How sticky is unemployment? Will it take three years to fall?

The views expressed by the new Bank of England Governor, Mark Carney, on interest rates and unemployment remain a hot topic. Interest rates will not be raised until unemployment falls below 7 per cent, a process he thinks will take three years.

The perception which many people have of unemployment is indeed that it is rather sticky. Once it has risen, it takes a long time to come back down. Certainly, from a spatial dimension, the general view is correct.  The average rate of unemployment in, say, the North of England or Wales has been higher than that of the South East for many years.

The same phenomenon is observed within each of the regions of the UK. Local areas where unemployment becomes high relative to the rest of the region then seem to be stuck with their unenviable position for many years. Comparing unemployment rates at a local level over long periods of time is a fraught process, not least because local authorities are frequently reorganised, renamed and their boundaries altered. But the Office for National Statistics does have a consistent set of data over the 1990-2010 period.

So in 1990, for example, Liverpool had the highest unemployment rate in the North West. Twenty years later, it was still in top spot in this particular table. The same was true of Middlesborough in the North East, Hull in Yorkshire and Great Yarmouth in East Anglia. Elsewhere, the dubious honour of having the region’s highest unemployment rate did change over time, but not by much. In the West Midlands, Birmingham and Wolverhampton simply swapped the number one and two positions between 1990 and 2010. Even in the South East the rankings were pretty static. Hastings had the seventh highest rate in 1990s and was top in 2010. The Isle of Wight fell from first to third.

But when we look at unemployment over time, a completely different picture emerges. Unemployment is now 7.8 per cent, and the Governor thinks it might come down to 7 per cent in three years’ time, a difference, obviously, of 0.8 percentage points. Of course, it might not fall at all, but the evidence for real momentum in the economy is growing rapidly.

Once unemployment does start to come down, what does history tell us? Going right back to the late 19th century, there are 40 separate instances of unemployment falling by 0.8 per cent. In 32 of these, it took just a single year to accomplish.  In another seven, it took two years. The only instance, in well over a century, of unemployment taking three years to be reduced by 0.8 percentage points is 1984-87.

Of course, the economy is not governed by physical laws which are fixed for all time, and history can be misleading. All we can say is that it would be very unusual, but not entirely unprecedented, for a 0.8 per cent drop in unemployment to take three years. A betting person would have to say that the odds were against.

Paul Ormerod

As published in City Am on Wednesday 21st August 2013

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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.