With working age economic inactivity lower than during the boom years, could we see unemployment start falling faster?

November 13, 2013

Today we saw the release of labour market statistics which showed the UK unemployment rate fall to its lowest rate since Spring 2009. This will be welcome news to the coalition, whose spirits continue to be lifted by strong economic news. It also has a specific relevance to Bank of England Governor Mark Carney, who holds 7% as the point at which an increase in interest rates will be considered. Today also saw the Bank of England revise its unemployment forecasts, with a 50% chance that unemployment will fall to 7% by the end of 2014. Certainly, if unemployment continues to fall at the rate it has in the last three months, this threshold should be hit by the months before the 2015 general election.

However this fall in unemployment since the summer also highlights the fact that it hasn’t fallen a very long way since the darkest days of the recession. Unemployment stood at 8% when the employment rate hit its lowest point, just before the coalition came into power in early 2010. Whilst the fall to 7.6% today is welcome, there are only 19,000 fewer people unemployed.

The real story of the labour market’s recovery lies in economic inactivity. Focussing on people of working age (in an attempt to remove the influence of an aging population on inactivity) we can see that economic inactivity has fallen to lower than was seen through the growth years of the early and mid-2000s. Indeed this is its lowest rate since just before the early 1990s recession.

(Source: ONS)

Whilst inactivity rose in 2009, it has fallen sharply as a result of the employment growth that has been seen since mid-2011. Over this period of job growth, three quarters of the rise in the working age employment rate has come from falling economic inactivity, rather than lower unemployment.

(Source: ONS)

There are a few factors that will have been affecting economic inactivity, both during the recession and in the build-up to it. One of the clearest changes is a rising participation of women in work, with female economic inactivity falling faster than it has increased among men. Policy changes will have had a role here too, with more lone parents expected to look for work in return for their benefits since 2008, significantly reducing the numbers who are inactive.

We have also seen a rise in part-time work and decreasing wages over recent years, meaning that many households will need more people in work just to get by.

However we must also question how much further inactivity will fall. Whilst there are some examples of economic inactivity being lower, this has never happened for a long period of time (since 1971 it has only been lower for four years). If the UK economy continues to create jobs at the rate that it has been since mid-2011, it is very possible that we will see unemployment fall significantly more quickly than it has over recent years.

If this is the case, it seems quite likely that the 7% threshold that Mark Carney has set will come into view quite a lot more quickly than might have been thought just a few months ago.

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