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Friday, September 25, 1998 Published at 11:56 GMT 12:56 UK

Business: The Economy

Why unemployment has to rise

Unemployment can only go one way, and that's up

Not a week goes by these days without another company with UK operations announcing hundreds, if not thousands of job losses.

Rover, Siemens, Fujitsu, Shell, Barclays, the list seems to be never ending.

But this is only the beginning.

A combination of government policy and a slowdown in the UK economy means that dole queues will get much longer.

[ image: Nailing down inflation is the government's priority]
Nailing down inflation is the government's priority
A sharp rise in unemployment appears inevitable.

Wage worries

During recent years, unemployment did fall steadily. This prompted a leap in wages.

With fewer people chasing more vacancies, workers have been able to command higher salaries.

With the economy growing strongly and company profits gaining momentum, employees have also received big bonuses.

Earnings have been rising at a rate of around 5% a year, raising concerns that the economy may overheat.

Price problems

The government has set an annual inflation target of 2.5%, or in other words it wants a gradual rise in prices to ensure stable economic growth.

But the government has washed its hands of the responsibility of achieving this target.

It has given the Bank of England, the UK's central bank, the power to set interest rates to achieve the goal.

This was a move designed to take the politics out of setting the level of interest rates.

But the sharp rise in earnings, coming in well above the inflation target, has fuelled concerns at the Bank of England that the rise in prices could run out of control.

Hence they have hiked interest rates in an attempt to dampen down the economy and the labour market.

The implication is that the Bank of England recognises that, however painful, unemployment has to rise for the government to hit its inflation target. And the bank is determined to reach this goal.

Shock treatment

Rising interest rates have already had a devastating effect on the UK's manufacturing industry.

Higher rates have helped stimulate a rise in the value of the pound.

That has made British goods relatively more expensive overseas, hitting export orders.

Imported goods are also cheaper, adding to manufacturers woes.

Companies have been forced to lay off workers as profits have dived.

And foreign firms that have invested in the UK have been forced to think again, with the rising pound increasing production costs.

Economic slowdown

After years of prosperity the UK economy is also heading for a marked slowdown.

The growing global economic crisis combined with higher interest rates is taking its toll.

And retailers are under pressure as High Street spending slows, with consumers becoming more cautious.

As companies get squeezed further, more job losses will be announced.

Job lot

Arguments have focused on whether or not interest rates have peaked.

But in terms of job losses that is missing the point.

[ image: More job losses are inevitable]
More job losses are inevitable
The Bank of England is only likely to lower rates if it feels that inflationary pressures have subsided.

That could come from an expected slowdown in the UK economy, if for example the global financial crisis worsens. Or there could be an easing of wage pressures.

Either way that implies a rise in unemployment.

Figure it out

Officially, unemployment is still declining.

Figures released in early September showed that unemployment had fallen to less than 1.8m, an 18-year low.

The unemployment rate has slipped to just over 6%.

But economists believe this low level of unemployment is unsustainable without increasing pressure on wages.

[ image: Bank of England holds keys to the economy]
Bank of England holds keys to the economy
To put the figures in context, nearly 3m people were unemployed at the peak of the last recession in the early 1990s, and the unemployment rate topped 10%.

At the moment nobody is suggesting that we will return to this sort of level in the near future.

The UK appears to be heading for a milder recession than last time.

But however much the UK government wants to avoid the boom and bust cycles of the past, hundreds of thousand of workers are likely to lose their jobs by the new Millennium.

After all that is what the Bank of England's policy will lead to.

The alternative, of course, would be inflation followed by even steeper interest rates which crippled the UK economy in the early 90s.

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