Unemployment is cited as a lagging indicator in the economy, in that it tends to follow on from a downturn. This is still true as unemployment is set to rise in the UK from its current level of around 7.2 per cent to just over 9 per cent (or 3 million people) in 2010.
In this recession, unemployment has also been a leading indicator, in that rising unemployment totals in the US, and then Europe, were starting to become apparent at the onset of the credit crunch and financial crisis. This was pointed out by the outgoing external member of the Bank of England’s Monetary Policy Committee, Professor Danny Blanchflower of Dartmouth College in the US. If his and other warning voices had been heeded, then interest rates would have been cut more sharply and some of the worst of aspects of the recession avoided, with the obvious consequences for SMEs under stress.
There are, however, more long term structural forces at play. The West Midlands is the industrial heartland of the UK in which 1 in 4 are employed in manufacturing. Many of the SMEs in this activity are part of global supply chains and are thus subject to monopsony power of their customers (the ability of large firms to dictate prices to smaller firm who supply them), for example the car industry. Despite the claims that we live in a web-based knowledge economy, many of these firms seem anachronistic in appearing to be a throw back to earlier times. They often produce low margin products in large bulk, using traditional production techniques on machines whose best days are behind them.
The rapid and sharp decline in world trade in the last quarter of 2008 and first quarter of 2009, created significant difficulties for which they had no strategic response. This is reminiscent of the British film Chance of a Lifetime, made in 1950, which portrays a group of angry workers, who in protesting about their wage and working conditions at a plough factory are allowed to take over the operation themselves.
It isn’t long before they realise that you can’t run a business on idealism and goodwill, as a large export order fails and the patrician factory owner returns and comes to the rescue. The only current patrician in town is the government but despite the very large bail-out of the financial system, direct aid in the form of wage subsidies to sustain employment during these difficult times is not on the agenda. This was a proposal made by Danny Blanchflower, but like many of his insights and suggestions, policy makers have ignored them.
Rising unemployment in manufacturing is not just the price of defeating deflation, it is the price of lower demand for goods and services; less direct and indirect incomes in the locale and beyond; postponed or cancelled investment; less sustained knowledge and innovation; and very importantly in a UK context, skills.
In an economy that has been termed one operating in a ‘low wage – low skills equilibrium’ this is the crucial factor. In exercising his divine right, King Cash may be in a comfortable counting house, but perhaps we need a new republic in which the government creates financial institutions to underwrite our industrial and manufacturing base. Without this base we all may be asked to eat cake by a latter day Marie-Antoinette.
*Dr Leslie Budd is reader in social enterprise at the Open University Business School in the Centre for Public Leadership and Social Enterprise (PULSE), and a member of the cross-faculty research centre.