Unemployment will scar us for years

Unemployment still matters. Fortunately the unemployment rate has been trending down in the UK, from 7.9 per cent in May 2010, to a high of 8.4 per cent at the end of 2011, to the latest estimate of 6.9 per cent. The number of unemployed has fallen by 414,000 over this period.

But those positive moves hides a multitude of sins. First, the unemployment rate of those under 18 is 21.7 per cent and 17.2 per cent for those ages 18-24. There are still 881,000 unemployed youngsters under the age of 25, of whom 600,000 are not in full-time education. Second, the unemployment rate of Pakistanis is 17 per cent; 18.6 per cent for Bangladeshis; and 15.9 per cent for Black/African/Caribbeans. Third, long-term unemployment has risen. In the latest data, 807,000 had been unemployed for at least a year, of whom 244,000 were under 25. Fourth, the groups that experience high levels of unemployment are hit by a double whammy; even when they get jobs they are often underemployed, many being forced into part-time and temporary jobs when they want full-time.

The charts, using data from the Organisation for Economic Co-operation and Development, put this rise in long-term unemployment in international context – measured as the percentage of the unemployed who had durations of a year or longer out of work. The first chart shows that France, Germany and the UK had comparable long-term unemployment proportions in the early 1990s, with that proportion falling sharply under Labour from 1997-2007 but rose again from around 2008. The US rate rose sharply from 2008 but, in contrast to the UK, started to fall sharply from 2011. The second chart shows the most recent estimates for the second quarter of 2013 and shows that long-term unemployment is markedly higher in the euro area, especially Greece and Italy.

The harmful consequences of high levels of unemployment, especially long term, is made clear in a stimulating new book by Tom Clark which illustrates the consequences of the Great Recession, uncovering drops in life satisfaction, frayed community connections and changing patterns of suicide.

In every case the toll is highest in poor neighborhoods, due not only to unemployment, Clark argues, but also to the precarious, unreliable jobs proliferating in the recovery. The book’s thesis is that scarring will blight individual and family life for years to come, especially those from minorities. Clark contends that “long-term unemployment is another blight which hammers some communities more than others. It seems plausible that societies which neglected so many of their citizens during the good times might be particularly prone to throwing them to the dogs in hard times”. Working life, he argues, especially at the bottom end of the workforce, has become “laced with worry”.

At the extreme, the once-clear distinction between the employed and jobless has now become blurred, with, for example, the spread of zero-hours contracts.

This story appears to also extend to the rapid recent growth in self-employment, which is up by nearly 600,000 since the Coalition took office. Is this a rise in entrepreneurial spirit? Probably not. A new study from the Resolution Foundation helps us to shed light on the growth of self-employment in the UK. The authors found that 8 per cent of unemployed people moved into self-employment prior to the recession whereas 11 per cent did post-recession, which the authors estimate accounts for a quarter of all the recent growth in self-employment.

Recent growth in self-employment has been spread across regions of the UK, with increases everywhere apart from in Northern Ireland since the onset of recession in 2008.

In nearly half the regions of Great Britain (the West Midlands, the South-west, the North-west, the North-east and Scotland) the self-employed grew more than employees.

In a survey that Ipsos Mori conducted for the study, the term “entrepreneur” was not a label two-thirds of respondents would assign to themselves. In addition, the proportion of self-employed people who do not employ anyone has risen from 77 per cent in 2005 to 83 per cent in 2013 and many are too small to even register for VAT.

The authors find that those starting out as self-employed since the recession, who began by working part-time, has increased much more than it has for employees. The authors conclude that self-employment growth is not correlated with strengthening labour markets at the regional level, and observe that self-employment has frequently held up or grown in places where employee jobs have fallen and unemployment has risen.

Resolution also found that only 30 per cent of self-employed people are contributing to a pension, compared to 51 per cent of employees. Of special note was their finding that self-employed weekly earnings are 20 per cent lower than they were in 2006-07, while employee earnings have fallen by just 6 per cent. The drop, the authors note, has been seen across genders and industries but is particularly notable among people of prime earning age (35 to 50), whose earnings are 26 per cent lower. As a result, the typical self-employed person now earns 40 per cent less than the typical employed person. The authors conclude “on earnings, self-employed people have experienced a chronic fall, with earnings decreases felt across the board”.

Recall that the self-employed, as well as workers in firms of under 20 employees, are excluded from the average weekly earnings, which is the national statistic on wages, suggesting that claims of rising real pay growth in the UK economy are an upward, biased estimate. It doesn’t appear that there has been a new burst of entrepreneurial spirit in the UK.