Wednesday, March 18, 2009

UK Unemployment - lessons from recent history

I thought it might be interesting to compare how unemployment is faring at the start of this recession with the last two UK recessions: 1980-81 and 1990-91.

Unemployment is what is known as a lagging indicator - that is rises in unemployment usually come alongside and later than falls in GDP rather than before. An example of a leading indicator would be changes in company stock levels as companies run down stock if they feel that bad times are coming.

For the purposes of this article, I take a recession to be 2 consecutive quarters of negative GDP growth. I use the unemployment rate (no of unemployed divided by total workforce) rather than absolute numbers of unemployed. All figures come from the ONS (link) unless stated otherwise.


In 1979, there were 2 non-consecutive quarters of negative growth but overall the economy grew at 2% which is slightly below 'trend'* and during this time unemployment was pretty much flat. Then between the first quarter of 1980 and the end of the first quarter 1981, GDP fell by a total of 4.6%.

The reason for the fall was that the Conservative Government pushed interest rates higher in an attempt to bring down inflation rates. They also reduced subsidies to loss making companies and industries. Unemployment rose from 5.5% in Q1 1980 to 8.9% in Q1 1981. Unemployment then continued to rise, quarter after quarter until by the first quarter of 1983, when GDP got back to pre-recession levels, it stood at 11.3%.

The final peak in unemployment was in the second quarter of 1984 and it didn't drop back to levels seen at the end of the recession until mid-1988, more than seven years later!


GDP fell by 2.6% between the third quarter of 1990 and the third quarter of 1991. This was again as a result of increased interest rates to squeeze inflation out of the system, inflation caused by a pre-election give-away by Chancellor of the Exchequer (Finance Minister) Nigel Lawson and a disastrous attempt to shadow the Deutschmark which had led to interest rates being set too low. Unemployment rose from 7.1% to 9.2% during the recession and then continued to climb until it peaked at 10.6% in 1993. It didn't reach the levels of the end of the recession until the last quarter of 1994, more than 3 years after the end of the recession.

Lessons for Today

The biggest problem with unemployment for Government is that it comes with a double fiscal whammy - tax receipts fall as unemployed people don't spend much money and welfare payments to those unemployed rise.

The problem for the UK Government right now is that the UK fiscal position is looking very messy already and set to get worse as the Government is looking to borrow well in excess of £100,000,000,000 - when looking at this figure it is also worth bearing in mind that it seems that almost every official estimate of how bad things are or will be has been too optimistic, probably because the economic models they use just can't respond to a Black Swan event such as the near-collapse of the banking industry.

Clearly the UK can't run such huge deficits indefinitely as ultimately they have to be financed as there is a limited appetite for UK sovereign debt - at some point investors just won't want any more at a rate of interest that can be financed by the UK taxpayer.

If it was down to me, I'd be trying to push people into the jobs that are available, even if they don't want to do them. It's unreasonable to expect the next generation to pay taxes so that you could wait for the right job to come along and the best way to do that is through the welfare system - if you don't genuinely try to work then you don't get benefits.

I'd also be looking to train people for the jobs that can't be filled, not the ones that the Government hopes will be empty when the economy recovers. There's little point in training solar power engineers for the future when the UK needs IT people now!

From looking at previous recessions we can assume that unemployment will rise for a lot longer and stay high for some time. The best that we can hope is that Government policy doesn't worsen the impact now and in the future.

*The trend growth rate is the normal level of growth a country can expect to see and is governed by many factors including investment rates, how well educated and trained the population is, how corrupt or otherwise the country is, the state of its infrastructure and lots of things like that. You get the picture I hope.


  1. Thank you Richard, very interesting and clear. :)

  2. Thanks.

    Sorry not to post here more. It's harder than you'd think!