UK underemployment and economic recovery

In my last post,
(, I pointed out that US employment growth was still pretty weak and was concentrated in low-paid sectors and part-time work or casual (so-called zero hours) contracts., while long-term unemployment remained at record highs. This week, the UK unemployment figures for August were released and were heralded by the Conservative-led coalition government as yet another sign that the UK economy was now starting to establish a significant and sustained recovery.  UK unemployment is now below 2.5 million and the headline unemployment rate fell to 7.7%, for the first time below the level at which the coalition took office in 2010. Employment is at record levels, although this is mainly due to an increasing workforce (immigration being a big factor here).

But beneath these headline figures, the story is not so rosy (see Russell Lynch, Evening Standard, 12 September).  If you add part-time workers who want full-time jobs plus those in temporary positions who want permanent work to the officially unemployed, the UK, as well as the number of economically inactive people who say they want work but are not seeking it (if they were, they would be classed as unemployed), then the UK has an under-employment rate of 21%, slightly higher than the 20.8% seen when the coalition government took office and well above the 15.8% seen at the start of the recession in 2008.  The number of part-time workers unable to find full-time work is up nearly 400,000 in the past three years. The number of temporary workers looking for permanent roles is up 100,000.  And, as in the US, there are huge numbers of long-term unemployed.  There are 891,000 out of work for 12 months or more between May and July, 36.1% of total unemployed, close to its highest level since 1997.  And youth unemployment has risen by more than 30,000 to 960,000 while long-term youth employment is up by a third to 277,000.


As a result of this underemployment, average real wages (after inflation) in the UK have taken the biggest plunge since the 1920s, according to the Bank of England.

UK real wages

So the statements of Osborne that the economy has moved “out of intensive care” and is “turning the corner” are really so much poppycock.   Take the latest data on UK industrial output.  It was completely flat in July, while as exports to non-EU countries (the key area for export growth) fell by over 16%, the largest monthly decline since January 2009.  Nevertheless, Osborne now claims that the government’s apparent sticking to fiscal austerity and government spending cuts despite opposition from Keynesians and others has proved to be right.  “In my view the last few months have decisively ended this controversy. Those in favour of a Plan B have lost the argument,” he said.“The pace of fiscal consolidation has not changed, government spending cuts have continued as planned and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.”

Osborne refers to ‘economic indicators’ of business opinion, like PMIs (see my last post), but not to actual activity,  He can hardly crow that a pick-up in real GDP of just 0.6% last quarter constitutes a boom and a vindication of austerity.   Indeed, as Michael Burke points out in an excellent post (, the UK economy has expanded by just 1.8% in the three years of the government’s austerity programme, less than one-quarter of previous trend growth.  I would add, that even if we take out the fall in North Sea oil and gas production, the average annual growth rate in the UK over the past four years has been just 1.3%. That compares with the credit and property-fuelled annual growth of 3.3% in the decade before the financial crash and a longer-term trend growth rate of around 2.5%.  The overall UK economy is still 3.3% below its 2008 peak, some five years on.

Ironically, as Burke exposes, real GDP growth to date is entirely a function of increased government spending!  Total government current spending barely changed from the time the coalition took office to the end of 2011.  However, from the 4th quarter of 2011 to the 2nd quarter of 2013, government current spending rose by an annualised £15.1bn. while the rise in aggregate GDP over the same period was just £14.8bn. So the rise in government spending accounted for the entire expansion over the same period (as investment and net exports contracted).

As I (and Michael Burke) have argued before
(, the slump of 2008-9 was driven by a collapse in capitalist investment and until there are signs that this is rising sufficiently to contribute to GDP growth, capitalism in the US and the UK cannot really be  considered to moving back to growth rates seen before the Great Recession.  And that is not happening.  Even worse, as Burke points out, what the UK government (like the Obama administration) has slashed is public sector investment, which just compounds the collapse in capitalist sector.

In my view, investment is driven by profits, and in particular, the profitability of new investment in UK industry and services, as opposed to buying up financial assets or investing abroad.  And here lies a conundrum: if profits are up so much (at least in the US), why is investment not rising as well?  It is a question that I have dealt with before in this blog.  I shall return to it in the next post.

10 thoughts on “UK underemployment and economic recovery

  1. There’s no direct correlation between profitability and levels of investment. Investment as a proportion of national income was highest in 1980 – the depths of the profit crisis. Capitalists sought to replace expensive labour with machines, and machines were expensive due to low productivity.
    At the moment investment may be relatively low as wages are down and its cheaper to hire flexible, low paid, workers than buy machines. Machines are cheap as productivity is high.

  2. The answer as to why companies do not invest when they are making large profits is in part given by Andrew Kliman in his book. He writes,

    “Companies’ decisions about how much output to produce are based on projections of demand for the output. Since technical progress does not affect demand – buyers care about the characteristics of products, not the processes used to produce them – it will not cause companies to increase their levels of output, all else being equal.” (Note 4, Page 16, The Failure Of Capitalist Production)

    In a period such as the one we are in now, where as your data amply demonstrates consumers incomes are constrained – let alone all the debt they have to deleverage – it is fairly clear that such companies will not invest in additional capacity, just because they are making large profits on their existing capacity.

    The same is true where those companies are Department 1 producers. For example, this was a quote from a trade magazine for the copper industry.

    “As a result of booming demand, operating profits in the copper industry have grown dramatically – operating margins up from 8% in 2001 to 38% in 2005. So why does copper supply not increase faster, as the industry clearly has plenty of cash to invest? To answer this question, we need to look at the basic economics behind investment decisions in the copper industry. Much of the added value in production of copper arises in the mining stage: only 25% of added value is in smelting / refining but the rest is in extraction and processing of copper ore. Thus the key supply constraint is the limited number of mines. When copper demand was lower, there was a surplus of production capacity and additional supply could be added simply by increasing throughput from existing mines. But supply cannot be increased indefinitely without additional copper production capacity, i.e. new mines. Despite the prevailing very high level of copper prices, copper supply from mines has not risen as fast as might be expected.

    Copper Industry Investors Look at Long Term Prices

    The economic theory is that when prices rise due to higher demand, supply will increase as it becomes possible to operate marginally economic mines at a profit due to the higher prices. The problem in practice is that copper is supplied from facilities that require huge investment in the mine and supporting infrastructure, and a major investment decision is required. A short-term rise in copper prices – even when sustained over several months – does not necessarily change industry investors’ perceptions of the long-term copper price. Mining companies will not invest in a project unless their expectations of long-term prices are at a level where the project becomes attractive.”

    Trends In Copper

    Actually, besides the goosing of the property market with cheap credit and the right to buy votes scam, the current upturn in the UK, as well as in the US and elsewhere, is almost certainly just the normal 3 year cycle in operation. In fact, austerity has probably delayed the uptick slightly. The bad news for Osborne et al is that the same cycle will cause a downturn again in mid 2014.

    More significant is the continued drop in Apple’s profit margins, its slowing rate of innovation, along with the increasing numbers of firms seeking additional capital from banks, to the Twitter IPO, to the $50 billion Bond issue by Verizon, and so on. More Capital being demanded, the profit rate starting to fall meaning less money-capital supplied = higher interest rates, collapse of the bond bubble, collapse of the inflated property markets, and exposure of banks as bust because of the exposure of their balance sheets to that property debt.

  3. Of course there are, and have been periods when companies do invest when they are making large profits– one such example being the US between 1993 and 2000– in the telecom and transportation and in the semiconductor fabrication businesses for example.

    And there are periods when investment does not go hand in hand with large profits, as, again in the US, the recovery from the 2001-2002 recession.

    There is no direct, immediate, linear correspondence between investment and profitability– there are trends and there is phasing of profits and investment, but the devil’s in the details here; in the determinants of profitability, and not in some determined fixed association between investment and profits.

    1. That’s right. As Bill says, post-war US investment/GDP was highest in the late 70s and early 80s, during the depths of the crisis in profitability. A critique of of the Keynesian approach – investment driving profits – does not mean we just have to reverse the causal relationship. Profitability can rise for a host of reasons and the defining characteristic of the current period is cost cutting by capitalists via real wages and austerity.

      1. That’s right, and as Marx sets out in Capital, one reason that capital may invest more when profit rates are lower is precisely because a lower rate of profit means more capital has to be invested to achieve a given rise in the volume of profits, or to achieve a given level of growth.

        Moreover, as both Marx and Engels point out the analysis of crisis in most of Capital relates to the situation facing the “many capitals” of the period during which most of that analysis was conducted. They make the point that once you get to the stage of joint stock companies, let alone giant corporations, the increase in the mass of profit becomes more significant than the actual rate of profit.

        Again, Engels in describing the period of boom that ran more or less from the mid 1840’s to the 1860’s, points out that although huge amounts of surplus value were used up in setting in motion productive-capital, building new factories, tenanting empty factories, buying new and additional machines etc. the amount of surplus value was so vast that it could not all be absorbed in this way. It resulted in an excess supply of money-capital over the demand for money-capital, which caused interest rates to fall, just as the same huge growth in the rate and volume of profit since the 1980’s has provided the capital to develop entirely new, massive economies in China and Asia, as well as for the creation of entirely new massive industries such as that in technology, and yet was so large that it caused the same excess supply of money-capital that has caused the 30 year secular fall in interest rates.

        In the 1840’s it led to speculation such as the Railway Mania, in the last 30 years it has led to speculation in shares and property. But, if you read Volume II of Capital in particular, you will see that this huge volume of money does not represent “overproduction” of capital. Money only becomes capital when it is used to buy productive capital, just as a machine only becomes capital when it is used capitalistically, and labour-power only becomes capital when it is use to produce surplus-value.

        Outside those conditions, money is just money, a machine is just a machine, and labour-power is just labour-power. Surplus value converted to money is not capital for example when it is used to buy champagne for the capitalist. Yet, as Marx says, once the surplus value is converted into money one use by the other capitalist is as valid as the other. Capital can only be overproduced when it actually is capital, i.e. when it is employed capitalistically to self-expand, i.e. create surplus value, but is unable to do so either because it is not possible to create surplus value given the costs of production, or else because the surplus value created cannot be realised. In the first case an over accumulation of productive-capital, in the latter an overproduction of commodity-capital.

        There is no indication that at a general level apart from the usual fluctuations of demand and supply, and the business cycle, that either of these conditions exist. On the contrary, firms continue to make huge profits across the globe.

  4. Dear mr. Roberts!
    Let me introduce myself first:
    My name is Branko Gerlič, 64, living in Slovenia (former Jugoslavija). If membership in the jugoslav kommunist party can be accepted as beeing “marxist”, I am. Or a part of it.
    Than I have to apologize myself for my English, especially not knowing all the terms, used in the matters You write about (and this is, of course, a reason for not understanding everything You write.

    First about the jugoslav system of selfgovernance:
    Jugoslavija used to be, since 1966, smthng between, not orthodox kommunist nor capitalistic.
    There were a large range of mistakes, but I personally think, that in case, that this system would get a chance to develop for further 50 or, may be 100 years it could became a very good system.
    But we decided that this is a too long period and we choose to became a part of the capitalistic world – now knowing, what this really means!

    And now about “underemployment” you wrote in at least two of your last blogs:

    In first place we all have to understand, that the rising ways of beeing partly employed and partly unemployed are a fact, which will never return back to the times of so called full employment.
    In Slovenia this would be happenenig even if we stayed in a socialistic system (as we called our system), may be a little slower, but in the same direction.
    In the report for 2009 our department for employment wrote:
    “workers, working just a part time (less than 8 hours a day) make 10% of all employed – and the aim is, to rise their percentage to 15% at least” (my translation, so the words are not exact).

    (Bundesagentur fuer Arbeit, wrote in january 2012 that the percentage of part time employed in Germany are not (concernig? smthng You have to worry about?) jet, but is rising.
    On the other hand, what really makes me thinking, is the rising part of so called “leiharbeit” – it describes a way of employment where people are employed with a contract in one enterprise, but working in an other, being “borrowed”, in first place immigrants from other countries, but (in Germany as in Slovenia) the Germans and Slovenians as well.
    In Germany this way of “employment” rised twentyseven times since 1980 – 33.000 in december 1980 up to 910.000 (or 3% of all employed) in june 2011.
    How many people are working under such unsecure conditions in Slovenia I don’t know. Either we do not follow them or I didn’t found the data.

    So, from the same source (Bundesagentur fuer Arbeit, jan. 2012) are the salaries they get: while the median of all salaries in Germany is €2702 bruto per month, the lended workers had a median of 1419€ bruto.
    Or, in a special group of qualificated workers of the more or less same kind: the regular employed earn 2750€ bruto while the “borrowed ones” had to be satisfied with 1528€ bruto. And having the same job about just three (3!) month.

    From an Institute from Duisburg (IAQ) are the data that the unemployment rate should be rised for 2 million young people at least – because this is an aproximate number of young people which are forsed to join educational programmes, beeing out of the statistics in this time.

    What I want to say?
    That “underemployment” is a fact and it will be stronger and stronger. This means that we all have to find completely new ways as for production as for the redistribution of the national incomes – worldwide.
    (I am working in group, searching for such ways and, if You are interested, I can describe some of this solutions. They are risky, but the risks are acceptable).


    I agree with Marx’s definition that the “new value” can be brought only by work of people.
    But I think, that a new theory must be created – there is a lot of work in more or less all societies, which is unpaid, but brings a very large input in the societies incomes. It should be possible to find a way to follow this work by statistical means!

    And, on the other hand, I am questioning about the “profit”, earned by pure financial transactions.
    I do not understand, where the profit came from? In my oppinion someone who makes profit in such a way can get get only by the loss of another one. I don’t see any new value which could be made in this “pure financial transactions”.

    I apologize for being personal, but I didn’t found another way to get in contact with You

    Branko Gerlič

  5. There is an interesting comment from Marx on investment and the demand for money-capital relative to the rate of profit.

    “The increased demand for money-capital had its origin in the course of the productive process itself. But whatever may have been the cause, it was the demand for money-capital which made the interest rate, the value of money-capital, climb. If Overstone means to say that the value of money-capital rose because it rose, then it is tautology. But if, by “value of capital,” he means a rise in the rate of profit as the cause of the rise in the rate of interest, we shall immediately see that this is wrong. The demand for money-capital, and consequently the “value of capital,” may rise even though the profit may decrease; as soon as the relative supply of money-capital shrinks, its “value” increases.”

    Marx here also makes the point that as the value of productive-capital falls, so the value of money-capital rises by the same amount.

  6. “Marx here also makes the point that as the value of productive-capital falls, so the value of money-capital rises by the same amount.”

    Can you give a concrete example of this in the recent (post 1973) movement of capitalism?

    Seems to me if the rate of interest is made equivalent to the “value of money-capital” then the value of productive capital and the rate of interest are neither counter-cyclical to each other nor always in corresponsence.

  7. There are two different points here one relating to the rate of interest as the value of money-capital, and the other relating to the value of money-capital. Marx is using the term in two different ways.

    In relation to the former he is using the term “value of money-capital” to mean the price that has to be paid for its use. That moves up and down with the demand and supply for it. As the rate and volume of profit rises, so the supply of money-capital rises. As he points out, at certain points when economic activity is strong, this supply of available money-capital means firms can supply their needs internally, without resort to bank lending. Interest rates are low for that reason, and because excess supply weighs on the market for those firms that do need to borrow.

    I’d argue the fact that we have seen huge capital formation in China, and Asia together with the development of huge new industries in the last 30 years in developed economies themselves, shows the supply of money-capital was high, generated by this high rate and volume of profit during that time. The others idle of it was that even after that capital accumulation, huge money hoards sat on corporate balance sheets, and as sovereign wealth funds. That pushed global interest rates down for 30 years.

    However, as Marx says, interest rates can be low, though when profit rates are low too, because after a recession there is caution and reluctance to borrow. Similarly, at the height of a crisis there can be high interest rates because capitals in trouble need to borrow to stay afloat, there may be cash hoarding out of fear.

    The second use of the term “value of money-capital” however, refers to it in the same way as the value of any other commodity i.e. its relative value. Here the point is tautologically true. Money-capital buys productive-capital. If the value of productive-capital rises, money-capital exchanges for less of it, or stated different, the value of the money-capital falls in inverse proportion to the rise in the value of the productive capital, and vice versa.

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