Because jobless figures north of the Border mirror the UK as a whole, it makes sense for an independent Scotland to keep the currency, writes David Bell
Wednesday’s unemployment statistics emphasised the current weakness of the Scottish economy. Unemployment rose by 16,000 in the three months from October to December, taking it to 231,000. After falling to a post-recession low of 204,000 in June last year, unemployment was rising quickly as the economy slowed down in the second half of 2011. Even if there is some modest recovery in output in 2012, the outlook for the jobs market will continue to be weak and unemployment is likely to rise further.
The male International Labour Office unemployment rate at the end of 2011 was 9.1 per cent, while the female rate was 8.4 per cent. Unemployment was growing much faster among males than females at the beginning of the recession in 2008. But recent figures have seen this trend reversed. Females now account for 45 per cent of total unemployment in Scotland. This share has almost returned to its peak value from 2007 and confirmed the slow upward trend in the share of females in total unemployment which has been evident since the 1990s.
Also of concern, is the fall in employment, which dropped by 20,000 in the last quarter of 2011. Since the beginning of the recession in 2008, employment in Scotland has fallen by 87,000 and unemployment has risen by 106,000. The difference between these is due to the additional 19,000 people that have joined the Scottish labour market since 2008. Many of these are young, joining the labour market for the first time. Only 35,000 of these are eligible to claim Jobseekers’ Allowance. The actual number of young unemployed now exceeds 100,000.
Around 105,000 full-time jobs were lost in the Scottish economy between 2008 and the middle of 2011. There was an increase of 15,000 temporary jobs and 45,000 part-time jobs. The overall quality of jobs has been declining. In addition, perhaps in response to the lack of available employment, there has been a small increase of 4,000 in self-employment. We do not know whether the increase in self-employment is a lifestyle choice, or due to the lack of any real alternative.
It does, however reinforce the trend that began before the recession, of increasing numbers of Scots working for themselves. The self-employed are predominantly men. Employees are evenly divided between men and women, but men comprise 70 per cent of the self-employed. Nevertheless, since 2004, the number of Scottish women setting themselves up as entrepreneurs has grown by 27 per cent, while male self-employment has only increased by a paltry 5 per cent.
Although unemployment causes significant human and social costs, unemployment rates also shed light on the constitutional change debate. The unemployment rate is the most up-to-date and reliable indicator of the extent to which economic activity is following the same, or different, paths, in Scotland and in the rest of the UK. And because the labour market operates within the same set of regulations throughout the UK, it is unlikely that factors other than economic activity affect the difference between the Scottish and rest of UK unemployment rate.
Why does this matter? If unemployment rates, and therefore economic activity, move together in Scotland and the rest of the UK, then it is much easier to design a monetary policy that will be appropriate for both Scotland and the rest of the UK. This is exactly what did not happen, for example, when Ireland joined the euro – low interest rates designed to help the German economy recover from recession propelled the Irish economy into an unsustainable and ultimately catastrophic boom. So if the Scottish and UK unemployment rates are broadly in step, then a common monetary framework might be the most suitable arrangement for an independent Scotland. In the jargon of economics, the component parts of the UK would form an “optimal currency area”. This is the basis for the argument put forward by Professor Andrew Hughes Hallett in his paper on optimal monetary arrangements for Scotland.
How does the pattern of unemployment rates in Scotland differ from those in the UK as a whole? One way to measure this is to calculate the average difference between the UK unemployment rate and the unemployment rates in the regions of England, Scotland and Wales. The figure shows these differences since the beginning of the recession in 2008. Regions like the North-East of England, the West Midlands and London have experienced unemployment rates well above the UK average. Their recession has been worse than that in the UK as a whole. In contrast, unemployment rates have been lower in the South-East and the South-West of England. They have fared better than the UK average.
And what of Scotland? The unemployment rate in Scotland has tracked the UK rate better than any other part of the UK except for the East Midlands. The average difference in unemployment rates between Scotland and the UK as a whole during the recession has been only 0.4 per cent. This is important for a number of reasons. First, it shows that policy has not driven any massive differences in labour market outcomes north of the Border since the beginning of the recession. Second, it confirms the Hughes Hallett argument that Scotland and the rest of the UK probably form an optimal currency area, and therefore reinforces the argument for keeping sterling. On the basis of these data, it is perhaps more appropriate that Scotland stays with sterling than should the North-East of England.
I have argued, as has Hughes Hallett, that if Scotland became independent and stayed with sterling, fiscal policy would have to be applied more aggressively, since an independent Scotland would not have any control of monetary policy. This would mean that the Scottish Government would have to set credible targets for debt or deficit reduction. Otherwise, the markets would likely impose a high-risk premium on Scottish debt.
But at least, as measured by unemployment rates, the Scottish economic cycle appears to be in harmony with that in the rest of the UK. If that were not the case, the difficulties of selecting an appropriate monetary framework would be even more challenging.
The contrast in rates of unemployment between Scotland and the rest of UK is insignificant compared with the differences within Scotland itself. In January this year, the claimant count unemployment rate in Aberdeenshire was 1.5 per cent, while that in West Dunbarton was 6.7 per cent. These are massive differences in the performance of the labour market between different parts of Scotland. While there is clearly an argument for directing policy towards such differences in labour market outcomes, it is unlikely that these gaps will significantly narrow until a substantial recovery is under way.
• David Bell is Professor of economics at Stirling University