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Analysis

UK and US unemployment

by Gabriel Stein

Mon 27 Jan 2014

UK and US unemployment Enlarge Chart loading Image

What the chart shows: The chart shows unemployment as a % of the labour force.

Why the chart is important: The Federal Reserve pioneered unemployment-related forward guidance in late 2012, promising to keep interest rates low at least until the rate of unemployment fell below 6.5%. The Bank of England followed in the summer of 2013 with a similar promise related to a 7% unemployment rate. While the Fed did not set a time when it thought the 6.5% rate would be reached, the implication was some time in 2015. The Bank of England was more explicit, saying that unemployment would not reach 7% until 2016. Both central banks have proven unduly pessimistic. The US unemployment rate fell to 6.7% in December 2013; that of the UK probably reached or even breached 7% in the same month. While there is an argument about the underlying reasons for the faster fall in unemployment (stronger economic activity, a falling labour force participation rate), these developments highlight the risks for a central bank to tie monetary policy to a variable beyond its control, which in addition, is a lagging indicator. Expect clarifications and changes to or of target from both central banks in coming months.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com