Labour pains

Will Hodges on why the latest employment figures spell bad news for those hoping for an early retirement.
Commercial awareness
Politics and economics

The latest UK employment figures, released in February, ushered a sigh of relief from many observers. In the three months to December 2009, the country's number of unemployed fell for the first time since May 2008, dropping by 3,000 to 2.46 million individuals. Looked at on its own, the level of unemployment, which currently stands at 7.8 per cent of the total workforce, does indeed give cause for optimism. At a little under 2.5 million, the number of people out of work falls some way short of forecasts, offered by economists at the start of the recession, which predicted the level would peak at some 3 million before its end. While the UK has not remained unscathed - the number of people out of work has risen by about 800,000 (or around 50 per cent) over the past 18 months - the impact has not been as severe as it might have been. Indeed, previous recessions have inflicted a far heavier toll. In the post-war era, the level of unemployment peaked at 12 per cent in 1981, rising again to 11 per cent during the early 1990s. Even this is some way short of the Great Depression of the 1930s when up to a quarter of the UK workforce was at one stage unemployed.

Yet behind the headline figure lurks reason for concern. Many workers who have held on to their jobs have done so at a considerable price. Employees have been forced to accept wage freezes and even cuts in pay to remain in employment. Over the final three months of last year, total pay rose by 0.8 per cent year-on-year, some way below the rate of inflation over the period (which now stands at 3.5 per cent). Workers have also had to make other sacrifices. Many have accepted part-time positions and, given that they would rather be working full-time, are officially classed as "underemployed". Some 2.8 million people reportedly fall into this category and, added with the unemployed, the total number of those unable to gain full-time work rises to 5.3 million - just under a tenth of the total population.

More worrying perhaps is a noticeable shrinking in the size of the UK's workforce. During the same quarter, the number of individuals registered as full-time workers fell by 37,000 to 21.22 million - the lowest total since Labour came to power in 1997. This suggests that those unable to find full-time work have found other ways to get by. A sizeable chunk have turned to further study as a way to sit out the lull in the job market and, in the fourth quarter of 2009, the UK's student population swelled by 62,000 people to 2.26 million - its highest ever tally.

The number of citizens paying income tax is declining. Given the size of the UK's budget deficit (£178 billion), this is a worrying trend. It doesn't take a PhD in economics to realise that fewer workers equals less tax in government coffers. This doesn't bode well for Labour's chances of persuading voters that it is capable of bringing the UK's debt down to manageable levels. Indeed, a few days after the release of the country's employment statistics, the government broke the news of a 5.7 per cent budget deficit for the month of January - the first time the government has been forced to borrow money in January since records began in 1993.

The decline in the tax base is undoubtedly the product of the recession; however, it also underlines a frightening longer-term trend: those supporting the economy are getting fewer while those being supported by it are becoming more numerous. Added together, the number of full-time (21.22 million) and part-time (7.7 million) workers comprise less than half of the country's total population which, according to recent estimates, is slightly more than 62 million. So what do the other 33.08 million do? If you are reading this, you are probably one of the 2.6 million in full-time secondary education. As mentioned, those officially unemployed make up 2.46 million, while the next biggest chunk (8.08 million) is made up of those classed by statistics agencies as "economically inactive" - a category which includes stay at home parents, individuals registered as ill or disabled and retired workers who have not reached pensionable age. This just leaves 20 million souls who are either too young or too old to work.

Shrunken head counts

To quote Winston Churchill, never has so much been owed by so many to so few. For all the public kudos Gordon Brown has gained by attacking bankers for their bonuses, he may in fact do better to curry favour with the country's top earners. Those in the top 1 per cent pay bracket contribute nearly 25 per cent of income tax, while the top 10 per cent of earners contribute more than half of revenues. The government has gone after the fat cats, introducing a new, 50 per cent tax band for those earning over £150,000 a year which will come into effect this April, as well as levying a one-off, 50 per cent tax on bonuses. While Labour is under pressure to be seen to be doing all it can to halve the country's budget deficit by 2014, there is a risk that bankers and other high earners will simply jump ship, leaving the UK in an even worse-off state.

In the UK, as in many developed states, the average age of the population is steadily rising. In Western Europe and North America, the biggest demographic is comprised of individuals born between 1943 and 1960, known more commonly as the baby boomers. These 50 and 60-somethings, born to men returning from the Second World War, were behind much of the economic growth of the later half of the 20th Century. As the West's population expanded, so did the demand for housing and consumer goods. Industries such as the automobile and electronics sectors boomed, catering to a general rise in incomes and urban populations. Now this once economically active demographic is shuffling, en mass, towards the end of its working life. Individuals born during the first year of the boom, 1943, reached retirement age in 2008. Over the next 15 years many more are due to follow.

This presents a major headache. Not only will there be a far greater number of pensioners to support, but, more significantly, those charged with the responsibility of supporting the non-working population will be fewer in number. Meanwhile, capital-intensive services, such as healthcare, will be put under increasing strain by an ageing population. Of course, Britain is not alone in this predicament - nearly one in three American workers will be aged 50 or over by 2012. Meanwhile, in Japan, renowned for having one of the highest life-expectancies in the World, almost a quarter of the population are over 65. Birth-rates are unable to keep up. As it is commonly known, the rate at which the population replaces itself is 2.1 births per couple. In most developed states it is some way below this margin and countries such as Japan and Italy are visibly shrinking before our eyes.

Young man's burden

This presents an inconvenient truth for today's twenty-somethings: those expected to enter the labour market over the next few years may find conditions to be considerably tougher than they were for their parents' generation. With less new blood flowing into the workforce, future governments will have little option but to squeeze more out of a steadily shrinking pot. Taxes will rise as, possibly, will the official age at which people can retire. There are other solutions however. One way of counteracting the imbalance, which the UK has been pursuing, is to lower barriers to immigration. Allowing young individuals to come to this country to work and to start families has kept the average age of the population relatively manageable while also adding valuable numbers to the workforce. The median age of a UK citizen is currently 40.2 years, which is noticeably lower than states which have employed less open immigration policies such as Japan (44.2) or Germany (43.8).

And yet this much-needed dilution of an aged workforce is under threat. The government, driven by public pressure in the run-up to an election, has gradually begun to enforce a stricter immigration policy, a programme likely to be continued by the Conservatives should they take office this summer. Beware. As illustrated by a recent TV documentary, presented by resident BBC economics personality Evan Davis, the backlash against immigrant workers in the UK has already began. Many observers, the British National Party among them, point to the age-old argument that x many immigrants = x many unemployed Brits who would otherwise have jobs. Obviously this is far from the truth. Most workers born in this country have what's known as a reservation wage - a minimum salary for which they are willing to get out of bed for. Many also have a pretty firm idea of the kind of work they are reluctant to do, agricultural or factory work for example. For immigrants the same standards don't apply, hence why many more menial jobs are filled with workers born overseas.

Should the number of foreign workers fall dramatically, it is unlikely that the level of unemployment would change. More likely, the total size of the labour market would shrink as companies, shorn of a pool of cheap and reliable workers, would go out of business. Offering higher wages to British-born employees would offer a short-term solution, but the higher production costs would see them come under increased competition from foreign firms.

As the population of the developed world ages, expect this to be a growing problem for governments. Countries such as the UK and Japan are likely to come under pressure from Asian and Middle Eastern states, which are blessed with a ready supply of young, eager workers. Here's hoping that enough of these still feel enough incentive to work in our towns and cities. I for one don't relish the thought of working until I'm 80.

A brief history of UK unemployment

The post-war era has witnessed a series of structural changes in the UK labour market. Under pressure from low cost competitors such as China, the UK has economy has shifted away from traditional labour-intensive industries (requiring a large number of employees) such as mining and manufacturing, towards capital intensive industries (requiring fewer workers) such as finance and telecommunications. Over time, this has led to a general rise in unemployment figures.

1964 - 1973 - *Average rate of unemployment: 3%*

Like many other regions, the UK benefited from a boom in global trade in the aftermath of the Second World War. Towns and cities needed to be rebuilt, fueling demand for raw materials and industries such as construction and manufacturing. Meanwhile, a surge in population figures led to increased demand for consumer goods which played into the hands of the UK automobile sector and other industries.

1974-1979 - *Average rate of unemployment: 5%*

A weak period for the global economy led to a marginal rise in unemployment levels as global trade endured a prolong slump. However, the rise in those out of work was relatively mild, largely due to the government's efforts to keep people in work by allowing inflation to rise and the proportion of those out of work never rose much beyond 5 per cent.

1980-1990 -* Average rate of unemployment: 9.4%*

The Conservative Party came to power in 1979, bringing with it a strict policies on government finances. To curb inflation, the government introduced higher interest rates, leading to an overvalued pound and a loss of export competitiveness. Meanwhile, the UK's traditional industries such as mining and manufacturing came under further pressure from the emergence of cheaper manufacturing bases such as China. Factories and coal mines were forced to close, sending unemployment levels surging. The number of people out of work peaked at 3 million or 12 per cent in 1981, a post-war record.

*1991-2001 *- Average rate of unemployment: 8%

The growth of new service industries such as finance in the 1990s saw unemployment levels trend downwards over the 1990s. The early 90s recession led to a surge in job losses, however, after peaking at 11 per cent in 1991, unemployment fell to just over 4 per cent by the turn of the century.

2001 - present - *Average rate of unemployment: 5.5%*

A period of uninterrupted economic growth between 2001 and 2008 has seen unemployment levels fall to its lowest level since the 1970s. There has been strong in the number of white collar jobs created over the period as the UK asserted itself as a global leader in areas such as financial services. With fewer people willing to fill low-skilled jobs, migrant labour has been sought to fill the gaps in the economy. However, there has been a notable uptick in the number out of work over the decade, largely due to the recession. The rate rose from 5.2 per cent in January 2001 to 7.8 per cent this year.

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