Financial crisis to leave ‘permanent scar’ on unemployment, warns NIESR

Financial crisis to leave ‘permanent scar’ on unemployment, warns NIESR

Unemployment will be permanently higher than its pre-recession level once the economy is back to full strength due to the ‘scar’ left by the financial crisis, the National Institute of Economic & Social Research has warned.

Structural unemployment will settle at 6.2%, the respected think-tank said, compared with 5.25% before the crisis.  An increase of that size would put 300,000 more people permanently on the dole.

“This is a permanent scar caused by the financial crisis, as the economy has shifted to a lower equilibrium,” Simon Kirby, NIESR’s UK economist, said.  A country’s structural unemployment level is its “full employment” rate – when the number of jobless cannot shrink further without forcing inflation above target.

NIESR’s estimate follows an even worse picture from the International Monetary Fund (IMF), which has estimated that Britain's structural unemployment level has risen to 6.8%.  At that level, the UK would have 2m permanently unemployed.

Despite the bleak outlook, NIESR reckons unemployment will peak at just 8.3pc next year – lower than its April forecast for 8.7pc as companies continue to “hoard” labour rather than slash jobs.  The figure is well short of the 10% experienced in the last two recessions.  Official statistics currently have unemployment at 7.7%, or 2.45m.

Despite its improved labour forecast, NIESR downgraded expected UK growth this year from 1.4% to 1.3% and left 2012 unchanged at 2% – still “below the trend rate”, Mr Kirby said.  It will not be until 2013 that “the recovery takes hold”.

This article was originally featured on

Thursday, 4 August 2011

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