How to unpick the apparent paradox of falling GDP and rising unemployment

GDP estimates are eagerly awaited in the City, and dominate the media headlines.  Huge significance is attached to arithmetically trivial differences, whether between market expectations and the announced figure, or to subsequent revisions to the data.

But GDP is not something which can be put in a set of scales, say, and measured accurately.  The concept is clear.  It is the value of national output at market prices.  Market prices?  How do we value the public sector, where there are no market prices?  A series of plausible conventions has evolved as to how to value such activities.  But there is a substantial amount of arbitrary judgment involved.

Even in the market sector of the economy, a vast array of disparate data and estimates have to be taken into account.  Measuring GDP is as much an art as a science.  National Accounts: Sources and Methods tells us that the potential margin of error around any single estimate is plus or minus 1 per cent.  A whole per cent!  So revisions of 0.1 or 0.2 per cent are scarcely worth commenting on.

This inherent uncertainty of measurement may offer a clue to a paradox which is receiving a lot of current attention.  Employment has been rising in the recent past, and is now effectively back to its pre-recession peak level.  In contrast, GDP remains nearly 5 per cent below its previous high point.  This contrasts dramatically with the UK’s last big recession, a non-financial one, that of the early 1980s.  When output regained its pre-recession level, employment was 9 per cent below its previous peak.

We have been here before.  Not in any of the post-war recessions, when each time employment fell more than output.  But to the time of the last financial crisis, in the early 1930s.  Then, as now, the percentage drop in employment was less than that in output.

The output of the financial services sector is notoriously difficult to estimate.  As an excellent but little noticed article in the Bank of England Quarterly Bulletin last autumn notes drily: ‘Users should not have unreasonably high expectations of some of the proxy measures that have to be used to estimate output in the sector’.

In other words, even the Bank has not got much of a clue as to what has been happening to output in financial services.  The key point here is that output per worker in this sector is exceptionally high.  Even a big fall in output does not have much of an impact on jobs.

Is this what has really been going on?  The falls in GDP are broadly correct.  But the ONS has got the balance wrong.  Financial sector output is down sharply, and the rest of the economy is not doing too badly.  This would help explain why employment has held up much better than expected in the financial crises of both the 1930s and now.

by Paul Ormerod

As published in City AM on Wednesday 22nd August 2012

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.