth of gig economy – temporary contracts.
- Real wages stagnant in past 10 years.
The fall in unemployment is very welcome, but there has been a rise in job insecurity and low-paid work.