Unemployment hits 10-year high, but numbers in work seem unchanged – what is going on?

Unemployment hit 5.1 per cent in October – the highest rate for a decade, excluding coronavirus lockdowns – according to the latest figures from the Office for National Statistics.

At the same time, the employment rate was unchanged from a year ago, at 74.9 per cent.

One way of resolving the apparent contradiction is that the ONS estimates that 21 per cent of the working-age population is economically inactive – that is, students, people on incapacity benefit, and others not looking for work. This figure has fallen from 21.8 per cent a year ago, but this only throws up another puzzle, given recent coverage of the rising number of young people who are Neets: not in education, employment or training.

The government is so worried about them that Alan Milburn, the former cabinet minister who is also advising Wes Streeting on NHS reform, has been appointed to review “soaring” rates of unemployment for young people. The unemployment rate for young people aged 16 to 24 is three times higher than that for workers of all ages, at 15.3 per cent in September, up from 14.8 per cent from the year before.

Ministers may be guilty of exaggeration in using the word “soaring” in the official announcement of Milburn’s appointment. Most of the changes in labour market figures since the new government took office 17 months ago have been small, although many of the trends are in the wrong direction.

There is a specific problem within the Neets category of the rising number claiming long-term sickness benefits for mental health problems.

It is true that 5.1 per cent unemployment is not high, historically. The figure bumped up above that during the pandemic but it was around 8 per cent as recently as 2012, declining gradually to 4 per cent just before lockdown.

But there are many reasons for pessimism about the future, which is why Milburn’s appointment might be a sensible move, politically, so that the government can claim to be doing something about the state of the labour market, for young people especially.

One problem is the uncertainty of statistics from one of the ONS’s main sources. Today’s figures come with a health warning: “Because of increased volatility of Labour Force Survey estimates, resulting from smaller achieved sample sizes, estimates of change should be treated with additional caution.”

The Resolution Foundation, a think tank specialising in labour market research, has been working on its own estimates and on Monday published its work suggesting that the employment rate has in fact been falling for the past two years, contrary to the ONS picture.

The gloomiest omen for the future is the combination of two things. One is that unemployment is a lagging indicator: it takes time for economic pressures, either job-creating or job-destroying, to work themselves through into the official statistics. The other is that the rise in employers’ national insurance contributions took effect in April, which was only eight months ago.

That increase – in a levy that Rachel Reeves herself once described as a “jobs tax” – is still working its way through the economy. One of its worst features was the reduction in the threshold at which employers start to pay it, down from wages of £9,100 to £5,000 a year – meaning that it is disproportionately a tax rise on young people’s and low earners’ jobs.

Perhaps Milburn’s review could start by looking at the effect of that tax rise on top of the politically driven increase in the minimum wage which is also making it more and more expensive to hire young people in starter jobs.