For both the newly appointed Governor of the Bank of England and the Chairwomen of the US Federal Reserve, Mark Carney and Janet Yellen respectively, the level of unemployment has been targeted as an indicator for increasing interest rates. It is encouraging that the unemployment rates have been dropping in both countries but for different reasons.
The flow chart below show that the US unemployment has dropped mainly because of the fact that people are leaving the workforce. Whilst across the Atlantic the UK’s fall in unemployment is more to do with conventional growth. However the US economy has experienced some significant growth which hasn’t feed through into more positive employment figures. On the contrary the UK economy has had weak growth but it has had little impact on employment figures. The Economist stated the following:
This divergence is commonly explained with nods to Britain’s “productivity puzzle”. America, the thinking goes, suffered a “normal” recession. Its low rate of inflation is symptomatic of weak demand, which can account for its output loss and much of the shortfall in jobs. In Britain, in contrast, tumbling demand has been matched by a strange decline in workers’ productivity. Falling productivity cushioned the economy against large job losses, since more workers were needed to do the same amount of work. But it also reflected a loss of productive capacity, the evidence for which was stubbornly high inflation. Since late 2007 annual inflation in Britain has been almost twice as high as in America, at 3.1% to 1.8%.