Responding to the DownturnResponding to the Downturn

Professor David BlanchflowerProfessor David Blanchflower

Stirling and DartmouthStirling and Dartmouth

1111thth September 2009 September 2009

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Surgeons Hall, Edinburgh

QuestionsQuestions1. What is going to happen to the UK and Scotland’s labour market, say over the next 5 years?

2. What is likely to be the differential impact, if any, on younger people versus adults?

3. What are the broad policy responses required to mitigate the consequences of the downturn and exploit the potential recovery?

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QuestionsQuestions1. What is going to happen to the UK and Scotland’s labour market, say over the next 5 years?

2. What is likely to be the differential impact, if any, on younger people versus adults?

3. What are the broad policy responses required to mitigate the consequences of the downturn and exploit the potential recovery?

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QuestionsQuestionsQ1. What is going to happen to the UK and Scotland’s labour market, say over the next 5 years?

A1. Recovery is going to be slow and unemployment is going to keep rising well into 2010. Probably to around 3.4 million.

Attempts to cut public spending and withdraw monetary and fiscal stimulus too soon may push unemployment closer to 4 million.

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Macro-economyMacro-economy1. Bank of England has interest rates at 0.5%

2. Very little likelihood of much inflation for a while

3. Recovery is going to be slow

4.Interest rates will be low for a while

5.There is still a possibility of a W-shape recovery or worse

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Latest fan chartsLatest fan chartsThe Bank of England is signaling that we are not out of recession by a long way

They are worried banks are not lending and foreign banks have withdrawn. Mortgages

The yield curve needs to come down

They will do more quantitative easing

The Governor will not be in a minority for long!

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What do the fan charts mean?The fan chart depicts the probability of various outcomes for GDP growth / CPI in the future, representing the best collective judgement of the MPC

The central projection is the single most likely outcome. There is a 10% probability GDP growth / CPI will lie in this range.

Each subsequent pair of lighter coloured bands represents a further probability of 10%.

The skew of the fan chart around the central projection represents the Committee’s view of the balance of risk.

The width of the coloured bands represents uncertainty surrounding the forecast.

Chart 1 GDP projection based on market interest rate expectations and £175 billion asset purchases

Chart 2 GDP projection based on constant nominal interest rates at 0.5% and £175 billion asset purchases

Table 1 Conditioning path for Bank Rate implied by forward market interest rates(a)

(a) The data are fifteen working day averages of one-day forward rates to 5 August and 6 May 2009 respectively. At short maturities, both curves are based on overnight index swap (OIS) rates. At longer maturities, the August curve is based on OIS rates, while the May curve is based on instruments that settle on Libor (adjusted for credit risk).(b) August figure for 2009 Q3 is an average of realised spot rates to 5 August, and forward rates thereafter.

Per cent

2009 2010 2011 2012

Q3(b) Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

August 0.5 0.5 0.7 1.1 1.7 2.2 2.7 3.2 3.6 3.8 4.0 4.2 4.3

May 0.5 0.6 0.9 1.2 1.7 2.1 2.5 2.8 3.0 3.1 3.2 3.3

Chart 3 CPI inflation projection based on market interest rate expectations and £175 billion asset purchases

Charts 5.4 and 5.5 The fan charts depict the probability of various outcomes for CPI inflation in the future. Charts 5.4 and 5.5 have been conditioned on the assumptions that the stock of purchased assets financed by the issuance of central bank reserves reach £175 billion and £125 billion respectively, and remain there throughout the forecast period. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that inflation in any particular quarter would lie within the darkest central band on only 10 of those occasions. The fan charts are constructed so that outturns of inflation are also expected to lie within each pair of the lighter red areas on 10 occasions. In any particular quarter of the forecast period, inflation is therefore expected to lie somewhere within the fans on 90 out of 100 occasions. The bands widen as the time horizon is extended, indicating the increasing uncertainty about outcomes. See the box on pages 48–49 of the May 2002 Inflation Report for a fuller description of the fan chart and what it represents. The dashed lines are drawn at the respective two-year points.

Chart 4 CPI inflation projection in May based on market interest rate expectations and £125 billion asset purchases

QuestionsQuestions1. What is going to happen to the UK and Scotland’s labour market, say over the next 5 years?

Q2. What is likely to be the differential impact, if any, on younger people versus adults?

3. What are the broad policy responses required to mitigate the consequences of the downturn and exploit the potential recovery?

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Unemployment and Youth Unemployment Rates (%)

Under 25s July 2008 July 2009 July 2008 July 2009

UK 5.7 7.8 15.0 19.1 Euro Area 16 7.5 9.5 15.4 19.8EU27 7.0 9.0 15.4 19.8Belgium 7.3 8.0 19.9 21.6Denmark 3.2 5.9 7.9 11.2Finland 6.4 8.7 16.5 22.6France 7.8 9.8 19.3 24.2Germany 7.2 7.7 9.3 11.2Ireland 6.0 12.5 12.4 26.5Netherlands 2.7 4.4 5.3 6.6Portugal 7.8 9.2 16.7 18.9Spain 11.4 18.5 25.0 38.4Sweden 5.7 9.2 17.7 27.3United States 4.8 9.4 13.5 17.8

Size of youth cohort, 2008Size of youth cohort, 2008

Regional Unemployment ratesRate Annual change

North East 9.8% 2.3%North West 8.5% 2.1%Yorkshire & Humberside 8.8% 2.8%East Midlands 7.3% 1.6%West Midlands 10.6% 4.2%East 6.5% 1.9%London 8.9% 2.0%South East 5.9% 1.8%South West 6.4% 2.6%England 7.9% 2.3%Wales 7.6% 2.6%Scotland 7.0% 2.7%Great Britain 7.8% 2.4%Northern Ireland 6.7% 2.6%United Kingdom 7.8% 2.4%

Table 3. Surveys of employment intentions(a)

Averages 2008 2009

since 1999 Q2 Q3 Q4 Q1 Q2

BCC(b) 15 6 0 -27 -16 -10

CBI(b) 2 -2 -17 -38 -43 -20

Agents(c) 0.4 -0.6 -1.5 -2.7 -3.3 -2.7

Manpower(b) 11 5 -1 -3 -6 -6

Latest labour market developments - Latest labour market developments - 111.1. Unemployment increased by 220,000 on Unemployment increased by 220,000 on

the quarter to 7.8%. the quarter to 7.8%.

2.2. 18-24 unemployment increased by 18-24 unemployment increased by 46,000 to 17.2% and by 1.0% on the 46,000 to 17.2% and by 1.0% on the quarterquarter

3.3. 928,000 youngsters under 25 are 928,000 youngsters under 25 are unemployed or 39.5% of the totalunemployed or 39.5% of the total

4.4. Unemployment has risen by 750,000 on Unemployment has risen by 750,000 on the year but employment has fallen by the year but employment has fallen by 573,000.573,000.

5.5. Full-time employment has fallen by Full-time employment has fallen by 653,000 but part-time employment has 653,000 but part-time employment has risenrisen by 80,000 by 80,000

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Latest labour market developments - Latest labour market developments - 221.1. Wage growth is benign. Average Wage growth is benign. Average

earnings including bonuses in June 2009 earnings including bonuses in June 2009 were up 1.2% on the month in the were up 1.2% on the month in the private sector and without bonuses 1.7%private sector and without bonuses 1.7%

2.2. In the public sector growth rates were In the public sector growth rates were 4.0% and 3.9%4.0% and 3.9%

3.3. There has been a growth of 10% in There has been a growth of 10% in applications to universities in England and applications to universities in England and Wales, particularly among people over 21.Wales, particularly among people over 21.

4.4. The number of jobs held by 16-24 year The number of jobs held by 16-24 year olds has fallen by 293,000/573,000 over olds has fallen by 293,000/573,000 over the last year.the last year.

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QuestionsQuestionsQ2. What is likely to be the differential impact, if any, on younger people (ideally 16-18s) versus adults?

A2. Unemployment is going to be high for some time to come. It is hitting the least skilled, minorities and the young the most. Government policy is helping, but the scale of that help is much too small. We need a big expansion of education

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QuestionsQuestions1. What is going to happen to the UK and Scotland’s labour market, say over the next 5 years?

2. What is likely to be the differential impact, if any, on younger people (ideally 16-18s) versus adults?

3. What are the broad policy responses required to mitigate the consequences of the downturn and exploit the potential recovery?

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AnswerAnswerThis has been the worst financial crisis in a hundred years and it isn’t over yet. The recovery to this point is anaemic

This is not the time to remove any stimulus

Cutting public spending now could well push us into a depression.

The VAT increase set for the end of the year should be postponed for at least 6 months

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i) There should be a substantial short-term fiscal stimulus focused on jobs. Interest rates need to be kept low and the Bank of England needs to raise quantitative easing to above 200 billion pounds

ii) Raise the Education Leaving Age to 18

iii) Provide further encouragement for youths to undertake further and higher education

iv) Expand the number of teacher training places

Proposals to address rising unemployment in the UK

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i) There should be a substantial short-term fiscal stimulus focused on jobs. Interest rates need to be kept low and the Bank of England needs to raise quantitative easing to above 200 billion pounds

ii) Raise the Education Leaving Age to 18

iii) Provide further encouragement for youths to undertake further and higher education

iv) Expand the number of teacher training places

Proposals to address rising unemployment in the UK

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) There should be a substantial short-term fiscal stimulus focused on jobs. Interest rates need to be kept low and the Bank of England needs to raise quantitative easing to above 200 billion pounds

ii) Raise the Education Leaving Age to 18

iii) Provide further encouragement for youths to undertake further and higher education

iv) Expand the number of teacher training places

Proposals to address rising unemployment in the UK

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i) There should be a substantial short-term fiscal stimulus focused on jobs

ii) Raise the Education Leaving Age to 18

iii) Provide further encouragement for youths to undertake further and higher education

iv) Expand the number of educators by placing an unemployed graduate in every school as an aide, for two years with pay equal to their unemployment benefits

Proposals to address rising unemployment in the UK

Proposals to address rising unemployment in the UK

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v) Job creation through investment in infrastructure with particular emphasis on shovel ready projects that could can be started quickly

vi) Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

vii) A temporary, limited and targeted expansion of Active Labour Market Programs

viii) Provide incentives to encourage the use of short-time working and job sharing. These might take the form of time limited tax incentives

Proposals to address rising unemployment in the UK

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v) Job creation through investment in infrastructure with particular emphasis on shovel ready projects that could can be started quickly

vi) Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

vii) A temporary, limited and targeted expansion of Active Labour Market Programs

viii) Provide incentives to encourage the use of short-time working and job sharing. These might take the form of time limited tax incentives

Proposals to address rising unemployment in the UK

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v) Job creation through investment in infrastructure with particular emphasis on shovel ready projects that could can be started quickly

vi) Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

vii) A temporary, limited and targeted expansion of Active Labour Market Programs

viii) Provide incentives to encourage the use of short-time working and job sharing. These might take the form of time limited tax incentives

Proposals to address rising unemployment in the UK

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v) Job creation through investment in infrastructure with particular emphasis on shovel ready projects that could can be started quickly

vi) Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

vii) A temporary, limited and targeted expansion of Active Labour Market Programs

viii) Provide incentives to encourage the use of short-time working and job sharing. These might take the form of time limited tax incentives

Proposals to address rising unemployment in the UK

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v) Job creation through investment in infrastructure with particular emphasis on shovel ready projects that could can be started quickly

vi) Allow public sector and non-profit organizations to fill available vacancies by providing increased funding for two years

vii) A temporary, limited and targeted expansion of Active Labour Market Programs

viii) Provide incentives to encourage the use of short-time working and job sharing. These might take the form of time limited tax incentives

ix) Subsidize the employment of the young by wage subsides and removing National Insurance contributions for anyone under age 25 for two years

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Professor David BlanchflowerProfessor David Blanchflower

Stirling and DartmouthStirling and Dartmouth

Thank youThank you

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