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Ian Brinkley
Economic Advisor
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Ian Brinkley

What does a "Full Employment" unemployment rate look like?

Authors: Ian Brinkley

02 April 2014

The Chancellor’s welcome but unexpected commitment to full employment as an economic objective continues to provoke debate about the comparators chosen and how we should measure it.  The Chancellor defined full employment in terms of an internationally comparable employment rate.  However, many people think about full employment as a very low rate of unemployment and ask what such a rate might be. The obvious starting point is to look at historic experience between 1950 and 1973 when the economy was by general consensus at full employment. Unfortunately, the way we measure unemployment has changed and there is no fully consistent series of statistics covering the whole period to the present day. 

I have taken the claimant count statistics as originally published for the period between 1950 and 1970, drawing on a helpful article on historic unemployment rates published by the ONS in the now defunct Labour Market Trends. The average claimant unemployment rate was just under 2 per cent. This is shown in the chart below by the dark blue line.

However, the claimant count is not a fully representative measure of unemployment because many people who do not claim unemployment benefits are still actively seeking work, and this would also have been true in the period 1950 to 1970. The better measure is the ILO unemployment rate which includes all active jobseekers regardless of whether they claim benefit or not. However, we do not have ILO estimates before 1971.

We can however make a rough guess by comparing the claimant count unemployment rate with the ILO rate between 1971 and 2013. The claimant count rate over this period averaged just over 5 per cent – the red line in the chart below - and the ILO rate averaged just over 7 per cent – the green line in the chart below. This gives us a 2 percentage point difference. If this held true before 1970, we might expect an ILO “full employment” rate to have been about 4 per cent. This is shown in the horizontal orange line in the chart.

 

View full size size chart.

There is, however, a caveat. The measure of claimant count unemployment after 1971 is not consistent with that shown before 1971. It is based on current eligibility and over time the criteria to claim benefits have become more restrictive. Other changes in the labour market have also increased the number of people counted by the ILO measure. After 1995 the gap between the claimant count measure and the ILO measure has widened and we may therefore be slightly overstating what the gap would have been between claimant count and ILO measures in the 1950s and 1960s.

If around 4 per cent ILO unemployment is about right for the UK to be at full employment, we can see from the dark green line that we were not that far from this goal between 2000 and 2005. A number of other OECD economies had also achieved very low ILO unemployment rates in this period. The OBR is currently forecasting that ILO unemployment will fall to 5.4 per cent by 2018 – shown in the dotted green line on the chart.

It would not be a huge stretch to return to the low point previously achieved before the financial crash. Taking that forecast rate down to 4 per cent would be more challenging. We do not know whether wage inflation, currently non-existent, would return with a vengeance and there are other formidable structural problems around labour market exclusion, skills, and regional imbalances that stand in the way. The economy could run out of steam after 2015 or be knocked off course by another house price boom, energy price shock, or financial crash.  But it is certainly possible that within the next decade we will have returned to a labour market at full employment in a way that policy makers of the 1950s and 1960s would have readily recognised.