Is low unemployment a bad thing?

Andy Thomas, Investment Director Greater Manchester Loan Fund 

The Office for National Statistics released their latest job statistics this week. They show a continued drop in unemployment, which is now tracking at 6.4% , the lowest level since late 2008 at the peak of the Credit Crunch. More locally we’ve seen similar positive indications, with the Greater Manchester Business Survey by New Economy indicating 25% of local employers are expecting to increase their workforce over the year. And our own Greater Manchester Loan Fund will shortly surpass 250 jobs safeguarded and created, well ahead of schedule.

But as encouraging as these job figures undoubtedly are, does there come a point where unemployment can be too low? Or to take it to the extreme case, is no unemployment a good thing?

Well it depends on what sort of unemployment is persisting. Consulting an economics textbook tells us there are 3 types:

Firstly, cyclical unemployment occurs as a result of the economic cycle. It falls as the economy expands, and vice-versa, linked to the ebbs and flows in the demand for the underlying product or service. Achieving zero cyclical unemployment would be a good thing, but it would need the economy to eliminate the so called ‘boom and bust’ cycle. This would be desirable, but in all likelihood, impossible - we all know what happened the last time we thought that had gone.
The position with the other two types of unemployment isn’t so clear.

Frictional unemployment describes the period when people are ‘between jobs’. It takes time for people to identify a new job or move to a new location and for employers to go through the recruitment process. Sometimes workers may not rush to find a new job in order to spend some time with the family, but it all adds to the jobless numbers. So for the individual, frictional unemployment can be a good thing, and for the economy it’s a necessary thing to enable to right labour to be matched with the right buyer.

Finally, structural unemployment is a result of a mismatch in the skills demanded by employers and the skills available in the labour force. Typically technology causes shifts in demand for skills: being computer literate is typically a must-have skill now, and those who aren’t can struggle to find work notwithstanding other skills they may have.

Structural unemployment is, regrettably for the people involved, a necessity. If this type of unemployment was zero, it could only be due to a lack of technological improvement, which would be more catastrophic. Workers that lit gas street lights in the early 20th century became unemployed when electric street lights were introduced, but overall the invention of electricity was clearly a good thing.

For every industry that suffers as a result of technological improvement, there is another that benefits, so jobs lost through structural unemployment in one sector or area can be replaced with those created elsewhere. The key is to make sure that those businesses that have the potential to grow have everything they need in place to enable them to do so, a key component of which is the right funding structure.

Hopefully that’s where the Greater Manchester Loan Fun comes in. We obviously can’t eliminate unemployment – and for the reasons outlined above, you wouldn’t want this to be achieved – but we can do our small bit to ensure that local businesses that can grow and increase their workforce have the finance in place to enable them to do so.