“These figures show just how much our economy is being affected by the crisis in the eurozone.”
Chris Grayling, September 16 2011

The background

The employment minister has pinned the blame for this week’s dire unemployment figures firmly on the sovereign debt crisis in Europe.

We’ve already FactChecked the claim – increasing popular on the Coalition front benches – that the eurozone is strangling the recovery in the UK, and we think it’s dubious.

Now the Lib Dem peer Lord Oakeshott has weighed into the row, posting this rebuke on Twitter: “Sorry,Chris Grayling,we can’t blame the Eurozone crisis for jobless figures. Lesson 1 in the economics textbook- unemployment lags economy.”

The analysis

Mr Grayling told ITV’s Daybreak programme: “Youth unemployment was falling four months ago and was below the level at the general election but since then we have seen the impact of the European crisis which has left a cloud of uncertainty over many of our most important trading markets.”

What’s wrong with this interpretation?

Unemployment lags recession

The mantra that unemployment is a “lagging indicator” is indeed common to many basic economics textbooks.

The idea is that it takes some time for companies to respond to the immediate effects of an economic downturn by laying off workers – and it can take a long time for firms to start hiring again after a recession comes to an end.

While not every single economist in the world agrees with this phenomenon, there’s convincing evidence that that’s how things have tended to happen in Britain.

For example, the respected Institute for Fiscal Studies points out that, in all three slumps in the 1970s, 80s 90s, unemployment didn’t rise until the second year of the recession.

The ONS thinks there’s evidence of unemployment lagging behind changes in GDP growth this time round too.

That backs up Lord Oakeshott’s point that you can’t make an immediate link between bad economic news and unemployment – it’s very unlikely that the shocks we saw in the eurozone this summer would create unemployment so quickly.

Long-term trends

Mr Grayling has zeroed in on one short time period in order to try to make his case.

It is true that youth unemployment figures went down slightly in the second quarter of this year, taking them just below the level seen at the time of the election last year.

But you would always expect figures for any economic indicator to go up and down over a few months.

As we pointed out in a previous FactCheck, the long-term trends are more important, and in this case analysis of ONS figures shows that youth unemployment has been rising in three quarters out of four over the last three years.

There’s no reason to think that they had peaked just before the summer and were about to fall permanently until the european debt crisis intervened, as Mr Grayling appears to be suggesting.

The verdict

Mr Grayling is one of a growing number of cabinet minister seeking to lay the blame for recent bad news at the door of our European neighbours, but few economists would agree that it’s possible to say now how much the crisis will really affect the UK.

Macroeconomics expert Tony Dolphin from the Institute of Public Policy Research told FactCheck he rejects “the way the government presents this as if all our ills are the fault of the eurozone crisis”, saying: “This is a political issue and both sides are trying to score political points, as you would expect.”

Mr Dolphin does however think that Mr Grayling may have “a bit of a point” when he warns of the effects of continuing uncertainty over the eurozone crisis on employment prospects.

A survey published The Chartered Institute of Personnel and Development showing that fewer firms plan to take on more staff in the coming months was “a classic sign of uncertainty”, the economist said, adding: “Firms just knuckle down in times of uncertainty. They think: ‘We’ll just knuckle down. We don’t know what our future demand is going to be.'”

That’s not good news, and of course, if Lord Oakeshott is right about the time lag effect on unemployment, the consequences go far beyond the question of who wins this political row.

If classical economics is to be believed, even when the economy recovers, it will be months or years before we can expect unemployment to fall.

By Patrick Worrall