Merv the Oracle and the phantom jobless

Like a Greek Oracle, Mervyn King has divined some encouraging signs at the quarterly Bank of England assessment of the UK economy. But the bulk of the statistical soothsaying was pretty bleak.

The banking system is still in a bad way and it may take some years for it to be “weaned off very large public support”. The recovery is likely to be sluggish and protracted. And they could not tell when unemployment would stop rising.

Amid the entrails of uncertainty, however, was a perceptive piece of statistical analysis and a gleaming ray of light on those jobs numbers.

In November, I was told in a private briefing by the then Secretary of State for Work and Pensions, James Purnell, that the Government was hopeful that for a given level of downturn in the economy there would be less unemployment in this recession. He put that down, obviously, to the Government own programme of activist labour market interventions, such as jobcentre plus, alongside Britain’s traditionally flexible jobs market.

On the first point, so far the Purnell’s private predictions have proven strikingly accurate. Even given the pain of 2.44 million official unemployment, the bald fact is that unemployment should be much higher given the calamitous collapse in the economy.

In the five quarters of this recession, the economy has contracted by a whopping 5.7 per cent, and employment, measured by the Labour Force Survey has fallen by 1.7 per cent. Yet in the 1990s recession half the contraction (-2.5 per cent) led to double the fall in employment (-3.4 per cent). In the 1980s a 4.7 per cent economic contraction led to a 2.4 per cent fall in employment.

Mervyn King talked about this in answer to a question from me today. His answer? That perhaps Britain’s flexible jobs market has allowed the reduction in demand for goods and services to be accommodated by moves to part-time working and pay cuts, rather than job losses.

Another theory, in fact it is my own, is that perhaps we have not yet seen a huge round of public sector job cuts. Given the current political talk about slashing spending, perhaps the “phantom jobless” will reappear in the next year or two. And then there’s the thorny issue of productivity, but more on that later in the week.

For now it’s is some unlikely good news to be gleaned from some bad unemployment numbers, and that Oracle of Threadneedle Street.