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OECD says ET was right about UK unemployment

by afew Sun Oct 23rd, 2005 at 02:37:00 PM EST

Over the past few months on European Tribune, we have several times taken a hard look at UK unemployment figures. Not because we enjoy UK-bashing, but because the conventional wisdom that underlies practically all economic reporting and commentary informs us ceaselessly that :

  • at 4%-5% unemployment, the UK enjoys full employment;
  • this is due to a "flexible" labour market.

What did we reply to this? We pointed out here and here that job creation in the UK over the past decade has depended fairly heavily on a Keynesian spending spree that has seen the creation of 861,000 public-sector jobs. This fact, that doesn't bring much support to the "flexibility" explanation for the low unemployment rate, has somehow flown under the media radar. Thanks to European Tribune -- and thanks very particularly to Jérôme -- it became rather more visible, making it to the WSJ editorial page.


The other point we have made is that the official UK unemployment rate is understated because a large number (relative to other countries) of people of working age are inactive.

It would appear that far more people of working age in Britain suffer from long-term sickness or disability than in the Eurozone.  This study (pdf) from researchers at Sheffield Hallam University, estimates the diversion from unemployment to sickness benefit may be as high as 3.2% of the working-age population (August 2003).

Well now. Perhaps we were nitpicking about the metrics instead of facing the truth and getting over it and moving on and all that sort of thing the right keeps telling us we need to do.

Except that here's some serious nitpicking from the OECD in their recent (12th October) report, Economic Survey of the United Kingdom 2005:

Seven per cent of the 25-54 year old men are now inactive outside the labour market, many more than three decades ago. Solid growth since the late 1990s has brought down unemployment but not inactivity, with 2½ million currently claiming incapacity benefit.

("Solid growth" plus public-sector job creation, they should have said, but we'll let them off that bit).

Inactivity because of illness or disability
As a percentage of population in each age group, 2003

(Click to enlarge)

The graph-and-stats junkies among you (you too, Izzy), will have picked out the OECD mean in the middle of each set, and noticed that "failing" France and Deutschland are consistently below that average. The really kewl kids in the klass may already be pondering the fact that a number of countries that are often cited as examples of economic success and a labour market licked into shape (apart from GBR and the US, anyone for Austria, Denmark, Finland, Ireland?), figure above the average.

What does this mean? That in France and Germany, for example, benefits for the long-term unemployed are sufficient for them not to try (in desperation) to get the doctor to sign them off sick or disabled (qualifying them for other benefits). In Britain, with a "neoliberal" unemployment benefit system, the long-term unemployed in the former industrial regions go massively on the sick dole -- and are no longer counted as "unemployed". Incapacity Benefit acts as a sink for the long-term unemployed in areas outside the tight labour market of London and the South-East, and it doesn't show in the unemployment rate.

The OECD report goes on to describe the British government pilot scheme, Pathways to Work, designed to help unemployed people on Incapacity Benefit find a job (pilot scheme which is due to be progressively rolled out throughout the country). OK. But what is clear is that the government recognizes that a significant number of inactive people have been diverted from the unemployment numbers to the sick and disabled numbers, and knows that the 3.2% estimate for this diversion by Beatty and Fothergill in the Sheffield Hallam University study quoted above is by no means exaggerated and that the true percentage of unemployment in the UK is not 4.6% but probably between 7% and 8%.

Have we heard this anywhere? Just one example of how we haven't: the OECD report came out on October 12th. The next day, the 13th, Gordon Brown published his pamphlet showing how "old" Europe was lagging behind the winners, those who had understood what globalization was all about and had, you know, flexible labour markets.

The UK unemployment number cited by Brown? 4.6%, you bet.

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Fascinating stuff... Thanks afew.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Oct 23rd, 2005 at 02:56:16 PM EST
I received the following error message when I clicked on your reference to the Sheffield report:
File not found ...

Sorry - the file you just tried to load doesn't exist on the Sheffield Hallam University web server.
If you typed the address yourself please check that you typed correctly.

If you have come from a link on someone else's page please contact them and ask them to correct their link.

by wchurchill on Sun Oct 23rd, 2005 at 03:04:18 PM EST
Sorry about that. I used the link that was working when I first posted on the subject. Probably it's no longer on the server. I have a copy which I could email to you. (Email me if you'd like me to do that).

But I'll try to hunt it down on Internet, obviously.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 03:17:33 PM EST
[ Parent ]
The Sheffield Hallam U site Google gives the same URL as I put up for this, but the file isn't there. They may have put it into their publications for sale list.

Here is a link to a Bloomberg article about the study.

Anyone who'd like a copy of the study, email me.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 03:37:15 PM EST
[ Parent ]
And if you're up for it, here's a page from the UK Parliament's Select Committee on Work and Pensions on the entire subject. If you scroll down to paragraph 11, they discuss the Beatty/Fothergill study favourably.

My point is, of course, that the fact of this displacement of the long-term unemployed is well-known in government circles. It's just so handy to ignore it when you want to use unemployment figures to point to weaknesses in other countries' economies.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 04:05:39 PM EST
[ Parent ]
Found it. You can download the study (pdf file) from this address.
by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 04:19:39 PM EST
[ Parent ]
thank you for your persistence in uncovering this.

It's pretty long and will take me a while to get through it, so perhaps over the next few days I'll develop a different view on the following comment, as I learn more.

The workings of the benefits system may seem a long way removed from the
measurement of unemployment. The point is however that for many of the longerterm
jobless who have health problems, the differential in benefit payments creates
an incentive to claim IB rather than JSA. For example, an unemployed man with a
wife in work and perhaps a small pension from a previous employer will not generally
be entitled to means-tested JSA.
In essence, his wife's earnings and his pension
reduce or eliminate his JSA entitlement. But if he has sufficient health problems, and
if he has enough NI credits (which most men with a work history do have), he will be
eligible to claim Incapacity Benefit irrespective of his wife's earnings or in most
circumstances of his pension as well.

5
The gatekeepers determining access to Incapacity Benefit are medical practitioners -
initially the claimant's own GP but for claims beyond six months doctors working on
behalf of the Benefits Agency. To qualify for IB a person must be deemed not fit
enough to work. In practice, however, the tests applied by the Benefits Agency
assess ability to undertake certain basic physical tasks rather than inability to do all
kinds of work in all circumstances. Many unemployed people have picked up injuries
over the course of their working life, and there is the effect on health and physical
abilities of simply getting older.
In practice, therefore, many of the unemployed with
health problems are able to claim IB rather than JSA. As IB claimants they are not
required to sign-on fortnightly or to look for work. Instead they will typically be
recalled for medical re-assessment only once every two or three years.

The diversion onto Incapacity Benefit distorts both official measures of UK
unemployment.
 Maybe it's the cynic in me, but I have a brother-in-law who would have loved this.  Particularly with the following:
Also, although Incapacity Benefit payments start at almost the same rate as JSA they increase after six months and
again after twelve months
It seems they get a couple of raises.

So if I'm a 50 year old bloke with a back injury incurred at work, maybe playing golf, and i have some bad luck and get laid off my job, would not I find it kind of tempting to look at this as an option.  Back cases are notoriously difficult to diagnose, and understand.  And my back really has given me some problems over the years--just not enough to quit.  But now i see that I can get my company pension (? could you do that in the UK,,,you can in the US, and it's been a while since I lived there, but I think you could), get my Incapacity Benefits, get my wife's salary,,,,maybe do a few odd jobs under the table on the side?  Or maybe like my brother in law, get a clean up job at the local, and when you're not cleaning up just have a few pints.  Sounds like a pretty good early retirement.  And of course it would be even more tempting if jobs in the area really were a little hard to come by.  Most people when they retire find their work related expenses were more than they realized, so his spending probably goes down as well, to offset the shortfall from his job income to this type of income.

What do you think?  And as I said, I'll keep reading to see if they've dug into this,,,but we've had problems in the US with the previous welfare program and some of the state's current disability programs.

by wchurchill on Sun Oct 23rd, 2005 at 06:24:57 PM EST
[ Parent ]
I think the report simply explains the mechanics of how people may slide from one category to the other. How fraudulent their intentions are is immaterial for the purposes of comparison between countries, unless we postulate that some nationalities have a greater inbuilt bias towards fraud than others, and I doubt we could prove that...

My point is to say that (irrespective of how and why it happens) the UK has significant numbers of long-term unemployed on the sick list, and that this throws doubt on the generally-admitted unemployment rate. Secondly, that this is well-known and well-documented, yet the media keep on running with the wrong ball.

Just a further point touching on your edifying tale of the 50-year-old bloke. The regions of the UK where Incapacity Benefit numbers are high are depressed formerly industrial areas where low-skilled workers have been left high and dry (from the point of view of new job offers). No doubt there are some who claim benefit and do odd jobs on the black -- following their strict and simple economic interest. The only thing that's on offer for them is to move to where the jobs are. The jobs in the UK are in London and its region. But high rents and house prices make it impossible to move there for people of modest means. These are not smart guys gaming the system, they are victims of brutal industrial closures. And no, they're not out there playing golf.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 02:46:44 AM EST
[ Parent ]
I once had a little booklet called "statistics without tears" that helped me to overcome my fear of statistics. But reading your post brings back the tears on seeing how statistics are used once more for lying. Well, we can only say, thank you to all the number wizzards here on ET who help the statistically challenged like me to see what the numbers really mean.
by Fran (fran at eurotrib dot com) on Sun Oct 23rd, 2005 at 03:09:50 PM EST
I wish I were a numbers wizard! But, anyway, you don't have to be a wizard to understand this. There are differences in the way countries handle unemploymant benefits and sickness benefits that lead to some people being in the sickness category who might just as well be in the unemployment category.

What I'm objecting to is the use of unemployment numbers as proof of who are supposed to be the winners and who are supposed to be the losers. And the nonstop echoing of this by the media.

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 03:43:58 PM EST
[ Parent ]
Did you realize how the Scandinavian countries are generally at the top of the list in every age and sex category?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Oct 23rd, 2005 at 03:56:46 PM EST
[ Parent ]
Yep. You'd have to be a specialist on the exact structure of each country's benefit systems to explain it, and I don't have anything like that omniscience.

Though I have read suggestions that the long winters and lack of light in Nordic countries lead to depression and other disorders. Does that have anything to do with it? Can anyone shed (cough cough) light on this?

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 23rd, 2005 at 04:10:19 PM EST
[ Parent ]
Yikes!  You gave me quite a turn, afew!  I suddenly felt like I did in 10th grade geometry when I'd realize the room was silent and -- the teacher was looking right at me!

"...?  Would you care to enlighten the class, Izzy, or are we disturbing your reading/conversation/nap?"  

<shudder>

But apart from the flashback, this is a seriously good post, afew!  The graphs a pretty, too. ;-)

Maybe we can eventually make language a complete impediment to understanding. -Hobbes

by Izzy (izzy at eurotrib dot com) on Sun Oct 23rd, 2005 at 04:57:36 PM EST
...happy times...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Oct 23rd, 2005 at 05:01:34 PM EST
[ Parent ]
Heh heh! Well, I was playing around with the teacher and class metaphor there, partly in self-derision, because I'd be the one the teacher had made to sit in the front row to keep an eye on him and make him work...

Sorry I gave you the shudders, though :-)

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 02:00:14 AM EST
[ Parent ]
the downloaded Sheffield report and the Bloomberg writer's commentary certainly do make the point that the buckets each country collect their data in vary from each other.  And I would agree that this is an issue, and it's very likely a good portion of this "incapacity benefit" group should be added to the UK numbers.  

i did also note in an above longer post that there may be the potential for a "welfare fraud" (that the US and some others have had over the years), as it appears for certain people this IB benefit could be a pretty good deal.  However, as I noted above, I'm still reading the article, and perhaps this is addressed deeper in the piece.

by wchurchill on Sun Oct 23rd, 2005 at 06:30:19 PM EST
What's going to happen when "Airmiles" finds out about all these lazy Brits?

Another "Emily Latella Moment"?

Nevermind!

by TGeraghty on Sun Oct 23rd, 2005 at 07:52:43 PM EST
Where did you get that pic of me up in front of the class????

Maybe I should change my sig to "If it's not one thing it's another". Makes sense.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 02:17:05 AM EST
[ Parent ]
It's also very strange how high the USA is on labor market "inactivity" - higher than OECD averages in almost every category.

More disguised unemployment? Without the generous European benefits, of course.

by TGeraghty on Sun Oct 23rd, 2005 at 07:56:14 PM EST
TG, I was looking for that diary with that data and graphs, but couldn't find it.  I was trying to recall how the UK compared to the overall averages.  Do you know where it's available?  thanks.
by wchurchill on Mon Oct 24th, 2005 at 01:04:44 AM EST
[ Parent ]
Which diary? And which data, graphs, and averages are you referring to?
by TGeraghty on Mon Oct 24th, 2005 at 02:18:14 AM EST
[ Parent ]
your comment " how high the USA is on labor market "inactivity" - higher than OECD averages in almost every category." reminded me of the charts/data I was looking for.  I thought based on your wording we were thinking along the same vein.  I think the data compares the working population to either total population, or working age population.  It's a different way of looking at this, stripping away all of the different buckets countries sometimes put the unemployed in for statistical purposes.  Our previous conversations had focused on the group of people that had just given up looking for jobs.

I should be able to find this myself, but I have not been successful.

by wchurchill on Mon Oct 24th, 2005 at 01:05:57 PM EST
[ Parent ]
"for statistical purposes" actually means "for obfuscation purposes".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Oct 24th, 2005 at 01:40:10 PM EST
[ Parent ]
Well, you have to try and work out why people aren't working: in an economy that was doing well and lots of people get rich, people might stop working earlier because they have enough to be comfortable on.

Being inactive isn't necessarily a bad thing.

Here's the real point: comparing unemployment rates across economies is at best difficult, at worst wilful bullshit.

by Colman (colman at eurotrib.com) on Mon Oct 24th, 2005 at 03:23:53 PM EST
[ Parent ]
Yes, but without specialist knowledge of what the statistics are based on, I prefer (other than an aside) not to draw any conclusions. Since it's the OECD, I imagine they're pretty much comparing apples to apples, but, as you say, there are countries with benefit systems and countries without.

It is intriguing, though, to note that some countries generally cited as examples of economic "success" have above-average numbers of people inactive for reasons of sickness and disability, while countries currently cited as basket cases (France and Germany yet again) have far fewer.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 02:09:28 AM EST
[ Parent ]
Since it's the OECD, I imagine they're pretty much comparing apples to apples, but, as you say, there are countries with benefit systems and countries without.

Or vaguely round fruit with other vaguely round fruit, depending on national definitions of fruit.

by Colman (colman at eurotrib.com) on Mon Oct 24th, 2005 at 04:24:21 AM EST
[ Parent ]
is a red round fruit, isn't it?

Oh no, wait, it's a vegetable... But damn useful when you have statistics about round fruity stuff...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 24th, 2005 at 05:25:38 AM EST
[ Parent ]
TG, what in fact is your take on this, on Sweden, in particular? (Since I see this excellent comment of yours on Sweden's active labour market policy.)
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 11:56:30 AM EST
[ Parent ]
In this week's Economist:


Welfare reform is one of those areas in which Mr Blair now wishes he had gone further and faster, and he is relying on Mr Blunkett to make up for some of the lost time. Next month's green paper is meant to show how the government intends to deal with something it has discussed for years, but not done much about--the scandal of an incapacity-benefit (IB) system that perversely incentivises recipients to remove themselves permanently from the labour market.

According to some estimates, little more than a third of the 2.7m who receive the benefit have medical conditions so severe that work of any kind is beyond them. There are 160,000 recipients under 25--a 60% increase since Labour came to office in 1997. The proportion of the working-age population in Britain on IB is more than double the number that receive similar benefits in comparable European countries.




In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 24th, 2005 at 09:27:41 AM EST
Well, this is further confirmation. But the scandal, imo, is that the UK will go on being cited as a successful full-employment country. The journalists won't be pointing their fingers at Bliar, Brown, and the pundits and spinners. We can already see where the fingers are pointing...
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 24th, 2005 at 11:10:32 AM EST
[ Parent ]


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