Tuesday, 31 July 2012

Unemployment in Iceland

Two weeks ago, the Minister of Economy, Business and Industry (yes, he's all three!) Mr. Steingrimur J. Sigfusson wrote an article with the headline (translated) "Unemployment dropping fast". The reason: registered unemployment in Iceland had dropped down to 4.8%. That's pretty fine for an economy whose banking system collapsed in less than a week four years ago! Well done guys!

Not so fast! Sorry, but I'm constantly the pessimistic guy digging a bit deeper than just repeating what the headline data told us.

OK, so three weeks ago the registered unemployment rate in Iceland registered at 4.8%. That was the data for June. This column graph is copy-pasted from the monthly report by Directorate of Labour. "Atvinnuleysi" is "unemployment" in Icelandic. Click to enlarge.

The DoL data is based on how many people receive unemployment benefits. That can be pretty limited if a) the rules regarding unemployment benefits do not apply to those who want the benefits, b) there are people who have given up on looking for a job and left the labour market and e.g. went studying, c) people have left the country or d) people want to work more but cannot because there isn't a job available.

Another data source for unemployment is the data bank of Statistics Iceland. The monthly data there tell a bit different story than the ones from the DoL. They are after all better, yet not truly adequately, defined than data from the DoL. Important definitions by the Statistics Iceland include:

Employed. People are classified as working (employed) if they worked one hour or more in the reference week or were absent from the work they usually carry out. Individuals on birth leave are considered absent from work if they went on leave from a paid job, even if they have no intentions of returning to the same job.

Unemployment. Persons are classified as unemployed who have no employment and satisfy one of the following criteria:
1. Have been seeking work for the previous four weeks and are ready to start working within two weeks from when the survey is conducted
2. Have found a job which will begin within three months but could start working within two weeks. (Until 2002 the criterion was that it sufficed for the job to start within four weeks without it being investigated whether the person involved could begin within two weeks.)
3. Await being called to work and are able to start working within two weeks
4. Have given up seeking work but wish to work and could start working within two weeks.
Students, including those looking for an apprenticeship in a trade, are only considered unemployed if they have been seeking a job along with their studies or a permanent job for the past four weeks and are available to start work within two weeks of the surveys occurrence.

Outside the work force. People are termed outside the work force if they are neither employed nor fulfil the conditions for being unemployed. The labour force is considered to consist of employed and unemployed persons.

The graph below shows the unemployment according to the Statistics Iceland data. The data has been smoothed with a 12 month moving average. 

OK, so unemployment is coming down. But is that enough?

No, it isn't. What counts must be the total hours worked in the economy. And that dropped like a stone in the crash and isn't coming back up, at least not seriously.

Total weekly worked hours in the Icelandic economy. Although unemployment is slowly coming down, total worked hours isn't steaming upwards.

We can use these data on total worked hours and divide them on the total number of people in working age and the total labour force.

Total worked hours has dropped significantly as previous graph showed, down to 2004 levels. But since the labour and man force have grown since 2004, the average working hours per individual in the workforce has taken a considerable dive. And on the bottom it stays.

Suddenly, the 4.8% unemployment according to the unemployment benefits estimate isn't that impressive anymore. Weekly worked hours per individual in the labour force is damn stagnant and has in fact dropped significantly after the October 2008 crash and stayed down. Realise that if weekly worked hours drop by around 4.6 hours, as they have done, the total monthly worked hours drop by around 19.8 hours.

Give yourself that the average person earns perhaps 10-15 pounds per hour (2000 - 3000 ISK or so) and the total lost monthly wage income is around 200-300 pounds. That's around 38,000 - 57,000 ISK per month if the pound is 190 krona.

So what happened? Why is the unemployment coming down?
We can see on the two first graphs above that the unemployment, even according to the Statistic Iceland methodology, is coming down. Yet, the total worked hours per person is lingering at levels that can hardly be present in an economy that is returning from a bust. So what happened?

Emigration happened. And despair about getting a job, resulting in a huge number of people outside the labour force, happened.

First, emigration was quite noticeable after the collapse. Droves of people, both immigrated travel workers that moved to Iceland during the boom years and Icelanders, left the country. Of course, they are then neither registered as unemployed nor are they in the man or labour force. That drives down the rate of unemployment. Many of those people left simply because they couldn't get a job.

Immigrated minus emigrated people, in thousands. After the collapse in 2008, a noticeable part of the workforce has simply left the country. That has had positive impact on the data on unemployment.

Second, people lost hope. They simply left the labour market. Both the University of Reykjavik and University of Iceland said that record number of new students had been admitted into the universities. One can only speculate how many of those people got back in the classroom because they couldn't find anything else to do.

This actually shows in the data. A record number of people have left the labour force, simply because they cannot find anything to do. There are no jobs around, they lose hope about getting a job, stop looking and they are therefore unregistered from the labour force according to the Statistics Iceland methodology. And people outside the labour force are not unemployed according to the data - although in reality they may well be!

When the collapse in 2008 happened, the trend of people leaving the labour force had been going on for around a year already. After the October 2008 collapse, the trend has been all but upwards. At the same time, record number of people have registered themselves in tertiary education, quite likely because they have nothing else to do. 

Checking the number of people outside the labour force as a percentage of the total man force does not make much difference.

The lack of employment has pushed record number of people out of the labour market, no matter if one looks at the number itself or the ratio of labour force leavers to total man force. 

So I'm very very sorry. Although measured unemployment is coming down, the main reasons for it are not increased employment or increased number of employment opportunities - that would show itself in increased number of worked hours per individual in the labour force - but people giving up on looking for a job. They leave the labour force either by educating themselves or by leaving the country. Of those active in the labour force, the average income is in the meanwhile perhaps 200-300 pounds lower than it was in 2008.

Unemployment in Iceland is not 4.8%. That's lies, damned lies and statistics.

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