Thursday 16 July 2020

UK's headline unemployment rate flatters to deceive - but perhaps not for too much longer

The UK Office for National Statistics has just released its monthly compendium of labour market data. These are nowadays usually published on a Tuesday, so it's a back to the future moment for those of us old labour market watchers who trawled over the numbers on a Thursday morning in the 1980 and early 1990s. However, and surprisingly for some given the magnitude of the impact of the Covid-19 lockdown, today's figures, including Labour Market Survey (LFS) results for the quarter March to May, don't show 1980s and 1990s levels of mass unemployment.   

While these figures provide the best official picture so far of what happened in the peak period of the lockdown, what emerges is a mosaic comprised of numerous negative impacts drawn from various data sources rather than a crystal-clear image. Our view of the underlying jobs situation is particularly blurred. The LFS indicates that the total number of people in work fell by 126,000 in the three months to May – with part-time employees and the self-employed hit hardest – but the ONS’ more up to date flash estimates of employment based on PAYE data show that the number of employees fell by 649,000 between March and June. Meanwhile, job vacancies fell by 463,000 between April and June to a survey record low of just 330,000, resulting in a sharp fall in people starting new jobs. 

Yet despite this there was no rise in the headline unemployment rate which remains at a situation defying 3.9% largely because many of those who found themselves without work while the economy remained in its hiring sapping Covid-19 induced coma ended up stuck in the ranks of the so-called economically inactive. The number of economically inactive people who told the LFS they wanted a job jumped by a record 253,000 in the three months to May. Add these extra ‘want work inactive’ people – the ‘hidden’ jobless - to the active unemployment pool and the full magnitude of the underlying labour market crisis becomes more apparent.

Thankfully, emergency policy measures, notably the large scale government funded Job Retention Scheme, prevented an even more catastrophic outcome in what we should now see as phase 1 of the Covid-19 labour market crisis, the overall severity of which is evident both in data for total weekly hours worked in the economy and average earnings. With millions of furloughed workers in jobs but doing no work, plus many other workers put on short-time working, total weekly hours worked in the economy suffered a record annual decrease of 175.3 million (a whopping 16.7%) falling to a near 23 year low of 877.1 million. Fewer hours combined with a mix of pay cuts and pay freezes have in turn hit regular average weekly earnings, which fell by 0.7% in cash terms and by 0.2% in real terms.

Worryingly, as we move beyond phase 1 of the Covid-19 labour market crisis, the underlying jobs situation is likely to get a lot worse before we see any noticeable sign of a turn in the tide. Business surveys also published today suggest major job cuts are inevitable into the late summer and autumn as employers faced with an uncertain economic outlook and less generous financial support for furloughing decide to shed rather than retain furloughed staff. A reasonable expectation is that at least 800,000 to 1 million currently furloughed workers will lose their jobs by the end of this year, while more of those people currently economically inactive will start searching for whatever work they can find. If so phase 2 of the labour market crisis will hit much harder than phase 1 as Covid-19 leaves us stricken with a double-digit unemployment rate.

Tuesday 16 June 2020

The latest UK jobs figures - an unfolding crisis in slow motion

The UK Office for National Statistics (ONS) this morning published its latest set of numbers on the state of the labour market, which using US terminology we might collectively refer to as the monthly Jobs Report.

Looking at these figures is a bit like watching the early part of a slow-motion video of a car crash when you already know the horrible outcome but have only witnessed the initial jolt. The quarterly headline employment and unemployment numbers are little changed on the previous quarter, in part flattered by the inclusion of pre-Covid-19 lockdown figures but more importantly by the government funded furlough scheme which has so far acted as a life raft for millions of jobs. A surge in furloughed workers with jobs on partial pay but no work to do, plus many others hit by cuts in hours and pay, has had a big impact on employee incomes. The annual fall of 94.2 million in total weekly hours worked in the economy is a record decrease, in turn dragging the rate of growth of regular average weekly earnings down to 1.7%, or just 0.4% in real terms. However, we know the underlying jobs situation is much worse than this.

The ONS’ more up to date flash estimates based on PAYE data show that the number of employees fell by 612,000 (2.1%) between March and May, with Labour Force Survey data also suggesting a fall in self-employment of well over 100,000. Add in a record quarterly decrease in job vacancies, which will be hitting young job seekers especially hard as they try to enter the labour market, along with what we can see from a rise in claims by unemployed people for Universal Credit, and it’s clear that level of unemployment will by now be somewhere between 2.5 and 3 million. The key question for the coming months is how much higher the jobless rate climbs as the furlough scheme unwinds and we begin to discover what the post-Covid-19 employment landscape actually looks like.

Friday 1 May 2020

Economics of Covid-19 – Let’s all avoid the ‘A word’

Boris Johnson is back from his personal battle against Covid-19 and yesterday chaired the daily Downing Street coronavirus press briefing for the first time since late March. One journalist asked if the cost of the pandemic to the public purse meant that the crisis will be followed by another lengthy period of fiscal austerity. The Prime Minister refused to utter the ‘A word’ preferring instead to look forward to the sunny uplands of an economic rebound. Many will see his response as a mix of political necessity and typical Johnsonian optimism. Either way, I think we should all avoid fretting about public borrowing and debt at present and focus instead on how to boost economic growth.

I was born in the 1950s at a time when the UK and many other major economies were burdened with massive post-war debt. Yet the first 20 years of my life were a time of growing prosperity, the ‘never had it so good’ generation. There was post-war debt but also a post -war boom, with very rapid rates of growth in national income driven by economic and social reconstruction. Public debt mattered but could be financed and so didn’t, to use contemporary parlance, ‘impose an intolerable burden’ on the post-war generation.

Unfortunately, for the past 40 years public discourse has been so dominated by small government thinking that balanced budgets are seen as a good thing in all circumstances on the assumption that state activity almost always crowds out private investment and enterprise. This is nonsense. It’s useful to be fiscally prudent in good times, reducing deficits and paying down debt, while the private sector does many things better than public bodies. But fiscal prudence doesn’t make sense if it actually results in reduced income generation, while excessive prudence (i.e. unwarranted austerity of the kind we saw for much of the past decade with the political aim of cutting public spending to the bone) is worse still.

I suspect that when the current crisis is finally behind us the UK government’s economic policy response will gain far greater plaudits than its health response. We should now ensure that economic policy continues on a sensible course as we gradually emerge into the post-crisis new normal. The focus must be on reconstruction and economic growth rather than short-term obsession with public borrowing and debt. Indeed, we will almost certainly need more fiscal stimulus, especially to boost investment, rather than less. The PM is right to avoid the ‘A word’ – we all should.   

Tuesday 21 April 2020

UK jobs market was cooling before coronavirus crisis – 8% jobless rate now the best we can hope for

Earlier today the UK Office for National Statistics (ONS) published its latest monthly Jobs Report, mostly including data from the quarterly Labour Force Survey for the three months to February 2020. According to the ONS the labour market was ‘very robust’ at that time. But to me things looks to have cooled before the Covid-19 lockdown measures placed the economy in a coma to help save lives.

Although the number of people in work increased by a very healthy 172,000 in the three months to February (taking the employment rate to a record high of 76.6%), with fast growing labour supply this was not enough to prevent a rise of 58,000 in the number unemployed, lifting the unemployment rate back to 4%. Cooling was also evident in a fall in total hours worked, fewer job vacancies and softening in the rate of growth of average weekly earnings, which dipped to 2.9% excluding bonuses (or 1.3% in real terms). Moreover, the ONS reports more up to date figures based on PAYE data which show that the number of employees fell very slightly (by 0.06%) between February and March – what will prove to be the beginning of the largest shake-out of UK jobs for at least 40 years.

Given what we know about the massive shock to the economy in the past month, it’s disconcerting to see that the jobs market was already starting to look a bit off colour when Covid-19 arrived on our shores. Whether this has implications for how well the market recovers after the lockdown is unclear but in any case we won’t be seeing the unemployment rate anywhere close to 4% for several years, with a peak of at least 8% the best we can hope for even with the government’s welcome business support and job retention measures in place. Some scenarios, such as that published last week by the Office for Budget Responsibility, look to a jobless peak of 10%, albeit with a relatively swift recovery. For the time being I remain on the ‘optimistic’ end of the opinion spectrum. But uncertainty about the future course of Covid-19, let alone the economy, makes me feel uneasy, and I look ahead as much with hope as expectation.  

Saturday 4 April 2020

Economics of Covid-19 – humanitarian vs. utilitarian

Economists pay a lot of attention to policy choices and trade-offs. Genuine free lunches are a rarity. The coronavirus pandemic has spurred a lot of comment on trade-offs, from economists and non-economists alike. Are governments, by effectively putting large parts of their economies into deep freeze to combat Covid-19, paying too high a price in terms of lost business, work and incomes to save what might prove to be a relatively small number of lives?

This seems like a horrible question to pose at this time of crisis but it is not completely unreasonable. As I say, trade-offs are part of the very stuff of economics. Indeed, implicit trade-offs are always being made within health systems. Available resources are finite and concepts like ‘quality of life years’ play a role in determining how to allocate care to different groups of people. It’s also likely that during the current crisis some medical practitioners will be faced with the distressing choice of which Covid-19 patients to help if hospitals run short of life saving equipment.

However, acceptance of this kind of micro choice doesn’t mean we should apply a similar calculus at the macro-level. The utilitarian principle of ‘the greatest good of the greatest number’ is of limited practical value when, as at present, we simply don’t have sufficient information to assess the trade-offs involved at the point when policy decisions have to be made. 

Even when the crisis is over, any post hoc assessment of the trade-off will be questionable because we’ll never know the counterfactual. UK epidemiologists think that without the lockdown and other measures the government has taken the death toll from coronavirus could potentially hit 500,000 in the UK alone. If, as we pray, the outcome is far better than this it will be highly misleading to simply weigh the economic cost against the actual number of deaths.

I fully understand why, with so many people suffering financial hardship as we battle Covid-19, some ask ‘is it worth it?’ I can’t answer that question but when pondering it my conclusion is that policy makers should favour the humanitarian response over the utilitarian.      

Friday 3 April 2020

Economics of Covid-19 – why total hours of work could prove the key labour market statistic in this crisis

Each day brings yet sadder news. The UK death toll from Covid-19 is now just shy of 3,000 and will probably pass that mark when we receive the next update this afternoon. Particularly sobering is the constantly updated tally of deaths in the United States and globally published by Johns Hopkins University, the global total already above 50,000

The human scale of this relentless tide of grim health statistics is evidenced by the fact that staggering record-breaking figures on the number of people making claims for unemployment related welfare benefits haven’t monopolised the headlines in either the US or UK in quite the way they would at any other time.

As mentioned in an earlier blog, it will be a while before we start to see the effects of the Coronavirus crisis appear in the UKs published official labour market statistics. In this respect the US Bureau of Labor Statistics is ahead of the game. But the UK’s Office for National Statistics (ONS) has helpfully begun to issue snapshot data on the business impact of Covid-19.

The first weekly release published yesterday showed that of more than 3,600 business responding to a survey between 9 March and 22 March 27.4% reported they would be cutting staff numbers ‘in the short-run’. A similar proportion 28.5% had reduced staff hours, while approaching half (46.2%) were requiring staff to work at home in line with government advice on social distancing for non-essential workers. Some of these businesses were making a combination of such adjustments and one would expect some will also be making pay cuts or introducing pay freezes, though this is not covered in the survey.  

While these data are useful, they don’t come close to giving us the kind of numbers that will at some point be provided by the large-scale rolling Labour Force Survey (LFS). Assuming the ONS’ normal data collection process isn’t itself disrupted by social distancing – interviews are conducted face-to-face as well as by telephone – analysts will be digging into crisis relevant data from late spring onward. However, even when these data become available, the labour market impact of this particular crisis could prove trickier to read than usual.

One reason is that the impact is very abrupt. An emergency brake has been applied to large swathes of economic activity. We’re not experiencing a slowdown and slide into recession but a sudden sharp halt. There is not the kind of lag in the labour market impact one would normally expect but instead a punch in the gut that immediately takes the wind out of the sails. The bad news is that, among other negative effects, this causes a mega surge in job or income losses so big that it tests the ability of policy makers to respond. The less bad news is that the initial surge doesn’t necessarily mean a relentless wave of pressure on the system. More likely is a sudden bout of acute pain which doesn’t get noticeably worse the longer the crisis continues but will nonetheless be very tough to live with.     

Another oddity of the current crisis is widespread use of furlough procedures. An as yet unknown but almost certainly high number of employees will be retained in jobs but placed on furlough under the government’s emergency Job Retention Scheme (involving an 80% wage subsidy subject to a monthly cap of £2,500). It also looks as though some employers will retain staff in similar ways without participating in the government scheme.

Furloughing hasn’t tended to be a noticeable feature of UK employment practice during recessions: job cuts, shorter hours, pay cuts or some combination of these adjustments are generally more common place. But the significance of the furlough for our reading of labour market statistics is clearly demonstrated by a look at how the Job Retention Scheme will operate.

To be eligible, furloughed employees won’t be able to do any paid work for their employer or paid work elsewhere (they can if they wish do unpaid voluntary work). Despite them being ‘idle’ the LFS will count these employees as in employment. A person is deemed to be employed if he/she has done at least an hour of paid work in the week when surveyed or is temporarily away from work for a legitimate reason such as paid holiday, sickness absence or, in current circumstances, on furlough. Consequently, the headline employment figure obtained from the LFS will give a somewhat flattering picture of the effect of the crisis, as might the level of unemployment and economic inactivity insofar as these furloughed employees would otherwise lose their jobs.

The hit on the labour market will therefore be much better reflected by the slump in hours worked by furloughed employees, which will be in addition to cuts in hours worked by non-furloughed employees who keep their jobs and by self-employed people unable to find any or only a limited amount of work. But this is not the only reason why hours of work will prove to be an even more important statistic than usual in this particular crisis.

In a normal recession, hours lost through sickness absence tend to dip; throwing a sickie is not a good idea when jobs are on the line. But in this Covid-19 induced crisis, rates of sickness absence will rise significantly, the virus in this way having its most direct negative impact on the labour market. Offsetting this, however, are two other unusual features of the current crisis. Essential services, across both public and private sectors, are working even harder than usual and increasing hours as well as recruiting extra staff. And anecdotally, it appears that the shift to widespread working from home during the lockdown might be seeing people putting in extra hours because they’re spending less time commuting.

What kind of overall hours effect should we thus be looking at? In the last three major UK recessions (the early 1980s, early 1990s, and 2008/9) total hours worked fell by 5.3%, 5.2% and 4.1% respectively. The corresponding falls in total employment were 2.4%, 3.4% and 1.9%. Judging from what we can see so far about the current crisis and the initial employment policy response it looks as though the fall in hours will be at least on a par with the relatively large falls suffered in the 1980s and 1990s even if we manage to avoid job losses on quite the same scale. Either way, hours of work (and, more important still, what change in these mean for weekly earnings) could prove to be the key labour market statistic to look at when measuring the impact of Covid-19.   

Tuesday 31 March 2020

Economics of Covid-19 – April 1st Living Wage hike could prove to be fools gold

The statutory National Living Wage increases by 6.2% tomorrow, rising to £8.72 an hour for employees aged 25 and over, benefiting around 2 million people. The lower National Minimum Wage rates for younger people go up 6.5% for 21 to 24 year olds and by 4.6% for the under 21s. That’s right, tomorrow, in the midst of a national economic crisis. A brave move, demonstrating how even Conservative governments have been fully converted to the merit of minimum wage regulation, or foolhardy at a time when many businesses are struggling to survive and millions of people are worried about their jobs?  

As in any crisis there will be winners as well as losers over the coming weeks and months. People working in essential services, public and private, may well see their workloads increase and receive higher reward for additional hours if not bigger pay awards. But at least as many private sector or charitable sector organisations will be badly affected by the Covid-19 lockdown. These will be making immediate pay cuts (including those who participate in the Government’s Job Retention Scheme but don't top up the 80% wage subsidy on offer), introducing pay freezes and/or cutting hours. Unemployment will also be rising as some businesses cut jobs which will depress wage pressure in the economy overall.

Millions of employees will feel the pinch which will slow average weekly earnings growth considerably. Without the Living Wage/Minimum Wage increases we would probably be looking at growth in regular average weekly earnings slowing from around 3% to around 1.5% in a matter of a few months and then slowing further the longer the crisis lasts. If so, real wage growth will fall close to if not below zero (depending on what happens to price inflation). This is bad news because we’ve only recently seen the average real weekly wage rise above the pre-Great Recession level.  

In view of this tomorrow’s Living Wage hike might be seen as a good move, offsetting the depressing economic effect of Covid-19 by putting more money in the pockets of the working poor. However, the Living Wage/Minimum wage increase is likely to prove only a partial palliative. A lot of recipients of the hike will be employed in exactly the kinds of sectors hardest hit by the crisis and employers may well respond by making even bigger cuts in hours or jobs than would otherwise be the case.

The overall effect on nominal average weekly earnings growth is difficult to judge since we don't yet know how businesses will respond. Optimists can point to well researched evidence of the benign effect of the minimum wage over the past 20 years, though whether this is guide to what might happen now is questionable.  

What one can say is that in current circumstances the faster the rate of growth of nominal average weekly earnings the smaller the squeeze on real wage growth and the greater the risk of a bigger than necessary rise in unemployment.

While a rise in the Living Wage/Minimum wage is highly desirable in normal times these are very far from normal times and a 6+% wage rise looks like Alice in Wonderland economics. Lewis Carroll himself might marvel at the Government hiking the pay of employees it was at the same time subsidising to keep in work.

There is of course nothing to stop ministers from exhorting employers who are able to afford it to voluntarily match the planned increase, perhaps targeting the supermarkets who might make a goodwill gesture to hardworking staff at this time. But it would be advisable to either limit the statutory increase or, and preferably, postpone it, with maybe October 1st rather than April Fools Day a better choice.