Wed, Jan 14, 2009 - Page 9 News List

Labor market is not working

We had all better get used to growing unemployment — and fear for a lost generation

By Larry Elliott  /  THE GUARDIAN , LONDON

ILLUSTRATION: MOUNTAIN PEOPLE

Unemployment is the big political issue of this year. The loss of more than 1 million jobs in the US in the final two months of last year is testimony to the savage shake-out following the financial market meltdown last autumn. US president-elect Barack Obama’s emergency package will be sold as all that stands between the US and the return of the Great Depression.

In the UK, the labor market has deteriorated for the past year, but the outlook has become far bleaker over the past few months. British Prime Minister Gordon Brown’s jobs summit in Downing Street on Monday was all about ensuring that those thrown out of work in the coming months do not become part of a lost army of the long-term unemployed. There is, in all honesty, a limit to what policymakers can do and they know it. Unemployment is bound to rise in the US, stimulus package or not. Brown can hold a jobs summit every other day until Easter, but the daily drip feed of redundancies will continue relentlessly.

Even so, active labor market policies are still worth the effort. The lesson of the 1980s is that when people lose touch with the labor market altogether, the loss of skills and motivation has dire personal and social consequences. Ministers are particularly worried about the rise in unemployment in the under-24 age group, because there is evidence that a spell on the dole when you are young leaves the deepest scars.

Brown also believes an interventionist strategy would have a beneficial impact on the wider economy, because the fear of being made unemployed is affecting consumer confidence and spending. For now, the UK government is sticking to its forecast of a savage but short recession, but that will not come to pass if there are negative-feedback effects from rapidly rising unemployment back into the housing market, where prices are falling at an annual rate of between 25 percent and 30 percent.

As things stand, it is hard to envisage the British economy bottoming out in the summer, as Chancellor of the Exchequer Alistair Darling predicted in the pre-budget report, but the feeling in Whitehall is that the economy may still show unexpected resilience this year — provided there is a comprehensive package for jobs, housing and banking that dovetails with the boost to growth from macro-economic policy.

ECONOMIC RECOVERY

Mindful not to be as dilatory as their predecessors in the 1930s, policymakers have slashed interest rates and allowed public borrowing to soar. They have bailed out the banks and are now planning to flood the financial system with money. Oil prices have collapsed and tumbling inflation means that real incomes for those in work are rising. The increase in public-sector employment since the 1930s provides a large chunk of the workforce with some protection against the downturn. All of this amounts to a powerful stimulus. Were Obama’s fiscal package — or even the prospect of it — to brighten the mood, economic recovery could conceivably begin in the autumn.

Equally, ministers know that this year could be even more of a stinker than expected. Despite the supposed boost from a weaker pound, UK factory output fell 2.9 percent in November alone and, in a sign of the neglect of manufacturing in the past decade, is lower than when Labour came to power in 1997.

But the final quarter of last year was marked not just by the severity of the UK retrenchment but by its widespread nature. What started as a misadventure in the Anglo-Saxon economies (with Spain and Ireland thrown in) has spread to Asia and continental Europe. Given the exposure to US consumer spending, it always appeared fanciful that China, Japan and South Korea would be able to de-couple themselves from the West, and so it has proved.

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