- Chris Melvin is Chief Executive of Reed in Partnership. Any views expressed are his own -

The latest employment figures from the Government today confirm analyst predictions that despite the number of people claiming Jobseekers Allowance beginning to level out, pay is down and the number of people recently out of work has increased.

In a climate such as this, with an ongoing influx of the newly unemployed into the market, it’s vital that we maintain help for the long-term unemployed to ensure they are not left behind, with an increased focus on getting them back into work.

There is a danger that people on benefits who have been out of work for some time, could end up being ‘parked’ in favour of those who are closer to the labour market and considered more ‘work ready’. We need to make a concerted effort to ensure that support services, such as re-skilling, confidence-building and training courses are widely available to the long-term unemployed so that when the economy does improve, this group of people will be in a good position to move into work.

A recent report from our ‘Keep Britain Working’ campaign called Meeting the People Challenge showed that when the upturn comes, employers will be looking to replace the staff they have made redundant, and also taking on more skilled staff once recovery begins. This shows a need to maintain the re-skilling and, more importantly, the up-skilling of the long-term unemployed to ensure we are not left with a huge skills gap once more jobs become available again.

The untapped potential of the long-term unemployed is too often overlooked, especially during an economic downturn. This is compounded by the influx of white-collar workers entering the job market for the first time, after finding themselves the victims of mass redundancies.

This group is up against a different set of challenges to those faced by the long-term unemployed. Many professionals have been working in their chosen industry for many years and find themselves stranded when jobs are no longer available in their sector. They are frequently pigeon-holed as their CVs and skills are often specific to their profession and are less transferrable to other industries.

Our experience suggests that this group can become disillusioned by the job market as they are inexperienced with modern recruitment and assessment methods. They also have limited knowledge of what other types of work might be available to them. However, we have found that with the right guidance and support, many are able to retrain and find work in other industries such as the retail, care and hospitality sectors.

For both white-collar workers and the long-term unemployed, the priority is moving them back into sustainable employment as quickly as possible. There needs to be a policy balance between getting the newly unemployed back into the labour market, whilst also providing the intensive support required to help the long-term unemployed move off benefits and back into employment.

-Tony McAleavy is the Director of Education at CfBT Education Trust. The opinions expressed are his own.-

In response to fears that 16 and 17 year olds were the forgotten victims of the recession, the government announced an extra 72,000 school, college and apprenticeship places from this month. If all the places are taken up, non-participation might dip from 14 percent to around 10 percent. And yet, as many as 100,000 16 and 17 year olds currently in employment (with or without training) would still be at risk from the recession.

This isn’t the first time youth unemployment has seen a worrying bulge. Since the early 1970s, policymakers have tried 34 different schemes - from the Training Opportunities Programme launched in 1972, to the Youth Training Scheme of the 1980s.

So what worked, what didn’t and have we learned anything from the millions spent about what actually gets young people off benefits and into work or full-time education? Our study of past schemes highlights ways forward for dealing with a very current problem.

The context, of course, has changed. In the 1980s, the majority of 16- to 17 year-olds were in work of some kind, with just 39 percent in full-time education in 1987. This figure had risen to 73 percent by 2007. Currently, participation in full-time education falls by around 11 percent between the ages of 16 and 17. Faced with limited job opportunities, the choice for many 17 year olds is between remaining in education or unemployment. Many will, hopefully, stay on in full or part-time education. But some might reject both unless labour market interventions can increase the number of jobs with training, and especially jobs with Apprenticeships.

The research shows that financial incentives for employers haven’t worked – they will employ young people if they need them, no financial reward or otherwise. In a minority of cases, employers used financial incentives to replace existing full-time staff with cheaper alternatives. The main problem has been that wages in youth schemes have been too low compared with market rates. Employers saw themselves being perceived as “mean”, and young people were turned off the whole idea.

Also, the training provided by employers has sometimes been poor (for example, in one study, 90 percent of employers said they’d provided training, only 70 percent of those recruits thought they had actually received any). At the same time, employer thinking is important, and those schemes based on consultation with employers in the design stage were found to be more successful.

Financial payments to young people in general are inevitably a working incentive. Historically, there was a split between allowances paid at 16 and 17. This principle has been forgotten in current financial support policy. Policy makers need to consider a higher rate of financial support to encourage 17 year olds either to stay on in full-time education or enter unwaged training such as programme-led apprenticeships.

The most effective programmes included a level of personalization. One-to-one support from individual mentors works, as do individual plans with incremental targets which build confidence and allow progress to be monitored. National programmes need flexibility to meet different local needs and participants’ expectations need to be managed – inaccurate information and unrealistic expectations have previously been the root cause of disillusionment and dropping out.

Lessons from History: Increasing the number of 16 and 17 year olds in education and training is available to download from www.cfbt.com

President Barack Obama's decision to impose safeguard tariffs on imported tyres from China has drawn predictable howls of outrage from economists, think tank staff and editorial writers -- none of whom has seen their job exported to China. It would be more constructive if they devoted the same effort to devising ways to compensate losers from globalisation in order to shore up waning public support for trade liberalisation.
Between 2000 and 2008, almost 4 million jobs were lost in U.S. manufacturing (22 percent of the total), many as the result of offshoring and increasing competition from lower-cost manufacturers in China and elsewhere in Asia.

Over the same period, the federal government provided just $1 billion per year in extended unemployment benefits and retraining under the Trade Adjustment Assistance (TAA) programme. In the fiscal year ending September 2008, TAA helped fewer than 100,000 workers who had lost jobs as a result of changing trade patterns.

No one questions the strong theoretical argument in favour of free trade over protectionism.

The problem is the highly uneven incidence of costs and benefits from the policy. Benefits tend to be distributed fairly widely among consumers in the form of cheaper prices. Costs are concentrated among those workers and households that lose income and jobs as the result of competition from lower-cost and more efficient producers abroad.

In theory, beneficiaries could compensate the losers, and everyone would still end up better off (free trade is "Pareto optimal" in the literature) through a system of taxes and transfers. In practice such compensation almost never happens. Politicians and proponents of trade liberalisation pay lip-service to the need to soften the impact on affected industries and households, but practical help has been limited.

All too often, once workers in affected industries are laid off, they cease to be treated as "victims" of trade liberalisation entitled to compensation. Instead they join the faceless ranks of the unemployed expected to find new employment as quickly as possible to minimise the burden on other taxpayers. Worse, when the federal government needs to find spending cuts to balance the budget, TAA funding has often been frozen or cut back.

There is something particularly callous in the way that many free-traders have turned their backs on workers affected by trade liberalisation -- as if they were victims of impersonal historical forces rather than deliberate policy choices.

TRADE BECOMES TOXIC
Many of the worst affected industries are clustered in the old industrial centres of the upper Midwest and the Mid-Atlantic, so the costs of liberalisation have fallen disproportionately by particular states and communities, raising the issue's salience, especially within the Democratic Party.

While free-traders extol the textbook benefits of liberalisation, practical political support among voters and their elected representatives has shrivelled.

In 1994, with Democrats controlling the House of Representatives (256-177) President Bill Clinton had to rely on Republican votes (121) to secure passage of the legislation implementing the Uruguay Round as a third of House Democrats rebelled and voted "no" (89). Scepticism about the costs of free trade has only grown in the intervening years within both major parties, and become intense over the last twelve months as job losses have been accelerated by the recession.

In the current climate, there is no majority in the Democratic Party to conclude the Doha Round of trade negotiations or other liberalisation, and President Obama cannot count on enough support from House Republicans to push implementing legislation through.

COMPENSATING LOSERS
Instead of delivering high-minded lectures about the perils of protectionism from the comfort of their ivory towers and think tanks, free-trade advocates need to wake up and start addressing the erosion in popular support. If support for trade liberalisation is to be maintained, more needs to be done to compensate the losers.

Extending unemployment benefits and improving retraining would be a start. Congress has extended eligibility and improved the terms of TAA benefits this year in response to the downturn. But even when displaced workers find new jobs, many suffer a long-term reduction in income as new jobs pay less than old ones. More needs to be done to find a way to replace lost income and create high-paying jobs that affected groups can do.

In the meantime, enforcing the safeguards and other trade remedies which Congress has approved in the past as the price for agreeing to reduce tariff and non-tariff barriers is one way to ease the pace and pain of adjustment.

With mounting resentment among voters and legislators about the number of jobs lost to foreign competition, the Obama administration's decision to risk angering China to shield some workers from the worst of the global downturn by implementing rather than ignore trade defences Congress has already approved in the past as the price for liberalisation does not appear so unreasonable. The alternative might be much worse.

- Marie Diron is senior economist at Oxford Economics. The opinions expressed are her own -

A swine flu pandemic would affect the economy via various channels involving supply and demand.

On the supply side, infection and death imply that employees would be unable to go to work. This is what most people think about when they think about swine flu’s economic costs.

But the demand channels are likely much more powerful. Fear of infection would keep people away from airports, train stations, restaurants, cinemas and shopping centres. This would imply cuts in travel and tourism and consumer spending.

In addition, uncertainty about the impact and duration of the pandemic would dampen investment, while financial markets would probably experience renewed tensions with spreads between policy and market interest rates rising again and share prices negatively affected.

To get a quantitative estimate of the impact, we need to make a few assumptions. First, based on the experience of previous pandemics and developments so far, we can assume that 30 percent of the world and UK populations would be infected and be unable to go to work for two weeks. We also assume a death rate of 0.4 percent.

Second, we look at the experience of the SARS outbreak in Asia in 2003 to calibrate the likely cuts in discretionary consumption and international travel. This episode showed significant reductions, of around 20 percent and 60 percent respectively. In the current environment of rising unemployment and needs of balance sheet repairs, households could cut discretionary consumption even more sharply.

Under these assumptions, the GDP loss during the six months of the pandemic would amount to around five percent in the UK. This means that GDP growth in 2010 would be at least as bad as in 2009.

However, and although once the pandemic is over the economic bounce back would likely be less sharp than post-SARS, chances are that, by 2011, GDP growth could be above our baseline forecast and the economic loss would be gradually recouped within around three to four years. CPI inflation would likely turn negative for a few months but would rise as pent-up demand is realised.

There is a risk that swine flu tips the UK and the world economy into deflation as the pandemic would hit at a time when businesses and banks are still reeling from the economic crisis.

Rather than catching up on postponed spending, households may raise savings for a longer time, while companies that are already fragile after the recession may succumb to this new shock.

We estimate that under such a scenario the UK and world economies would fall into deflation. UK CPI inflation would fall to around minus one percent throughout 2010-12 and UK GDP growth next year could be as low as minus seven-and-a-half percent. With the government budget deficit already at sky-high levels and the Bank of England’s interest rates pretty much at zero, there is little that public authorities could do to try to buffer the impact.

- Andy Powell is the CEO of Edge, an independent education foundation dedicated to raising the status of practical and vocational learning. Edge is leading the education and business communities in the second annual celebration of vocational qualifications, VQ Day (Vocational Qualifications Day), on 24 June 2009. The opinions expressed are his own. -

It’s a challenging time to be running a small or medium enterprise (SME). Despite talk of “green shoots” the unemployment figures out today paint a fairly dim picture, with the prospect of a worsening scenario in September and tough prospects for graduates and school leavers this summer.

We are in one of the most turbulent economic and political periods of recent times and to emerge from the downturn we are going to need people full of creativity, innovation and talent. Yet research released today by education foundation Edge reveals that three-quarters of SME bosses feel there is a mis-match between young people’s skills and the requirements of their organisation.

This research is reinforced by the Confederation of British Industry, which this week reported a skills shortage in London that could hamper economic recovery. The research stated that the hardest hit sectors were transport, energy/manufacturing/construction and hospitality/leisure/retail. With rising unemployment figures, why do we still have skills shortages in industries that are key to us emerging from the downturn?

Edge believes part of the problem lies in an education system that, on the whole, has stood still for too long and has not developed in line with changing business needs. This top-down, one-size-fits-all system places young people on a learning conveyor belt, leaving them ill-prepared for the world of work. We need to encourage young people to discover who they are and want to be in life, developing determination, initiative and self-knowledge. These attributes cannot be learned by academic study alone – they require learning by doing.

Vocational and practical learning offers a way of achieving these aims. SMEs say that new employees with vocational qualifications are better developed than recruits with academic qualifications in the vital areas of team working, business and customer awareness, attitude and enthusiasm, and self-management. 71 percent believe the job market contains too few people with vocational qualifications and practical skills, and two thirds believe every young person should study at least one vocational qualification at school. So why aren’t more young people given the opportunity to take a vocational qualification in school?

Many SMEs are feeling the pinch of the recession and want to make sure their workforce is operating at an optimum level. They don’t want to have to train recruits in the basics; they want them work-ready.

There are many paths to success and we know that an education involving practical and vocational learning prepares young people for the varied world of work and adult life. It nurtures cognitive thinking and helps develop enterprise, originality and self-knowledge to succeed – qualities the UK needs now more than ever. So, it’s time for a revolution in education, putting this approach at the heart of our system to ensure our young people get the chance to discover their talents and have the right kind of training to meet the needs of businesses. This will help the UK accelerate out of the recession and continue to compete on a global level.

* Ian Kessler is a reader in employment relations at Said Business School at the University of Oxford. The views expressed are his own *

The Chinese define a crisis as ‘an opportunity on a dangerous wind’, and the crisis created by the current economic downturn has certainly placed the management of human resources centre stage. Corporate survival has become dependent on controlling and reducing labour costs, while future organisational viability has necessitated restructuring, placing further strains on the workforce. The challenge confronting human resources management is reflected in the predicted scale of job losses: the International Labour Organisations suggests that in 2009 as many 51 million jobs worldwide could be lost.

The tension between opportunities and dangers is clear:  radical change in a crisis runs the risk of undermining workforce motivation and performance, so precipitating the very organisational failure the changes were designed to avoid. At the same time if employee morale and productivity can be maintained, the likelihood of competitive advantage in the upturn is considerably enhanced.

Success during a crisis is likely to revolve around the balancing of three sets of issues:

Insiders and Outsiders

The shedding of jobs represents the quickest and surest way of reducing financial costs. It is, however, a process fraught with hidden costs and likely to unleash tensions, not least between insiders retaining their jobs and outsiders losing them. This should encourage reductions in the workforce other than through redundancies, for example relying on redeployment, natural wastage or a recruitment freeze. As an alternative, organisations might use more flexible forms of employment such as agency working, so protecting the core workforce. The 850 redundancies recently made by BMW at its Mini plant in the UK were all agency workers. This is not to deny the unease created within the workforce and the community even in this situation, highlighting the need for organisations to care both for those workers who go and stay.

The help provided to redundant workers, for example, career counselling will have a significant bearing on the reactions of remaining workers. The guilt felt by workers in retaining their jobs while others lose theirs is mitigated if those leaving are seen as being helped. Moreover, job losses place increased work pressures on the residual workforce, reflected in research which indicates that for those keeping their jobs in times of downsizing the risk of a heart attack doubles. This suggests the need for organisational sensitivity to these increased demands

Substance and Process

In times of crisis, organisations often have little choice but to place downward pressure on substantive terms and conditions of employment. They are likely to have greater discretion over the processes used to enact these changes. Such discretion is crucial in determining employee reaction to substantive change:  how organisations do things, can be as important as what they do.  Equity theory suggests that employee motivation relates to how fairly workers feel they are being treated in procedural terms - the systems used to reach decisions. Punitive employer decisions are less likely to provoke a negative employee response if introduced fairly. US researcher Greenberg examined two similar factories: one reduced pay by 15% with an explanation and an apology; the other cut pay by the same amount without any explanation or apology.  Workers in the former were not too happy and thefts from the plant increased by 54%; however, in the latter factory where no remorse was expressed theft rates increased by 141%.

How can crisis changes be implemented fairly? Fairness resides in managerial transparency, honesty and humility, pursued through open communications with the workforce. But employee voice, whether through representatives or more directly, also becomes crucial: the chance for employees to express their views in meaningful ways.  Moreover, fairness lies in consistent and equitable treatment throughout the organisation; workers assess fairness by how they are treated relative to those closest to them, typically those within the same rather than in different organisations. It is for this reason that the disproportionate rewards received by senior managers in an organisation so often prompt employee unrest.

Opportunistic and Strategic

In times of crisis, the management of human resources is likely to be driven by short term, opportunistic cost considerations. This runs the risks of weakening the very efficiency and effectiveness of the workforce which created corporate success in the past, while threatening the basis for organisational success in the future. Cutting training budgets subverts the possibility of updating and investing in skills; voluntary redundancy programmes encourage the most talented, typically the most marketable, to leave.

HR systems require years to settle down. The success of the oft quoted payment system run by US company Lincoln Electric lies in the fact that it has been in operation for almost a century. Workers have come to understand and trust it. Any attempt to radically change an HR system, say by a rash pay reduction, threatens to destroy worker trust and the likely effectiveness of the practice. Worker trust in an HR system takes years to develop; it can be destroyed in flash by an unthinking act. Periods of crisis call for an enlightened opportunism: quick action where possible which never loses sight of the organisation’s strategic goals and the maintenance of a workforce able and wiling to deliver them.

James H. Carr is chief operating officer for the National Community Reinvestment Coalition, a Washington-based association that promote access to basic banking services for America’s working families. He is a member of the Insight Center for Community Economic Development’s “Experts of Color Clearinghouse”. The views expressed are his own.

The U.S. economy is unraveling at a pace not seen in decades. The more than 650,000 jobs lost last month has contributed to a growing concern that the unemployment rate could rise to 10 percent or higher before the economy rebounds. At the center of the economy’s instability is a foreclosure crisis that has claimed 3.5 million homes in the last year alone, and threatens the loss of an additional 8 to 10 million homes to foreclosure over the next five years.

The loss of wealth associated with the collapse of the housing market is staggering. More than $5 trillion in housing equity has virtually evaporated since the foreclosure crisis began. Major stock indexes have also been cut in half, further contributing to decreased consumer confidence, substantially reduced spending, lower productivity, rising unemployment and additional foreclosures.

The magnitude of the economic decline has led many observers to conclude that the current crisis is an “equal opportunity financial nightmare.” But, reality paints a different picture.

While few have been able to escape the financial pain completely, African Americans, Latinos, Native Americans and many Asian sub‐populations are bearing the brunt of this national epidemic. Today, as the national unemployment rate rests at 8.1 percent, African Americans and Latinos are mired in double-digit job losses -- the unemployment rate exceeds 13 percent for African Americans, is just under 11 percent for Latinos, and is a little over 7 percent for non-Hispanic whites. For young black males, the rate is 25 percent and climbing.

Before the current crisis, African Americans and Latinos held on average a mere $10 and $12 of net worth respectively for every $100 held by the typical non‐Hispanic white household. The disproportionate impact of the foreclosure crisis on African Americans and Latinos expands further the racial and ethnic wealth gap.

African Americans and Latinos were the disproportionate targets for the unfair, deceptive and reckless lending practices that triggered the foreclosure collapse and imploded the credit markets. The situation is so dire within the African‐American community that United for a Fair Economy, a Boston‐based policy group, estimates that African Americans could experience the greatest loss of wealth since Reconstruction.

To date, federal intervention has focused almost exclusively on propping up the credit markets. While ensuring the health of the credit system is essential, ignoring the plight of struggling homeowners has proven to be a costly and ineffective remedy. In total, the federal government has provided $9.7 trillion in investments and loans to ailing financial institutions. This amount is equivalent to almost 90 percent of all mortgage debt outstanding. Yet only 11 percent of outstanding home loans are delinquent or in foreclosure.

Meanwhile, the financial system remains in critical condition and may require several hundred billion dollars of additional life support. The Obama administration recently launched the most comprehensive program to date to stem foreclosures, but more borrower‐focused assistance is needed. The administration has also enacted a major economic recovery program to preserve or create 3 to 4 million jobs. Although impressive in scale and scope, that nearly $800 billion package of stimulus spending will not fully repair the severely damaged economy that has been inherited by the new administration.

There is growing consensus that a second round of stimulus will be needed. The administration and Congress should consider targeting spending in a manner that prioritizes communities that have the highest levels of unemployment, the greatest concentrations of foreclosures and historically under‐funded, inferior or poorly maintained infrastructure.

Channeling dollars to individuals and communities that need them most will immediately stimulate the economy and save and create jobs because families living on the margins of survival will pour those recovery dollars immediately back into the economy through spending on food, medicine, clothing, child care, energy, transportation and other necessities. Prioritizing areas hardest hit by the foreclosure crisis would more directly help stabilize the housing markets and steady falling home prices that continue to infect financial institutions.

Finally, investing in areas most in need of infrastructure improvements would provide fertile ground for shovel‐ready projects in communities long‐neglected. This prioritization of economic recovery spending would not only jump start the economy, it would aid the most financially vulnerable populations, stabilize communities, and reward all Americans by providing a more direct route to economic recovery.

Of course, there are those who will feel now is not the time to focus on wealth and income disparities and that further one‐time tax rebates to struggling middle-income families generally would be more equitable in the current crisis. But broad‐based stimulus checks will not have the same economic leverage effect as channeling those same dollars to the families and communities that need them the most.

-- John Kemp is a Reuters columnist. The views expressed are his own --

Rising unemployment is the now the largest single threat to attempts to stabilize the banking system through recapitalization and assets swaps designed to remove toxic assets from bank balance sheets.

It is also the main impediment to restarting bank lending, renewing output growth and preventing debt-deflation becoming entrenched.

So far, the rising wave of defaults has been concentrated in the riskier portions of banks' loan books: subprime mortgages, buy-to-let loans, and lending to private equity ventures and management to finance asset acquisitions and highly leveraged buyouts.

Defaults on prime mortgages, credit cards, auto loans and other forms of bank lending have all risen, but generally not very much, and from a very low cyclical starting point.

Senior bankers are correct when they insist conventional parts of the lending business have performed well until now. Problems have arisen mostly on the funding side of banks' balance sheets and certain specialized parts of the lending side.

Elsewhere risk-management systems on the lending side have performed reasonably well. Losses have risen where credit control and risk management systems were deliberately overridden by senior executives anxious to grab market share or generate mortgages for packaging as part of the originate-and-distribute model. Leadership failure rather than technical errors in credit control lies at the heart of the debt crisis.

But the accelerating wave of job losses, especially in the United States and the United Kingdom, threatens to create a new and even more deadly threat to the banking system.

RISING JOBLESSNESS

Between November 2007 and January 2009, the number of people in full-time employment in the United States fell by 6.1 million (5.0 percent) from 121.9 million to 115.8 million, according to the Bureau of Labor Statistics' "Current Population Survey" (see https://customers.reuters.com/d/graphics/EMP1.pdf).

The pace of job losses is accelerating. Almost as many full-time positions were lost in just the three months from November 2008 to January 2009 (2.6 million) as had been lost in the whole of the previous year (3.5 million).

It would be nice to assume most of those who have lost full-time jobs were well-paid professionals living off past bonuses and "resting" until banking picks up. But the statistics suggest otherwise.
The number of people unemployed but actively looking for work has jumped 4.4 million since November 2007 (and by 1.1 million in the last three months alone).

Others appear to have settled for part-time work instead. The number of part-time workers has risen by 1.5 million (and more than 600,000 in the last quarter).

Some have simply given up. The number of working age people not actively seeking work and longer considered part of the labor force has risen almost 2 million in the last 15 months.

FALLING CASH INCOME

Falling full-time employment rates are now translating into declines in household income. Total personal income (adjusted for population growth but not prices) stood just 0.5 percent higher in December 2008 than it had been twelve months earlier. Personal income is rising at the slowest rate since the start of 2002 and before that the 1960s.

As layoff programs are implemented, income growth looks set to turn negative for the first time in more than 40 years during the first half of 2009 (https://customers.reuters.com/d/graphics/INC1.pdf).

The situation is even worse than the headline figures suggest. Personal income from wages and salaries in private-sector employment posted declines in both November and December compared with the same period a year earlier, the first sustained fall since 2002-03 (https://customers.reuters.com/d/graphics/INC2.pdf).

Only continued growth in public sector wages, social security payments and other transfers, some of them triggered by the rise in unemployment, is keeping the overall growth in household incomes positive (https://customers.reuters.com/d/graphics/INC3.pdf).

DEFAULT RATES SURGING

Even with the safety net, the rising tide of unemployment is pushing more and more households into default.

The proportion of single-family residential mortgages in which some or all payments are 30 days past due or more has climbed from 1.73 percent in Q3 2006 to 2.72 percent in Q3 2007 and a staggering 5.08 percent in Q3 2008 (https://customers.reuters.com/d/graphics/DEL1.pdf).

By the middle of last year, the number of non-business bankruptcies was already running at an annualized rate of more than 1 million per year, up from 600,000 two years earlier.

Bankruptcies are increasingly wiping out households. The number of bankruptcies under Chapter 7 (which involves liquidation of assets) had doubled to 720,000 per year, while debt reorganizations under Chapter 13 were up 45 percent to 345,000 (https://customers.reuters.com/d/graphics/BUST1.pdf).

Default rates and insolvencies are both expected to have risen substantially when data for Q4 is published in the next few weeks, and will keep on rising in Q1 and possibly Q2 as job losses work their way through.

The problem is that income losses associated with rising unemployment are highly concentrated. The risk of default on mortgage and other loans jumps sharply when a household's primary income earner becomes unemployed, or it loses a major secondary source of earnings.

Loan losses on otherwise sound conventional loans risk draining banks' capital, along with bonus payments and dividends paid to shareholders, even as governments on both sides of the Atlantic try to pump money into them through recapitalization programs and swap out more obviously impaired assets from their balance sheets.

Moreover, the fear of unemployment restrains spending even among households that remain in work, and the risk it will rise further increases the danger to banks making new loans.

EMPLOYMENT, NOT OUTPUT

Output in the United States, the United Kingdom and most of the other major economies contracted sharply in the final three months of last year. But this is only the first round. Rising unemployment will force a second round of spending cutbacks in the coming months, deepening the recession.

Unless government policy can stem the rising tide of redundancies, attempts to stabilize the banks and restart growth will come to nothing.

I have written elsewhere about the need to sustain nominal income growth (including generating a positive rate of inflation) to preserve capacity to repay debts fixed in nominal terms. But the distribution of nominal income is as important as the total in terms of default rates.

Government policy needs to sustain high levels of employment as well as ward off a collapse in asset values or a downward spiral in wages and prices. The central aim of the stimulus packages being considered around the world needs to be maximizing employment, rather than output.

This suggests the focus needs to be on spending money on labor-intensive low-skilled services, construction and low-technology manufacturing areas rather than transformative new technologies intended for a long-term legacy.

Expanding employment within the public sector itself, or commissioning simple construction work and an expansion of existing services and procurement projects is likely to be more effective.

In many of these areas, output can only be delivered locally rather than traded across borders, minimizing the risk fiscal stimulus will leak abroad to foreign firms, without resorting to the more obvious trade barriers, such as the incendiary "Buy American" provisions in the U.S. stimulus bill.

The risk with the current debate on stimulus spending is that it is confusing the important short-term goal of job creation with longer-term investment and social transformation needs such as new energy technology. Park keepers, social care workers, new school buildings and social housing are what the economy needs now.

Much of this spending is on the type of low-technology, semi-skilled, labor-intensive and low-productivity work that in other times would be decried as a waste of money. But right now creating jobs - not building a shining legacy for the future - is more important. There will be plenty of time to worry about technological transformations later.

For previous columns by John Kemp, click here.

Peter Hemington is a Corporate Finance Partner at BDO Stoy Hayward. The views expressed are his own.

Over the past few weeks several business surveys, including our own BDO Business Trends report, have painted a very gloomy picture of the UK economy. Short and medium term business confidence continues to plummet as the credit crunch takes its toll on unemployment figures, the housing market, the ability or desire that banks have to lend and consumer spending.

But despite this, the UK has some short term positives that we should not forget – low interest rates and inflation, plus a relatively flexible labour market. Additionally, although public sector borrowing is clearly running at too high a level, the ratio of national debt to GDP ranks somewhere in the middle amongst high income countries. So perhaps the UK’s credit is better quality than some commentators have suggested. And despite an equally gloomy outlook for the employment market – highlighted by this week’s announcements about two big names from the high street, Woolworths and MFI, going into administration - the unemployment figure is considerably lower than it was at the onset of the last recession.

Low interest rates and inflation, relatively low unemployment, not such a bad fiscal position - perhaps overall we could be in a stronger position than we were in 1991.

As for the longer term, it’s worth remembering that Goldman Sachs suggested not so long ago that the UK’s per capita GDP could catch up with that of the USA within twenty years or so. No doubt a part of this was extrapolation of historic trends. But these trends are based on some strong fundamentals. The UK is a free trading nation strong in sectors, such as financial services, which will grow their share of world GDP in the longer term. Foreigners come to the UK to do business because they trust our legal system and our government institutions. They will continue to do so and this will continue to generate income for the British economy.

2009 will undoubtedly be an uphill struggle for businesses, but the foundations described above should provide longer term solace for UK businesses as they try to predict what the future has in store for them.