Thursday, 12 September 2013

Unemployment and Forward Guidance

Mark Carney (for Martians: the new Governor of the Bank of England and a Canadian) says he won’t be making it worth taking your money out of a sock and putting in a deposit account until unemployment is below 7%. And 7% isn't a trigger, he was making noises about how unemployment around 5% would show that the economy strong. (Think about that for a moment: 1 on 20 people can't get jobs, and that's "strong"? Who's kidding? "Strong" is when employers who don't pay enough lose all their people next week to another employer who will.) Anyway, I thought you might like to see how often even 7%  happens. At a first glance, between 1971 and this year, it happens 48% of the time. 

But wait. Around 100 or so of those months were in the pre-modern era when we had strong Trade Unions and other such horrors, so they don't tell us anything about this economy, and at least another 100 were in the “bubble” era Oughties, which nobody thinks is coming back. That brings the proportion down to… 11%. Most of which was in the lead-up to the bubble.

So unless Mr Carney thinks there’s another bubble on the way, a sock still looks like a good option. Especially since, as you will remember, a few months ago all the pundits were talking about how the UK economy had a puzzlingly large number of people in work, given its output. Employers were supposed to be holding on to people “for stock”. In other words, there’s plenty of productive slack in the current workforce and employers will have no reason to hire even as the economy picks up. I'm not sure I believe that, but I do think that the 5% unemployment rate in the Oughties was very different from the 5% in the late 70's. It's made up of a lot of long-term unemployed, ethnic minorities are over-represented, and there were clearly a lot of people whose employment was pretty marginal, as they were tossed out of work briskly after 2008. Unemployment decreases slowly and increases sharply. Unemployment in the Tens is much more sticky than it was before the Modern Era. 

It could be that Mr Carney is as aware of this graph as you are now, and chose 7% exactly as a way of saying "interest rates are NEVER going back up again, EVER" which of course he couldn't say out loud. Remember, just as the largest direct or indirect employer of low-paid, contract and off-shored workers is the British State, the largest payer of interest is also the UK Government, which would mean me and you, as taxpayers. Nobody really wants interest rates to go up again. Except savers and investors. 

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