Unemployment mystery: not so mysterious...

Published on 12 August 2009

How fast is unemployment rising? Recently, the number of people claiming unemployment benefits has been rising at a slower rate than the numbers unemployed on a broader measure. The Government has announced an investigation into this apparent discrepancy. But is there really any discrepancy at all?

Today's unemployment statistics showed an increase of 220,000 in the three months to June 2009, using the widely watched International Labour Organisation (ILO) measure of unemployment. Meanwhile, the number of people claiming unemployment benefits has risen more slowly, with the latest figures showing an increase of just 25,000 from June to July, following increases of 22,000 in June, 31,000 in May and 50,000 in April. Earlier this week, the Government announced an inquiry into the discrepancy between the two series for unemployment. But is there really a discrepancy?

We should bear in mind that the two series measure different things - the claimant count (as the name suggests) measures the number of people claiming unemployment benefits, while the wider ILO measure counts the number of people looking for work, regardless of whether or not they are claiming benefits. The ILO measure therefore tends to show higher levels of unemployment than the claimant count - but what about changes in the two series as we enter the recession? Should we expect the two measures increase by the same amount?

First of all, we must make sure that we are comparing like with like. The claimant count figure is a month-on-month increase (from June to July), while the ILO numbers give the increase from quarter to quarter (Q1 to Q2 2009). The 'latest' increases therefore cover different time periods, with the claimant count also slightly more up to date (as it includes July 2009, where the ILO measure only extends to June).

In order to compare the claimant count figures with the ILO measure of unemployment, we have a constructed a three-month rolling average for the claimant count. The graph below then shows the increase on the previous quarter for each of these series.

As we already knew, the latest ILO figures show an increase of 220,000 on the previous quarter. Defined on the same basis, the claimant count figures show an increase of 167,000. This is lower than the ILO numbers, but the discrepancy is certainly not as big as the initial numbers suggested.

Looking at the period as a whole, since Q1 2008 (just before the UK recession started), we calculate that the ILO measure of unemployment has increased by a total of 810,000. The claimant count has increased by 740,000. Put like this, there seems to be no mystery: the claimant count has increased by slightly less, but this is understandable, as some who are unemployed on the ILO measure choose not to claim unemployment benefits or are not entitled to them.

If anything, a case could be made that it is the ILO measure that is increasing slower than one might have expected. Before the recession began, for every two people unemployed on the ILO measure, one was claiming unemployment benefits, yet the two measures of unemployment have increased by very similar magnitudes, and the ratio has fallen to about 1.5 to 1.

The two measures have also increased sharply at different times. The ILO measure rose faster than the claimant count in mid-2008. They both then tick up following the financial crisis of autumn 2008, but the claimant count 'catches up' - rising faster than the ILO measure throughout late-2008 and early-2009. More recently, we seem to be seeing another period in which the ILO measure is accelerating away from the claimant count. But that really only leads us to expect the claimant count to play 'catch up' again in the autumn, as some of these newly unemployed people start claiming benefits - though both series will hopefully slow as the recession eases.

Therefore, there appears to be no mystery, the mismatch just leads us to expect the claimant count to increase faster than the ILO measure ('catching up' somewhat) in the future. It is also an important lesson in not placing too much emphasis on one or two months' worth of data.