Seasonal unemployment. Agriculture, construction and tourism are especially vulnerable to seasonal variation.
Residual unemployment. This is the hard core of people who The natural rate Economists argue that there is a natural rate of unemployment (NRU) or non-accelerating inflation rate of unemployment (NAIRU), at which the demand and supply for labour are in balance.
The natural rate
The basic premise is that an increase in demand can be translated into higher employment only up to the NAIRU, at which point employment stops growing and the increase in demand spills over into higher inflation.
5.3 Unemployment
Source: OECD
Estimates of the NAIRU are subjective and vary from country to country and over time, depending on the level of minimum wages, benefit rates, payroll taxes, unionisation and demographic factors such as the age structure of the labour force.
The cycle
There is a clear cyclical pattern in unemployment. As demand increases, companies take on more workers and unemployment decreases. When there is no more labour available (when the NAIRU is reached), demand bubbles over into inflation or imports. Strong consumer demand is less likely to be inflationary if the unemployment rate is well above the NAIRU rather than close to it. During the mid- and late 1990s, unemployment continued to decline in America and Britain below the unemployment rate previously thought to be the NAIRU, with few signs of inflationary pressure. Economists therefore think that the NAIRU declined in these two countries during the 1990s.
Longer-term trends
Unemployment in the industrial countries started to rise again in the early 1990s. It reached 7.4% of the labour force in 1995, and has since fallen back to 5.9%. The rate is higher in Europe (7.5% in 2008) than in America (7.4%), where flexible labour markets and strong economic growth have pulled unemployment down.
Hire or fire?
Where employers are most optimistic, and pessimistic
In 27 out of 36 countries surveyed by Manpower, an employment-services firm, more companies said they expected to add jobs in the three months to the end of June than said they reckoned on reducing their workforce. The difference between the proportion of hirers and firers was highest in Brazil and India. Throughout Asia companies have become more optimistic about hiring than they were a year ago, most dramatically in Singapore but only slightly in Japan. Things look less rosy in Europe. In several countries, including Spain and Ireland, more companies expect to see cuts to their workforce than expect it to grow. Of the four countries where the outlook has darkened, three are in Europe.
Employment outlook
Source: Manpowe
The Economist, March 11th 2010
The structure of unemployment helps to identify problem areas. In 2008 long-term unemployment in the euro area (those unemployed for more than 12 months) was 48% of total unemployment. However, it was lower in Japan (33%) and in America (11%).
A job to do
As countries climb out of recession, employers begin to recruit again
Recruitment in both Europe and America rose in October, according to the Monster Employment Index, which measures the strength of companies’ hiring intentions by counting online advertisements. In Europe this was the first increase since February. In America there were more openings in health care and public administration in October, but fewer retail jobs on offer. Steep declines in most of the second half of 2008 mean that the American index is still more than 20% lower than a year earlier. The picture is worse in Europe, where recruitment was more than a third lower than 12 months earlier. Recruitment continued to fall in Germany in October, but it rose substantially in Britain.
Job vacancies
*Includes 24 countries
Source: Monster Worldwide
The Economist, November 13th 2009
Other clues
The monthly change in unemployment is a good guide to economic developments. Compare the last 2–3 months with the average change in the same period of the previous year. Most figures are seasonally adjusted, but watch out for the effects of severe weather or industrial disputes.
Other figures, such as weekly claims for unemployment benefit, job advertisements for help wanted and vacancies, provide a useful backup to unemployment figures.
Regional unemployment figures provide a guide to structural unemployment since they highlight the relationship between job losses and the location of known twilight industries.
Surveys, such as of employers, also give an indication of the employment outlook.
Chapter 6
Fiscal indicators
Blessed are the young, for they shall inherit the national debt.
Herbert Hoover
Fiscal indicators are concerned with government revenue and expenditure, which are significant influences on the circular flow of incomes (see pages 42–43). Taxes and duties take money out, while spending is an injection. In any one day or year the American government spends more than any other government, company or other organisation anywhere in the world.
Fiscal activities allow governments to provide services, redistribute incomes and influence the overall level of economic activity. They are one of the government’s tools for controlling the economy. Others include monetary policy (see Chapter 12) and direct intervention and controls over wages, prices and industrial activity.
Level of government
Various problems of definition arise because of different treatment of financial transactions by central government, local authorities, publicly owned enterprises, and so on.
In an attempt to standardise, international organisations such as the OECD focus on general government, which covers central and local authorities, separate social security funds where applicable, and province or state authorities in federations such as in North America, Australia, Germany, Spain and Switzerland.
Watch out for fiscal fraud: spending can be shifted to publicly owned enterprises which are generally classified as being outside general government. Net lending to such enterprises is part of government spending, but it is not always included in headline expenditure figures.
Timing
Many governments run their accounts on a calendar-year basis. Britain, Canada and Japan have financial years which cover the 12 months to March 31st; Australia’s fiscal year runs to June 30th; and America’s ends on September 30th.
Total tax revenue
Tax revenues have risen as a share of GDP across the OECD over the past 30 years. In 2007 Denmark’s government collected nearly half its GDP as taxes, making it the most heavily taxed among all the rich countries. The Danes narrowly edged out Sweden, the previous year’s most heavily taxed country. France, Norway and Italy also have tax revenues of more than 40% of GDP. At the other end of the spectrum, America and South Korea are relatively lightly taxed, with ratios of under 30%. However they are not as lightly taxed as Mexico, where the government’s tax revenues are barely a fifth of GDP. In general Europe is the most heavily taxed region in the OECD and taxes are lowest in the Americas.
Public expenditure
Measures: Spending by the government.
Significance: Affects aggregate demand, size of the budget deficit.
Presented as: Monthly and annual totals in current prices.
Focus on: Total, trends.
Yardstick: OECD average public expenditure was 40.2% of GDP between 2000 and 2008.
Released: Monthly, at least one month in arrears.
The cycle and the automatic stabiliser
Government spending provides services including law and order, defence, education and health, roads, and so on. Such spending is an injection into the circular flow of income and has a considerable effect on aggregate demand. It is a stabilising influence to the extent that payments of welfare benefits increase when unemployment rises, which helps to maintain consumer spending.
Classification
Public spending may be classified in several different ways.
By level of government: central and local authorities, state or provincial authorities for federations, social security funds and public corporations.
By department: agriculture, defence, trade, and so on.
By function: such as environmental services, which might be provided by more than one department.
By economic category: current, capital, and so on.
Breaking down the economic effect of public spending into current and capital spending is a useful way to interpret it.
Current spending
Major categories of current spending include the following.
Pay of public-sector employees: this generally seems to rise faster than other current spending.
Other current spending: on goods and services such as stationery, medicines, uniforms, and so on.
Subsidies: on goods and services such as public housing and agricultural support.
Social security: including benefits for sickness, old age, family allowances, and so on; social assistance grants and unfunded employee welfare benefits paid by general government.
Interest on the national debt.
Interest payments reflect the size of the national debt (see page 87) and the level of interest rates. In 2008 net interest payments ranged from 4.9% of GDP in Italy to -3.8% in Norway.
Social security transfers do not directly create output and are not included when measuring GDP. Their size reflects the level of state support, demographics and the economic cycle. Payments are mostly financed by specific employers’ and employees’ contributions. Where these are passed through a separate social security budget, headline spending figures are lower. National accounting conventions also affect the figures. For example, the British government counts the working families’ tax credit, a means of support for low-paid people with children introduced in 1999, as a deduction from tax revenues. The payment it replaced, family credit, was counted as social-security expenditure. The effect of the change is to reduce the headline spending figure.
Subsidies are caught in the market price measure of GDP, but are added back in as part of the adjustment to a factor cost basis. They range from around 0.5% of GDP in America and Japan to nearly 2% in Sweden.
Other current spending on pay and other goods and services makes up the “government consumption” component of GDP on an expenditure basis. This exceeds 25% of GDP in countries such as Sweden and Denmark where many services are supplied by the government rather than the private sector.
Capital spending
Capital spending is mainly fixed investment in infrastructure and dwellings. Note that some spending is arbitrarily classified as current spending even when there is a considerable capital outlay, such as in defence. Also current spending on things such as education, industrial training, and research and development might be regarded as investment although they are never classified as such in economic figures.
This capital spending is part of investment in the expenditure measure of GDP. Public-sector investment ranges from around 2% of GDP in Britain and America to 5% in South Korea.
Patterns and targets
Monthly public spending figures are rarely seasonally adjusted, although there is often a definite pattern of spending during the fiscal year. Eliminate this by comparing the latest 2–3 months with the same period 12 months earlier, or the fiscal year to date with the same part of the previous year, but note that the smoothing effect will be smaller at the start of the year (perhaps covering only two months) than the end (when perhaps 11 months are included).
The year-to-date comparison is useful for judging spending in relation to budget projections. For example, if in the first six months of the fiscal year spending is 5% up from the previous first half and expenditure is projected to rise by 2% during the year as a whole, it is a fair bet that the government is overspending. However, watch for any erratic items which distort the seasonal pattern.
6.1 General government spending
Sources: OECD; EIU
Spending tends to rise above target if the economy grows more slowly than expected. Always ask whether government economic forecasts are realistic when looking at expenditure projections.
Prices
Monthly government spending figures are always presented in nominal money terms. Judge their influence on the real level of economic activity by deflating them. For example, if government consumption rises by 10% and inflation is 6%, the real level of such consumption is approximately 4% higher.
Choosing an appropriate deflator requires care. Table 13.1 shows that prices in the public and private sectors can increase at different rates. If public servants tolerate larger price rises than private individuals, then prices in the public sector will rise faster than in the private sector. If the public sector is facing a cash squeeze, then prices may rise more slowly in the public sector.
Quarterly and annual spending figures are available in volume terms. The consumption component can be found in GDP data, although public investment is not usually distinguished separately from private investment in the main GDP breakdowns.
Table 6.1 General government spending
Government revenues
Measures: Government receipts mainly from taxes and duties.
Significance: Affects aggregate demand; finances (partly) government spending.
Presented as: Monthly and annual totals in current prices.
Focus on: Total; trends.
Yardstick: Compare with spending (see Budget balance, page 83). OECD receipts averaged 38.0% of GDP between 1998 and 2008.
Released: Monthly, at least one month in arrears.
Overview
Government revenues are raised largely through taxes, social security contributions, fees or charges for services and some miscellaneous sources such as interest on government loans. A few governments also conduct trading activities which generate income.
For the industrial countries as a group in 2007, personal income taxes, payroll taxes (largely social security) and taxes on spending each accounted for 25–30% of the total tax take. The remaining 20% came mainly from taxes on company profits and property.
Asset sales
One other source of income is receipts from the privatisation of activities previously undertaken by the public sector. In some countries, such as Britain, the receipts are classified as “negative expenditure". Either way, they have a one-off effect on public finances which is perhaps akin to selling the family silver and should not be mistaken for an underlying improvement.
The cycle and the automatic stabiliser
In addition to financing government spending, taxes have a major effect on economic activity.
They also have an important automatic stabilising influence. The government tax take increases and helps to moderate consumer demand when more people are earning and spending more at the top of the economic cycle. Similarly, the tax take declines during recession and to some extent helps to offset falling wage incomes.
Progressive or regressive
Progressive taxes take a larger proportion of cash from the rich than from the poor, such as income tax where the marginal percentage rate of tax increases as income rises.
Proportional taxes take the same percentage of everyone’s income, wealth or expenditure, but the rich pay a larger amount in total.
Regressive taxes take more from the poor. For example, a flat-rate tax of £200, such as Britain’s controversial and short-lived poll tax, takes a greater proportion of the income of a lower-paid worker than of a higher-paid worker.
Direct or indirect
Direct taxes
These are levied directly on people or companies. They include taxes on personal and corporate income, capital gains, capital transfers, inheritances and wealth; and royalties on mineral extraction.
Direct taxes are usually charged at percentage rates; frequently they are progressive. Payroll taxes tend to be regressive if considered separately from the associated social security benefits.
As mentio
ned in the previous brief, social security payments are mostly financed by specific employers’ and employees’ contributions. Where these are passed through a separate social security budget, headline revenue figures are lower. But Denmark’s social security bill is mainly met from general taxation, which depresses the apparent level of social security revenues.
Indirect taxes
Levied on goods and services, these include the following:
Value-added tax (VAT) charged on the value added at each stage of production; this amounts to a single tax on the final sale price.
Sales and turnover taxes which may be levied on every transaction (for example, wheat, flour, bread) and cumulate as a product is made.
Customs duties on imports.
Excise duties on home-produced goods, sometimes at penal rates to discourage activities such as smoking.
Indirect taxes tend to be regressive, as poorer people spend a bigger slice of their income. They are charged at either flat or percentage rates. Flatrate duties do not rise with inflation and have to be “revalorised”, usually in the annual budget, if the government is to retain its real tax-take.
GDP at market prices includes indirect taxes, which increase selling prices and have to be subtracted as part of the adjustment to a factor cost basis (see page 38).
Monthly figures
As with spending figures, revenues are usually published monthly in nominal values. Erratic movements can be smoothed out by taking several months together. They can be converted into real terms using the same deflator that is used for public expenditure.
When comparing revenues against budget projections, remember that revenues will tend to be below expectation if the economy grows more slowly than forecast.
Guide to Economic Indicators Page 7