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Sparkling employment figures mask real picture of UK economy

Credit The Guardian

Falling unemployment has been the one bright spot in what has been a distinctly mediocre year for the economy. Harold Wilson was prime minister the last time Britain had a jobless rate as low as 4.3%.

When the Bank of England’s monetary policy committee meets this week to discuss interest rates, the state of the labour market will feature prominently. Many of the members think that the UK is at, or very close to, full employment and that any further falls in joblessness will lead to wage inflation.

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We’ve been here before. The Bank thought earnings growth would start to pick up when unemployment hit 7%, 6% and 5% and was wrong every time. Nor, to be frank, is there any evidence of an imminent wage-price spiral now.

That’s because the bulk of the jobs being created are low-skill, low-wage jobs in the service sector competed for by retirees coming back into the labour market to supplement their pensions, those arriving in the UK from overseas and former welfare claimants looking for work as a result of tougher benefit rules. The increase in the supply of labour is keeping pace with demand, keeping the lid on pay.

The lack of any real upward pay pressure is one difference between today’s labour market and that of the mid-1970s. Hidden unemployment is the other big change, as research from Sheffield Hallam University, funded by the Joseph Rowntree Foundation, shows. It concludes that the real level of unemployment is considerably higher than the officially reported rate.

There are two ways in which the Office for National Statistics calculates unemployment. First, there is the claimant count, which picks up the number of people out of work and claiming jobseeker’s allowance or universal credit. In the spring of 2017, the claimant count stood at 785,000.

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The claimant count fell out of favour in the 1980s, however, when the then Conservative government made more than 30 changes to the way in which it was calculated, almost all of them leading to a lower total. Greater attention was paid to a broader measure of unemployment based on criteria laid down by the International Labour Organisation. This second method states that a person is unemployed if he or she doesn’t have a job, has looked for work in the past four weeks and can start within a fortnight. This methodology tops up the claimant count with another 735,000 people giving a total of just over 1.5m.

The Sheffield Hallam researchers – Christina Beatty, Steve Fothergill and Tony Gore – say a further 760,000 should be added because they are people hidden on incapacity benefits. Real unemployment, the study says, is just shy of 2.3m.

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Parking people on incapacity benefits was a way of keeping the official unemployment total down in the 1980s and 1990s. Despite the population becoming gradually healthier, the number on incapacity benefits rose from 750,000 at the end of the 1970s to more than 2.5 million by the end of the 1990s. Vigorous efforts have subsequently brought the total down, but not by much.

The researchers say many of those claiming incapacity benefits would like to work, but take a dim view of their job prospects because they feel their health is too poor or their disability is too severe, or because they think the chances of finding a job are small, especially when they are in competition with fit and healthy workers likely to catch the eye of potential employers.

To be clear, the research does not say that these people are claiming incapacity benefits to which they are not entitled, but it notes that ill-health is not necessarily an insuperable barrier to holding down a job, and that the employment rate of those with a work-limiting disability depends on geography.

grim-faced miners leaving colliery
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Kellingley colliery in Yorkshire, the last remaining deep coal mine in the country, which shut in 2015. Photograph: Christopher Thomond for the Guardian
According to official data, 44% of the 6.1 million people of working age classified as having a work-limiting disability are in employment, but the key factor is whether jobs are in short supply or hard to come by.


In the north-east of England for example, the employment rate among men and women with a work-limiting disability was 37%, with similar rates for Scotland (38%), Wales (39%) and north-west England (40%). By contrast, it was 53% in the south-east and 52% in the south-west.

The researchers calculate the level of hidden unemployment by benchmarking a town or region against what would be achievable were the local economy to be operating at full employment. As would only be expected, the highest rates of hidden unemployment are in the parts of the country where de-industrialisation has been most marked: South Wales, Merseyside, north-east England and Clydeside. In these areas, incapacity benefits can account for up to 10% of the entire working-age population. These are places where standards of health have long been below the national average, but a generation ago the incapacity claimant rates were far lower.

The good news is that hidden unemployment is coming down, from just over a million in 2007 to 900,000 in 2012 and 760,000 now. That means the Sheffield Hallam estimate of real unemployment has also fallen by more than a million in the past five years.

The bad news is that the total remains high and is concentrated in the regions with the weakest labour markets. Blackpool has the highest hidden unemployment on incapacity benefits, estimated at just over 7% of the town’s working population. According to the claimant count, unemployment in Blackpool is 3,760. Adding in those classified as unemployed under the ILO definition, the total comes to 4,260. The study suggests a further 6,100 people are hidden unemployed, taking the total to 10,400, or 12% of the working population. Hartlepool, Blaenau Gwent, Merthyr Tydfil and Middlesbrough fill the next four spots in the real unemployment list.

Whatever the official figures might suggest, Britain is a long way from full employment. Some parts of the country are in the happy state of having enough jobs for all who want them, including those who feel marginalised, but almost all of them are in the home counties.

Fothergill dismisses the idea that Britain was at or close to full employment, saying: “What our estimates of the real level of unemployment show is that big variations in the health of regional and local economies are still very much with us.”

So if the Bank puts up interest rates this week, it won’t be because the labour market is overheating in the Welsh valleys or former Pennine textile towns. It is now almost 40 years since the recession of the early 1980s decimated Britain’s manufacturing base, and more than 30 years since the miners’ strike heralded the end for coal. Those parts of the country have never recovered.