Responding to the Downturn

1. Responding to the Downturn Surgeons Hall, Edinburgh 11th September 2009 Professor David Blanchflower Stirling and Dartmouth 1

2. Questions 1. 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? 2

3. Questions 1. 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? 3

4. Questions Q1. 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. 4

5. Macro-economy • 1. 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 • Interest rates will be low for a while • There is still a possibility of a W-shape recovery or worse 5

6. Latest fan charts The 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signaling that we are not out of recession by a long way They are worried banks are not lending and foreign banks have withdrawn.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! 6

7. 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. 7

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

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

10. 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.

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

12. Questions 1. 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? 12

13. 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 19.8 EU27 7.0 9.0 15.4 19.8 Belgium 7.3 8.0 19.9 21.6 Denmark 3.2 5.9 7.9 11.2 Finland 6.4 8.7 16.5 22.6 France 7.8 9.8 19.3 24.2 Germany 7.2 7.7 9.3 11.2 Ireland 6.0 12.5 12.4 26.5 Netherlands 2.7 4.4 5.3 6.6 Portugal 7.8 9.2 16.7 18.9 Spain 11.4 18.5 25.0 38.4 Sweden 5.7 9.2 17.7 27.3 United States 4.8 9.4 13.5 17.8

14. Size of youth cohort, 2008

15. Regional Unemployment rates Rate 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%

16. 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

17. Latest labour market developments - 1 • Unemployment increased by 220,000 on the quarter to 7.8%. • 18-24 unemployment increased by 46,000 to 17.2% and by 1.0% on the quarter • 928,000 youngsters under 25 are unemployed or 39.5% of the total • Unemployment has risen by 750,000 on the year but employment has fallen by 573,000. • Full-time employment has fallen by 653,000 but part-time employment has risen by 80,000 17

18. Latest labour market developments - 2 • Wage growth is benign. Average earnings including bonuses in June 2009 were up 1.2% on the month in the private sector and without bonuses 1.7% • In the public sector growth rates were 4.0% and 3.9% • There has been a growth of 10% in applications to universities in England and Wales, particularly among people over 21. • The number of jobs held by 16-24 year olds has fallen by 293,000/573,000 over the last year. 18

19. Questions Q2. 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 19

20. Questions 1. 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? 20

21. Answer This 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 21

22. Proposals to address rising unemployment in the UK 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 22

23. Proposals to address rising unemployment in the UK 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 23

24. Proposals to address rising unemployment in the UK )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 24

25. Proposals to address rising unemployment in the UK 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 25

26. Proposals to address rising unemployment in the UK 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 26

27. Proposals to address rising unemployment in the UK 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 27

28. Proposals to address rising unemployment in the UK 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 28

29. Proposals to address rising unemployment in the UK 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 29

30. Proposals to address rising unemployment in the UK 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 30

31. End Thank you Professor David Blanchflower Stirling and Dartmouth 31