UK unemployment not following Mr Carney's script?

Mark Carney

Mark Carney has been keen to link movements in UK interest rates to falls in unemployment. Apparently many investors want to do the same with the exchange rate.

News of a fall in the level of joblessness has pushed up the value of the pound to its highest level against the dollar since the spring.

Apparently, people in the markets think the jobs data provides more reason to expect official interest rates to go up before 2016, the date that is currently pencilled in by the Bank's policy-makers.

With UK economic data now improving so rapidly, that is certainly possible. But if we do see unemployment fall faster than the Bank of England now expects, we must all hope that it comes from surprisingly strong demand across the economy, not weaker than expected supply.

How surprising are today's labour market figures? If the response of city economists is anything to go by, the answer is "not very".

Economists at Goldman Sachs and Barclays have said they are strong, but in line with their forecasts. Like the Bank, they expect unemployment to fall only slowly between now and 2016, reaching 7% only in 2016 (if then).

It's certainly worth keeping the 0.1 percentage point fall in the headline unemployment rate in perspective. Though 7.7% is 0.4 percentage points lower than a year ago, it's no different from what it was last November.

The employment ratio, at 71.6%, is also the same as it was in that month. That is higher than it has been for most of the past 4 years, but still some way off the 73% recorded at the start of 2008. We have a record number in work, but that is not unrelated to the fact that our population is also at a 'record high'.

So, the Bank might not be tearing up its unemployment forecasts just yet. But the numbers from the broader economy have been so much better than anyone expected the past few months, you have to assume they will be thinking about revising up their growth forecasts for this year - and probably next year as well.

That might well have knock-on effects for unemployment, even if the Bank and others are right that employers have ample room to boost output without raising employment.

The Office for Budget Responsibility is one institution that will be changing its figures in light of all this good news. At the time of the Budget it was assuming that the broader ILO measure of unemployment would be unchanged over the course of 2013, at 7.9%, rising to 8% in 2014, only falling significantly below 7% in 2017.

For the Bank of England, the key issue for policy is not just what happens to unemployment over the next few years, but why.

The Bank of England

The best possible outcome is for Britain's GDP, employment and productivity (output per head) to all grow strongly from here on in. That is not impossible. But there aren't many in the city who would say it was the most likely outcome.

The "experts" almost always underestimate the strength of recoveries, once they get going. There's no reason to think it won't happen this time as well, even if we have waited a long time to be surprised. If so, the Bank's forward guidance will not stand the way of bank rate going up in 2015, as many in the markets now expect.

However, the Bank's new framework also allows for a much bleaker possibility, that output and employment go up, but productivity does not - meaning that the long-term potential of our economy really has been seriously undermined by the events of the past decade.

That might also mean an earlier than expected rise in interest rates. But it's not a prospect that any of us are likely to welcome.

As things stand, the run of recent data suggests that UK unemployment might fall a little faster than the Bank of England expects, not because of surprisingly bad news from the supply side of the economy, but thanks to the sheer strength of output and demand. That would be good news indeed.

But, as Vince Cable would say, it's early days yet.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 94.

    @92 "...housing bubble..."
    If everyone says there is one, does that make it true? The Land Registry HPI covering completed sales of all pre-owned properties in England & Wales (so, excluding new-builds) shows an annual change of 0.8% (6.3% in London). ONS, covering only properties where there is a mortgage shows an annual change of 3.3% in England and 4.3% in Wales (8.1% in London).

  • rate this

    Comment number 93.

    @ SATM & Verano.. An economist is someone who sees something working in practice and wonders if it will work in theory. (As someone reminded us last week).

    I'm less and less impressed with MC.. He doesn't even know how to raise an eyebrow.

  • rate this

    Comment number 92.

    73.RW49 "He's got to prick the housing bubble before it gets out of hand. He hasn't much time."

    Minus 3 months!

    We already have a severe housing bubble that will take a substantial raising of interest rates to even moderate. All new money is already going into house prices. Wait any longer and there has to be a very high probability of a catastrophic crash. All caused by the fool Carney!

  • rate this

    Comment number 91.

    87.Sage Against The Machine

    The scientific method is only valuable - that is any good at all - if its theories can produce predictions that can themselves then be tested - otherwise it is just economics.

    So economics is NOT a science. Indeed its very lack of successful prediction from it theories make it worse - an anti-science.

    It is only bovine excrement and then not even any use as manure.

  • rate this

    Comment number 90.

    It's also worth looking at the breakdown of employment by hours worked (Table 7(1)). In October 2012, 71.3% of those in employment usually worked more than 30 hours whilst 8.6% worked up to 15 hours. The August 2013 figures are 71.7% (+0.4%) and 8.3% (-0.3%), so it appears that "underemployment" has decreased more significantly than unemployment.

  • rate this

    Comment number 89.

    "Though 7.7% is 0.4 percentage points lower than a year ago, it's no different from what it was last November." SF

    Not sure about this. November 2012 is not a month for which the ONS published a rate. The October 2012 rate (published in December) was 7.8%, 0.1% higher than the August 2013 rate of 7.7% (or, at 7.817%, 0.123% higher than the latest 7.694%). So that's 23,000 fewer unemployed now.

  • rate this

    Comment number 88.

    Sorry, that's 24,000 unemployed with ages 65 to 74 of an economically active population (65 to 74) of 1,030,000 (1,006,000 employed). The economically inactive population (65 to 74) was 9,617,000.

    [Table 2 in ]

  • rate this

    Comment number 87.

    4 Hours ago
    Where's the science in economics?~
    In measurement, observation, experimentation & proving.

    Just like science. :)

    But sadly not in terms of its prediction power. Unlike science. ((

  • rate this

    Comment number 86.

    You are quite wrong about that. I think you must be confusing the unemployment rate with the claimant count. The claimant count unemployment rate (18+) is 4.2% in August, down from 4.3% in July. In this definition, the denominator is the number of jobs, rather than the "economically active population", however. ILO unemployment (7.8%) includes 24,000 unemployed aged 65 to 74 (of 1,006,000).

  • rate this

    Comment number 85.

    84; No they only count those actively registered for JSA and ESA.

  • rate this

    Comment number 84.

    No. "Economically active population" is defined as "employed" plus "unemployed", where "unemployed" has the definition I gave @65. Only those under 16 and over 74 are excluded (by the "working age" part of the definition). So pensioners up to age 75 would be counted as "unemployed" if they were available for and seeking work.

  • rate this

    Comment number 83.

    Key Statistical out is 'economically active population'. anyone wanting work or no who can be lumped into the economically inactive total is so lumped. Pensioners looking for work don't count as unemployed, but they'll take a job if they can get one, for example.
    78: Single Social Security claimants do not get £26000, most get between £50 - £71 a week , and if they qualify, Housing Benefit

  • rate this

    Comment number 82.

    @81 BlackWednesday
    Yes, I'm absolutely certain that the methodology is statistically sound and compliant with European legislation. In Great Britain, the survey covers nearly 90,000 households each quarter (about one third of 1% of total households). Each quarter, one fifth of households in the survey are replaced by a nationally representative sample to ensure that there is no systematic bias.

  • rate this

    Comment number 81.

    "The unemployed comprise all persons of working age who were.."
    Are you sure they are not the product of some vague survey of a few people set up in the 1970s?
    A figure that is almost infinitely variable even before the other massive groups are redefined?
    We learn more every day about government "statistics".

  • rate this

    Comment number 80.

    Story today: "[Carney] also said that when the time came ..., it would raise interest rates before it started selling any of the bonds "

    Presumably he would target target the support rate as has happened (more or less) in Canada. Thus allowing a raise in bank rate whilst keeping excess reserves in the banking system.

  • rate this

    Comment number 79.

    52 Continued..
    Just imaging what a move of three percentage points will have. Then we have the rented sector, in the private arena they require a return on investment of more than inflation / interest rates just to stand still which will mean that rents will be high. In the public sector there just aren't the funds along with the fact that they too also need a return to balance their debt. TBC..

  • rate this

    Comment number 78.

    The left wing and there idiotic policies that got the UK into this mess in the first place , those that do not understand the value of money.

    In kent £3.50 a tray of cherries that about £10.50 ph. Not one single UK national doingthe work when around 2_500_000 to 5_000_000 on around £26K benifits package

  • rate this

    Comment number 77.

    The nights are drawing in.
    The government is pushing on with Gideon's plan
    But something is not right.
    Never mind - just sell off Royal Mail.
    Throw some tax payers money away.
    Meanwhile the real world is biting:
    How soon before other grant aided "me too" outfits in deprived areas like start failing?

  • rate this

    Comment number 76.

    The markets don't believe the Tory led dog of a Coalition Government's figures actually mean what the Tory MPs claim it does.......

    ....but apart from the little Tory boys who would vote for a monkey is a blue tie and claim it spoke perfect sense who does believe a word this Government says on anything....????

    Their obfuscations would make even Spin Master General Tony Blair blush.....

  • rate this

    Comment number 75.

    Where's the science in economics?
    In measurement, observation, experimentation & proving.

    Just like science.



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