It is a sign of depressing times when an increase in unemployment is greeted as good news. It rose by 30,000 in the three months to September, according to recent figures from the International Labour Organisation (ILO). That means a total of 2.46 million people are out of work, 7.8 per cent of the workforce. But this is the lowest increase for 16 months. So unemployment is still going up, but it's going up more slowly. Six months ago most economists thought things would be worse than this. It's now hoped that unemployment will peak at under 3 million, which would be about 10 per cent of the workforce. Although this hardly seems cause for celebration, it's better than the post war nadir in 1984 of 11.9 per cent. It's also better than in the US, where unemployment has already reached 10 per cent, which is double pre-crisis levels (the UK's unemployment has risen by less than 50 per cent so far). That's the good news. If you're not feeling particularly perked up by this then it's probably because the bad news concerns you more directly.
Unemployment amongst young people rose by 15,000 in the same period, to record levels of 19.8 per cent. 943,000 16 to 24 year olds are now recorded as unemployed. The number of young people claiming job seekers' allowance (JSA) for more than six months has more than doubled in the last year.
The chief executive of the Association of Graduate Recruiters (AGR), Carl Gilleard, said: "These unemployment figures are a major disappointment. We know that there are far fewer graduate vacancies this year and that the situation for graduates is tough. It is still too early to say whether we are likely to see an improvement in 2010 but there is optimism amongst graduate recruiters that the situation should start to ease somewhat." In a survey by the Confederation of British Industry (CBI), 38 per cent of employers said they were not looking to hire graduates next year.
The Conservatives have accused Labour of writing off a generation of young people. The leader of the opposition, David Cameron, raised the issue at prime minister's questions. The prime minister, Gordon Brown, pointed out that over a quarter of those "unemployed" young people (267,000, or 28 per cent, to be precise) are in fact in full-time education. This is because the ILO statistics are based on surveys which count the number of people who say they are actively looking for work, which can include those who are also studying whilst searching for part-time jobs (looking for as little as an hour per week of work would count). Mr Brown also drew attention to various government schemes, including the Future Jobs Fund, a £1 billion pot of money made available to councils and charities to offer jobs to the young and the long-term unemployed. So far it has created 95,000 jobs and the government has announced plans to create 35,000 more.
There are even a few people who feel that the young are getting too much attention. "There is no good reason to single young people out as a special kind of tragedy in this recession. If anything they are taking less pain than the older unemployed right now," said Ian Mulheirn, the director of Social Market Foundation, a London thinktank. He points out that the rate at which young people find jobs is actually higher than the average for people over 25. Many had feared that the number of unemployed young people would already have reached 1 million by now. This grim benchmark has been (narrowly) avoided. In fact the overall figures for the whole of the labour market are much better than might be expected - the dip in employment levels to date has been surprisingly shallow given the decline in GDP.
What, then, has stopped employment falling further? And what does it mean for the economy? It could be that it's harder to make redundancies these days than it was in previous recessions. Legal protections may be holding up the process of laying people off. In which case, rising unemployment would lag behind negative growth and we could expect job figures to continue to decline slowly. However, a more likely (and less depressing) explanation as to why unemployment has been lower than feared, is that employers have resisted making redundancies. In return, employees have been willing to accept frozen wages and reduced working hours. The big winners in the labour market have been women who work part-time. Men looking for full-time work have fared less well. Without much fanfare, employers and their staff have struck up an accord which has helped to keep the economy on the road. In doing so, employers are gambling on a quick recovery. If the economy starts to grow again and the demand for goods and services picks up, then the labour they have retained will be an advantage. But that's a big "if".
Although the Bank of England's recent forecast for the economy was encouraging, there is still uncertainty as to what will happen to demand. The Bank has predicted growth in GDP of 2.1 per cent for next year and 4 per cent for 2011. It has revised upwards its corresponding August predictions of 1.9 per cent and 3 per cent respectively. However, the governor of the Bank of England, Mervyn King, was at pains to stress that any recovery would be slow and difficult. GDP is unlikely to return to pre-crisis levels until the latter half of 2011: "such is the scale of the fall in output over the past 18 months... we have only just started along the road to recovery", he said. He also warned that inflation was likely to exceed the Bank's target of 2 per cent in 2011 because of rising oil prices and a higher rate of VAT next year. This is assuming that the Bank keeps interest rates at 0.5 per cent and doesn't extend its quantitative easing (QE) policy beyond its current mark (£200 billion).
"What we find surprising about this report was the combination of a very great optimism about future growth and the pessimism in rhetoric", said Kevin Daly, an economist at Goldman Sachs. David Blanchflower, a former member of the Bank's monetary policy committee (which is responsible for setting the UK's interest rate), was clear about the fragility of the UK's growth prospects and the importance of the labour market: "A lot of what we are seeing is being driven by government stimulus. But we need to look at the real economy, and firms are not hiring. They are not laying off but they are not hiring." Mr Blanchflower has warned that the slowdown in unemployment is a "lull before the storm" and predicts unemployment will go on rising well into next year, eventually reaching 3.4 million. He advocates exempting young people from National Insurance contributions for two years.
The greatest threat to future jobs is weak demand. In a survey by the British Chamber of Commerce (BCC), 64 per cent of businesses said they saw a lack of customer demand as the biggest barrier to growth. The CBI has also expressed concern about demand levels. Following its latest survey, the CBI's chief economic advisor Ian McCafferty said last week that: "the weaker pound has softened the blow for exports, but the ongoing lack of demand for manufactured goods reconfirms that any recovery will be anaemic and slow."
The macroeconomic forces which determine demand are in dynamic equilibrium (in English, things are in the balance). On one side of the scale are the factors which should strengthen demand. The government's spending programme (or fiscal stimulus) and the Bank of England's policy of quantitative easing are both ultimately aimed at giving businesses and individuals more cash to spend by making it easier to borrow money. On top of that, the 25 per cent drop in sterling should boost UK exports by making them cheaper for other countries to buy. But set against all that is the continued constraint on bank lending (despite all the QE). In the BCC survey, 33 per cent of businesses said it had become more difficult to access finance over the last three months - a rise of 10 per cent since June. The other factor weakening demand is consumer deleveraging; we are choosing to spend less and pay off our debts instead.
There is a limit as to how long the Bank of England can continue the "loose" monetary policy of QE and low interest rates. Similarly, the government cannot keep up the fiscal stimulus forever - at some point it will have to start paying back the deficit. Bond investors, who lend money to the government, are starting to worry about the value of their investments being damaged by inflation. They are looking to sell long-term government bonds (gilts), which is driving down their price. Yields on ten year gilts (which are inversely related to their price) have risen 50 basis points in the last month. Eventually this could force the government to offer higher rates of return. The international ratings agency, Fitch, recently warned that the UK government is the major economy most at risk of losing its AAA credit rating. This would make it much more expensive for the government to borrow money.
In the long run the risk to jobs (and to any economic recovery) is that demand won't have picked up by the time the fiscal and monetary measures must come to an end. So if you don't manage to "deleverage" this Christmas - if you fail to pay off any of that student debt but end up buying yourself a big present instead - then at least you can tell yourself that you're doing your bit to stimulate demand and save jobs. It's the responsible thing to do, in a way.