On Friday, the Office for National Statistics raised its estimate of the economy’s growth in the fourth quarter of last year from 0.1% to 0.3%. This is, of course, good news, but the most interesting growth question at the moment is not “Are we up or are we down?” but “How likely is it that the economy will expand enough in 2010 to prevent big rises in unemployment?” Unfortunately, there is no reason to think anything more than “unlikely.”
Since the recession started many firms have asked their employees to work fewer hours or take pay cuts. This bargain has been underpinned by employers hoping that demand for their goods and services would pick-up again, and that their staff needed to take the partial and temporary hit of a poorer job in order to avoid the big hit of not having any job.
In the jargon, someone who is working but wants to do more hours is “underemployed”. There will always be people who want to work more, but there has been a big rise in their number recently. In the year to the third quarter of 2009, 605,000 extra people declared that they were underemployed when the Office for National Statistics asked them about their job status. It is this group that is under threat from growth not being good enough to keep them in work.
This is worrying, not least because many of them will have to claim unemployment benefits when they do fall out of work. As a Policy Exchange report out this week will show, they will fall into a welfare-induced poverty trap that can make working look like a bad idea. Some claimants will, when they see how their benefits are withdrawn when they move into work, realise that they are likely to end up working for less than £1 per hour. Would you work for that?
Lawrence Kay is a Research Fellow in the Policy Exchange Economics Unit. “Escaping the Poverty Trap: How to Help People on Benefits in to Work” will be out this week.
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