According to NIESR’s report this morning, persistently weak demand is maintaining high unemployment, and may lead to a permanently higher rate of joblessness.
The economic argument in the UK can be boiled down to this: Are we in a government deficit crisis which, while its being reduced, is leading to a weakness in demand or, do we face a demand crisis which is making it harder to reduce the deficit.
Either way, while the deficit is a problem for the long-term health of the economy, so is unemployment.
The National Institute of Economic and Social Research report says:
“The weakness in demand this year is expected to translate into a 0.3 per cent fall in the level of employment.
“This adds around ½ percentage point to the current unemployment rate, peaking at 8.9 per cent in the fourth quarter of 2012, and a slow decline starting from 2013.
“Although we do not report forecasts for the youth unemployment rate, we expect it to continue to rise throughout the rest of this year.
“In our forecast there is a permanent increase in the equilibrium unemployment rate as a consequence of the increase in long-term unemployment experienced in recent years.
“By 2016 it will gradually decline to 6.4 per cent, which is still almost 1 percentage point above the pre-crisis level.”
NIESR also find there may also be a structural loss in productivity:
“Productivity in the first quarter of this year is still 1½ per cent below the level prior to the onset of recession. In the 1980s and 1990s, productivity was 13 and 15 per cent higher, respectively, at the same point in time. We do not expect any convergence on past productivity perfomance over the next few years.”
The coalition has taken the view that the deficit needs to be reduced as quickly as possible, while implementing measures to reduce unemployment while necessary.
However, unless joblessness takes higher priority, fewer of us will be working to support more people on unemployment benefit, and the end of the hard times will be further from sight. The government shouldn’t ignore one long-term problem for the sake of another.