The truth behind the UK's unemployment figures

Yesterday saw official data out that showed unemployment fell by 45,000 to 2.63 million, the lowest level since last summer.

Commentators say that this is not indicative of a country in the midst of a double-dip recession. Neville Hill at Credit Suisse said: “Overall, this set of numbers is absolutely inconsistent with the idea that the economy is in recession.”

So, what are the trends behind the unemployment figures and what is likely to happen in the future?

There are a number of factors that are important to consider. These are a rise in self employment, a decline in wage increases and perhaps dubious official GDP figures.

Employment trends

There has not been an increase in full-time jobs since the three months ending in June 2011. Since then the number of full-time employees has dropped from 21.35 million to 21.24 million, by about 110,000.

Part-time workers

The number of part-time workers overall actually dropped quite dramatically between the three months ending in June 2011 and the three months ending in September 2011, by over 100,000, down from 7.92 million to 7.8 million.

You may expect this to coincide with an increase in full-time employment over the same period, but this was not the case, making that 3rd quarter in 2011 particularly bad news on unemployment.

However, in the six months since September 2011, there has been a big rise in the number of part-time workers, up by almost 200,000 from 7.8 million to 7.99 million. But, just to confuse things over the past 12 months there has been an increase in part-time employees of just 13,000, up to 6.85 million from 6.72 million.

During the same time the number of full-time employees has fallen by almost 200,000. So, what is the missing link?

Self-employed

Self-employed workers are the missing link. The number of people working full-time who classify themselves as self-employed has increased by 100,000 from 2.87 million to 2.97 million and the number of part-time self employed workers has risen by a similar amount from 1.09 million to 1.19 million people in the past 12 months.

So, although the number of part-time employees is not rising dramatically, the overall number of part-time workers is because of the increase in people who classify themselves as self-employed.

So, when analysts say that unemployment is falling, there are a lot of different narratives behind this.

Presumably many of the newly self-employed are people who were employed but have lost their jobs.

Some will have decided to try out a self-employed work lifestyle but many will have done so because they have been made redundant and cannot find another job with an employer.

Some people who have lost their jobs in the public sector will have set themselves up as consultants, perhaps happy to be self-employed, work less hours for higher pay if they can and supplement their new incomes with redundancy payments and perhaps a pension.

This is conjecture but we can conclude that over the past year, a small decrease in full-time jobs has been partly compensated by a small rise in part-time jobs. Total employment in the three months to the end of March is 29.233 million. To the end of the same period 12 months ago the figure was 29.240 million. So, there are just 7,000 fewer people in work now than there was a year ago.

The difference is the type of work they are doing and the amount they are being paid.

What is clear is that there has been a drop of 200,000 full-time jobs in the past 12 months and a rise of 100,000 in the number of full-time self-employed and 100,000 who are part-time self-employed.

Tax receipts

On a side-note it is likely that the government’s deficit reduction programme is not helped by this trend as although tax receipts on self-assessment deadline day on January 31st were at a record level this year, it is unlikely that the receipts would have covered the shortfall from the preceding 12 months lost through employee and employers PAYE tax receipts not received because of the loss of employee jobs.

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Earnings vs inflation

Inflation has fallen but is still running at 3.5 per cent, according to the consumer prices index measure. But yesterday’s figures showed that earnings have only risen by an average of 0.6 per cent compared to a year earlier. This includes bonuses and is in part because of the lower bonuses paid to people in the financial sector, but even excluding bonuses, average earnings have only risen by 1.6 per cent, less than half the current level of inflation.

This is why many people in the UK have and are facing such a big squeeze on income. This trend has been seen for the past year at least and is unlikely to change anytime soon.

Part-time workers will earn less than full-time workers and there has been an increase in those whether employed or self-employed.

Lower earnings mean households have less money to spend on goods and services that drive the economy and is bound to contribute to a fall in GDP that has caused the double-dip recession.

Yesterday, the Governor of the Bank of England admitted that inflation will remain above the bank’s forecast for at least another year.

Low wage increases are one reason that the unemployment figures have fallen slightly and are not worse than they are.

Official figures

So, are the official figures on GDP and the activity in the economy wrong? The Bank of England’s Monetary Policy Committee (MPC) thinks they might be. Neville Hill, who we quoted at the start of this article, thinks they might be.

Or is it perhaps that a combination of lower earnings and a change in the type of employment that people are performing has caused the contradiction between a fall in unemployment in the midst of a recession.

And that the lower earnings at a time of relatively high inflation means households are facing a squeeze on disposable income and cannot make the discretionary purchases that would turn a minor contraction in the economy into minor growth.