Belfast Telegraph

Monday 22 December 2014

Inactive Unemployment

A perfect storm is brewing which is set to have a profound impact on NI's jobless numbers, finds Paul Gosling

Northern Ireland’s latest unemployment figures are very worrying. An extra 500 people began claiming unemployment benefit in September. The unemployment rate here is now 7.6% - up from 7.0% a year ago, though still below the UK average of 8.1%

This may see reassuring, but it is not. Northern Ireland has a vast troop of ‘hidden unemployed’. This is reflected in Northern Ireland’s unwanted position at the top of the economic inactivity league table. Some 27.0% of Northern Ireland’s working age population is economically inactive, significantly above the UK average of 23.3%.

Some economic inactivity is good – particularly the young adults investing in their future by attending university and college. Others who are economically inactive are exercising personal choices: they may have taken early retirement, or are bringing up families.

This is far from the whole story – a large proportion of the economically inactive would like to work if only they could. And in Northern Ireland, even more people are becoming economically inactive than are becoming officially unemployed: another 4,000 working age people became economically inactive in the last quarter.

But, says Richard Ramsey, chief economist of the Ulster Bank, this trend is about to reverse. In future we will see many more people who are currently classed as economically inactive move into the official unemployment figures as a result of the Government’s welfare reform programme. Ramsey predicts tens of thousands of people in Northern Ireland will transfer in the coming months.

“Economic inactivity is going to fall and unemployment rise,” suggests Ramsey, “just because of welfare reform.” The first signs of this are already apparent through the big increase in female unemployment, he says. However, the scale of economic problems and changes to lone parent entitlement are also causing more women to do small amounts of part time work, causing them to no longer be classified as economic inactive, but also not being fully reflected in the employment numbers.

It can be argued that once the reforms have been fully implemented, there will be a positive impact in the sense that Northern Ireland will have to confront the full scale of its problem of its worklessness. “You will get a more realistic unemployment rate, perhaps of around 12%, if you incorporate those who are classed as economically inactive, but who in reality are unemployed,” argues Ramsey.

Ideally, policy-makers would like to see a substantial increase in Northern Ireland’s employment rate: at the beginning of this year it was 65.8% in Northern Ireland, compared to 70.5% across the UK. If the focus was on that measure rather than on the unemployment figures, we would have a clearer idea of the dire state of Northern Ireland’s economy.

There are several reasons for the low levels of employment in Northern Ireland and these need to be properly understood if they are to be corrected. Arguably, the most important factor is skills. Some 39% of the economically inactive have no qualifications – by contrast only 15% of those who are economically active have no qualifications.

Other factors play a part. Northern Ireland has the second largest proportion of lone parent families of all UK regions – only London has a higher rate. Single parents comprise 13.3% of Northern Ireland households, compared to a UK average of 10.7%. Unsurprisingly, the employment rate for lone parents is much below that of average working age adults.

Another issue is the bigger percentage of Northern Ireland households with children than elsewhere (33.9% against an average of 27.8% across the UK).

Interestingly, men with dependent children are much more likely to be working than those without. There is much less difference for women – but there is a big variation between the proportion of women who are working and have one child and those with three or more, who are much less likely to be employed. This is another important factor, as many more families in Northern Ireland have three or more children than in the UK as a whole.

The challenge of the very high rate of economic inactivity was recognised in the UK Treasury’s recent paper that considered how to rebalance the Northern Ireland economy. However, no policy proposals were put forward on how to correct this – merely the question to be considered during consultation of to what extent “welfare reform has the potential to reduce economic inactivity and increase economic growth”.

Nor does anyone believe that there are easy solutions to the problem of economic inactivity. A report published earlier this year by Sheffield Hallam University’s Centre for Regional Economic and Social Research (CRESR) explained the deep-seated nature of the problem and suggested it will worsen.

In the pre-recession period – which might now be regarded as an economic boom – there was a sharp fall in both unemployment and economic inactivity on a UK-wide and Northern Ireland basis. The sharpest falls were in the areas with the highest claimant counts. But the recession has increased both official unemployment and economic inactivity, affecting most severely those areas, such as Northern Ireland, that traditionally have the highest levels of unemployment.

Much of that earlier rise in employment had been in the public sector. We are now undergoing a sharp fall in public sector employment, which is one of the explanations for the rise in unemployment and economic inactivity. Job losses in the public sector are intended to continue, with the obvious severe impact on Northern Ireland, which remains highly dependent on the public sector.

According to the Sheffield Hallam research, things now look bleak for those areas with traditionally high unemployment. The report concludes “there is little hope that benefit claimant rates in Britain’s weaker local economies will be reduced to acceptable levels by 2020 – at least not within the framework of present and planned policies”.

The report also concludes that there is little chance the private sector will generate sufficient jobs to reverse current unemployment and economic inactivity trends.

Christina Beatty, a principal research fellow at CRESR and a lead author of the report, shares Richard Ramsey’s view that many more people will migrate from economic inactivity to official unemployment in the coming period.

“I think it will speed up and quite rapidly,” she predicts. The relevant changes to welfare benefits include more people being classed as fit for work and more lone parents about to be regarded as available for work. The social impact of this will be compounded by the benefits of more people becoming means-tested.

“As unemployment goes up, an element of that is moving people from inactive benefits to active benefits,” explains Beatty. She believes that when all the welfare reforms are in place this will have the effect of increasing the total official unemployment figure in the UK by about a million.

This could catch many observers by surprise, she suggests.

“I am not sure people have thought this through to the final conclusion.”

The trend of increased joblessness will be further exacerbated by rises in the retirement age, which will reduce the supply of employment.

Without creating a substantial flow of new jobs, it is difficult to see how the welfare reforms will improve economic performance – particularly in a region with a weak economy, such as Northern Ireland.

Along with rising rates of unemployment, more people without work will have to either live off the earnings of a household member in work, or from their savings – until these are exhausted.

The prospect is grim.

Beatty no doubt speaks for many when she says, “I’m glad I’m not looking for a job at the moment.”

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