Youth Unemployment

Posted on May 4, 2012 by George Higson

Unemployment of young people in the UK in February 2012 was 1.03m – down from 1.04m in the last quarter of 2011. Despite this modest fall, observers in the UK and around the world, including the UK’s National Institute of Economic and Social Research and the World Economic Forum, agree that youth unemployment represents one of the most serious economic and social problem facing developed and developing economies alike. Youth unemployment of 1.03m (at 22%) means that approximately one in five young people actively engaged in the labour market (those defined as active), are looking for work but cannot obtain a job.

Globally some 75 million 16 to 24 year olds are unemployed. In some countries in the Arab world, up to 90% of 16-24 year olds are unemployed. Across the European Union, Spain tops the pile with youth unemployment of 47.1 per cent, with the lowest rate in Austria at just 7.3 per cent.

In the UK there are a 7.3m young people aged between 16 and 24 in the UK – roughly two thirds (4.8m) are ‘economically active’ and one third are ‘economically inactive’.  The economically active are either working or available for and seeking work – i.e. employed or unemployed – and the economically inactive are not available or not seeking work. Most of these are students (1.8m).

Youth unemployment in the UK has risen consistently during the last three recessions – in 1993 it was 15%, and by 2008 it has risen to 19%, with the latest rate at 22%. It is clear that the UK is suffering from a structural problem, as well as suffering severe bouts of demand deficient youth unemployment.

According to the Commission on Youth Unemployment, unemployed young people represents a financial time-bomb, with an estimated direct cost to the exchequer in 2012 of £4.8 billion and further costs to the economy of £10.7 billion in lost output.
Of special concern is the number of long-term unemployed young people – defined as looking for work for 12 months or more – and those referred to as ‘NEETS’ – not in education, employment or training. In the wake of last year’s riots, concern is also focussing on unemployment among young black people.

So what lies behind the figures?

It is clear that young people face a number of significant challenges when attempting to make the transition from education and training to the labour market. While young people experience higher rates of unemployment than older generations their job security is lower, and they receive lower average pay. In addition, they are more likely to be employed on a part-time or temporary basis. Young people are also likely to be more proportionately affected by recession. Low-skilled youth show the highest unemployment rates. Ethnic minorities also seem to suffer higher rates of youth unemployment, although some economies fair better than others in this respect.

According to recent research undertaken at Manchester University, which compared the UK and the USA – unemployment affecting black youth was significantly higher in the UK. According to Professor Yaojun Li, unemployment figures for black men in the US over the last three recessions were up to 50% lower than in the UK. He believes that the affirmative action programme and requirements for public institutions to employ people from all sections of the population adopted in the US has helped reduce the unemployment rate among black people.

Policies

Many countries have introduced specific ‘active labour market policies’ (ALMPs), including the provision of information and advice, the introduction of new types of employment contract and incentives to hire young people. Other policies include the provision of work experience and ‘job guarantees’. In many countries, specific vulnerable groups have been targeted, including early school leavers, disabled young people and those with few qualifications.

In Austria, some 40% of young people go into work-based apprenticeships and many attend vocational colleges, where general education is combined with practical employment skills. Somewhat surprisingly, only 20% follow an academic programme.

In the UK, as in the 1980s and 90’s, recent government policy has focussed on supply-side incentives, including the introduction of a Youth Contract, which includes an injection of £1bn to get young unemployed people working or studying. It also includes wage incentives worth more than £2,275 for each 18-24 year old an employer recruits or provides with work experience placements. There are also 20,000 incentive payments to support employers who create apprenticeships and £126m to help teenagers into education, employment or training.

In 2010 the European Commission launched its Europe 2020 Youth On The Move initiative, to encourage young people to become more flexible and mobile, and to provide the young with better quality information across from across Europe.

What is clear is that while such supply-side policies are essential to remove rigidities and restructure the labour market, firms will only take on workers when they themselves experience an increase in demand and are confident that this will be sustained. Given the lack of demand across Europe it is unlikely that youth unemployment will begin to fall in the medium term.

Sources:

  • International Labour Organisation (ILO)
  • Eurostat
  • The European Commission
  • The Daily Telegraph
  • World Economic Forum (Davos)
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UK back in recession

Posted on April 25, 2012 by George Higson

While the Leveson Inquiry rumbles on, spare a thought for the poor old UK economy. Figures released today tell a sorry tale of economic woe, with negative growth of 0.2 in the first quarter of 2011. While these figures are subject to official revision, it is unlikely that revised figures will show growth, hence the UK can now officially be declared in recession with little prospect of a return to growth in the near future.

For three out of the last six quarters the UK has been shrinking – even during the upturns, growth has been well below the level required to prevent further unemployment and business closures. Indeed, unemployment will continue to rise long after any upturn kicks in – when and if it arrives. The ‘double-dip’ recession is the first since the 1970s, when strikes, oil shocks and the 3-day week combined to end the long period of uninterrupted post-war growth and prosperity.

Despite some good news on trade, export growth is unlikely to compensate for falling confidence and stalled consumer spending, combined with the contractionary effects of a shrinking public sector and very weak construction and production sectors, which fell by 3% and 0.4% respectively. A decline in mining and quarrying activity contributed most to the fall in production, followed by manufacturing. However, it is the construction sector that represents the biggest downward driver, with many publicly funded infrastructure projects put on hold, or shelved completely. Running underneath these figures is a more worrying four-quarter decline in investment spending – an inevitable by-product of falling demand, but a clear indicator that when any upturn comes inflationary pressure will quickly gather steam as firms will face capacity pressures.

Chancellor Osborne was again forced to defend his deficit reduction strategy stressing that he remained committed to re-balancing the economy in the medium term and stressing that long term prospects depend ultimately on improving competitiveness in global markets. Of course, the alternative view is that it is precisely at times of recession that strong leadership and vision is required – especially in terms of government spending – a bit more debt now, which can help prime-the-pump for growth, may lead to much less debt in the future and, perhaps, a better infrastructure as a lasting legacy.

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Budget 2012

Posted on March 23, 2012 by George Higson

George Osborne, the UK Chancellor, presented his third budget to Parliament this Wednesday (March 23rd, 2012) and immediately faced a storm of protest from pensions groups, unions, and those representing society’s poorest. Although a fiscally neutral budget – political opponents have already dubbed it the ‘We’re clearly not all in it together’ Budget. A more considered view was offered by analysts, including  Paul Johnson, Director of the independent Institute of Fiscal Studies (IFS), who described the 2012 Budget as a hotch-potch of reforms which might end up being less fiscally neutral than Mr Osborne intended.

The Economy

On the Economy, the independent Office of Budget Responsibility (OBR) has been forced to revise its growth forecast from 2.1% to 1.7% for 2011, and to 2.5% for next year, which if met will push the UK close to its trend growth rate – the rate at which many economic woes begin to ease. Which all sound spiffing were it not for the fact that, at least according to the majority of independent analysts, 2.5% is a rather over-optimistic growth forecast in the light of the fiscal straightjacket worn by the majority of the UK’s trading partners.

The Treasury’s inflation outlook is that price rises this year will average between 4 and 5%, falling back to the desired core target rate of 2.5% in 2012.

The Treasury is also upbeat about the UK’s borrowing prospects, forecasting that borrowing for 2011 will fall to £146 – below the government’s own target – and will shrink even further to just over £100bn in 2012-13. Again, all assuming a stable trend rate of growth.

Taxation

In terms of taxation, while personal allowances will increase from £7,475 to £8,105 in April 2012, and to £9,205 by April 2013, the headline grabbing item is the scrapping of the top rate of tax of 50p and the introduction of a 45p top rate. Estimates suggest that the higher rate generated extra revenues of just £1bn – far less than was expected when it was introduced in 2009. This lends weight to the deep rooted belief that high marginal tax rates create a disincentive effect for the high paid. If true, revenues may actually rise as a result of the scrapping of the 50p rate – the so-called Laffer effect. Of course, cynics might argue that the less-than-expected revenues were the result of some nifty tax avoidance footwork. Indeed, various tax avoidance loopholes will be closed, which is estimated to raise £1bn, and some 43 tax reliefs will be removed to simplify the system.

However, some 300,000 workers have been dragged into the 40% tax bracket as a result of a reduction in the level of taxable income that triggers the movement from the basic tax rate – the current 40% rate which starts at an income of £42,475, will now start at £41,450.

The main rate of Corporation tax will be reduced by 2%, from 25%, falling eventually to 23%.

It was also announced that there would be no further changes to alcohol and tobacco duties, but the tobacco duty system will be reformed to narrow differential between lower-cost brands and premium brands.

In terms of fuel duty, a new fair fuel stabiliser will replace the existing fuel escalator, and 1p will be removed from fuel duty from March 21st.

Pensions

One of the biggest surprises was the phasing out of tax allowances for those over 64 – dubbed the ‘Granny Tax’, with a flat rate pension of £140 per week for those who have worked for 30 years, but those who have may see their pensions cut. Ever since 1925, when Winston Churchill introduced the higher tax free allowance for pensions, those of retirement age have been able to benefit by earning more before income tax kicked-in. This perk has now been scrapped, which, Age UK estimates will cost the average pension over £250 per year, One further impact of the flat rate pension is that those who have made additional contributions to their pension may not see the full benefit when they retire. In addition, the Chancellor is committed to undertaking a regular review of how pensions are calculated, and indicated that retirement age will be linked to a life expectancy index.

Supply-side policies

In terms of support for enterprise, numerous business regulations will be removed, along with increases in tax relief and business rate relief for small businesses. In addition, the Treasury announced the creation is 21 special enterprise zones, and the introduction of new export credits for manufacturers, and support for science and technology research. In addition, the funding of technical colleges will be extended.

Housing market

There will be a boost to the housing market in the form of a package of £250bn to help first time buyers purchase newly built property. At the other end of the marker, stamp duty on property transactions of £2m and over will be increased to 7% (raising duty to £140,000 on a £2m sale).

Environment

In terms of the environment, a new Green Investment Bank will be launched, and a carbon price floor will be introduced for the energy sector later this year. In addition, railways will get an injection of £200 to improve the regional rail infrastructure, and more money will be made available for road maintenance.

For further reactions, go to:

The Daily Telegraph

The Guardian

The Independent

 

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New competition authority announced

Posted on March 16, 2012 by George Higson

The Department for Business, Innovation and Skills (BIS) has announced its plans to create a new competition watchdog, the Competition and Markets Authority (CMA), which will replace the Competition Commission as well as take over the all competition functions of the Office of Fair Trading (OFT. According to Business Minister, Norman Lamb, the new regulatory regime will be more streamlined and less of a burden on business while having increased power to investigate anti-competitive behaviour. The new authority will be operational by April 2014.

Lamb commented that ”We want to see a simpler, more streamlined structure so that a single competition authority can provide strong leadership and improve the speed and quality of decisions for business. Above all competition drives prices down and quality up, which benefits consumers and improves UK productivity and growth.”

Reform of the current structure is long overdue, with increasingly lengthy investigations often bogged down in detail and reaching what many regard as unsatisfactory conclusions. Effective competition policy should be capable of quickly rooting out anti-competitive behaviour while at the same not deterring domestic enterprise or foreign investment – this is central to improving the long term competitiveness of the UK economy, which itself will help sustain growth improve job prospects.

 

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Latest changes to the CPI shopping basket

Posted on March 14, 2012 by George Higson

The ONS has announced its latest changes to the basket of goods and services it uses to compile its influential CPI and RPI inflation indices. Into the basket come tablet computers, fees paid to dating agencies, and ‘teenage fiction’, and out go photographic film development charges and cable TV subscriptions. As well as adjusting the composition of the basket to reflect changes in typical household spending, there are also adjustments to the grouping of goods, and to their weights, which are reviewed every year.  For example, DIY materials have switched group and large TV screen now have their own grouping. Food products have gradually lost their weights to reflect the fact that spending on food represents just over 10% of typical household budgets, compared with just under 20% a generation ago. Indeed, the average household now spends more on ‘eating out’ than cooking at home.

The Consumer Price Index (CPI) is calculated by tracking some 180,000 individual price movements of the 700 items included in the basket of goods and services bought by the ‘average’ UK household. Price movements are monitored in around 150 different geographical regions, including prices in inner-cities, suburbs and rural areas across the UK. Adjustments need to be made on a regular basis to ensure that the CPI and RPI remain broadly representative and hence remain useful for policy purposes, including the setting of interest rates.

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UK unemployment hits 17 year high

Posted on February 16, 2012 by George Higson

Unemployment in the UK rose by 48,000 in the last quarter of 2011, reaching 2.67 million, some 8.4% of the active population.  This is the highest level of unemployment for 17 years, and provides yet further evidence that, like the rest of Europe, the aggregate spending in the UK is not sufficient to create new jobs or to save existing ones. Over 60% of the increase in unemployment can be accounted for by women, with youth employment and the public sector also being hit hard.  The figures, published by the ONS this week, would have been worse were it not for the rise in part-time employment.

 

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