IFS seeks explanations for low unemployment

1st February 2013

The Institute for Fiscal Studies has been grappling with one of the biggest mysteries of the financial and economic crisis.

The think tank is seeking explanations to why we have experienced two recessions and, at best, a lukewarm recovery while unemployment has remained relatively low hovering around two and a half million. The direst predictions were that unemployment would get close to or surpass four million.

However as the Guardian reports, the IFS’s conclusions are not all that comfortable for the public or indeed for politicians because it includes a fall in productivity.

IFS research economist Wenchao Jin says: "The fall in labour productivity seems to have been driven by low real wages and low firm investment. Productivity slowdown has happened right across the economy. They have not been driven by a change in the composition of the economy nor by a change in the composition of the workforce."

The IFS says that wages are not increasing for a host of reasons including pension and benefit reforms as well as the lower level of economic activity. The good news is that the difficult economic outlook has not led to 1980s or even 1990s style mass redundancies – the bad news is that the British consumer is not going to ride to the rescue of the economy any time soon.

Perhaps even more worrying is that fact that business investment is down 16 per cent though once again this is hardly surprising as we know that many firms have been ‘hoarding’ cash for some time until the general economic outlook improves.

At Mindful Money, we think the fact that there has been no big rise in unemployment has let the Coalition off the hook at least a little when it comes to explaining the poor performance of the economy.

For many people, we are not talking about poverty, just a general feeling of being less well off.

It also suggests that the Labour opposition was on to something when they started talking about the 'squeezed middle'. But perhaps they were a little too early.

To put it another way, people are used to putting up with financial pain for a while. That is almost accepted as an economic reality. It is something altogether different, if they believe they are experiencing a fall in living standards lasting for a decade or more.

This applies to pensioners as much as to those who are working. If people begin to realise that they are permanently poorer, then household incomes are surely going to become a very big political and economic issue. 

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