Mounting recruitment difficulties?

As a keen watcher of the welter of comment on the employment scene, in recent months I have been particularly intrigued by the number of press releases and media reports signalling an increase in skills or talent shortages leading to mounting recruitment difficulties, and warning of the emergence of a so-called ‘two-speed’ jobs market in the UK.

This strikes me as most odd in an economy with an unemployment rate close to 8% and a slowing nominal rate of growth in average weekly earnings (now down to just 0.8%, and a paltry 0.4% including the effect of bonus payments). A poorly functioning jobs market with lots of structural problems might encounter a serious mismatch between the supply of and demand for skills even when unemployment is still very high, though it’s widely accepted that the UK’s flexible jobs market functions very well. But in any case, if the labour market was suffering a high rate of structural unemployment and experiencing widespread recruitment difficulties this would normally be expected to trigger an increase in wage pressure rather than the ongoing pay slump at present being experienced.

This casts considerable doubt on all the recent hype about recruitment difficulties which has doubtless been due to some employers facing some greater difficulty in hiring staff compared with the depth of the recession in 2008-09, the perception further exacerbated by the surprising jobs boom of 2012 which meant that businesses suddenly became excited about taking more workers on. I have tried in vain to pour cold water on the hype and was therefore encouraged by the sober analysis of the Bank of England’s latest quarterly Inflation Report, published yesterday, which concludes:

“Survey indicators of companies’ recruitment difficulties have risen, and are closer to, but still below, historical averages. The (Bank) Agents’ contacts, however, suggest that difficulties in recruiting suitable staff for available roles are limited to only a few niche sectors, and are rarely a significant constraint on capacity.”

This conclusion is far more in keeping with the broader labour market and macroeconomic indicators, albeit less likely to grab the headlines.

In a sense of course we always have a two speed, or perhaps more appropriately a multi-speed labour market, as evidenced by different unemployment rates for different groups and associated pay relativities. Similarly, there will be times when demand for certain types of occupational skills increases and vice versa. However, there is little to suggest any significant recent change in the structural make-up of the jobs market, whereas there is a lot of evidence that the jobs market as a whole is suffering from a serious shortfall in demand stemming from prolonged weakness in the macro economy.

Moreover, insofar as there are signs of greater two-speed activity in the jobs market this is due not to any generalised increased shortage of supply of skill or talent but instead to an increasing excess supply of less skilled people, driven in part by the government’s welfare to work measures which are pushing more lower productivity individuals into economic activity. No wonder therefore that the CIPD earlier this week were reporting that 45 people are currently competing for every available unskilled job which, as the pay slump further indicates, makes jobseekers reduce their wage demands and workers ever more fearful of asking for a raise in the knowledge that their employer is well aware that so many idle hands are waiting at the door.   

Deeper chill returns to UK jobs market

As I write, the Governor of the Bank of England, Sir Mervyn King, is still taking questions at what is his last Inflation Report press conference. The Bank’s overall message is slightly more optimistic than it has been of late – it reckons the economy will grow a little faster this year than previously forecast, up from 0.9% to 1.0%, while Consumer Price inflation will be a little lower, albeit still well above the rate the Bank targets. However, in his opening remarks at the conference Sir Mervyn also stressed that “this is no time to be complacent – we must press on to ensure a recovery and bring down unemployment”, a further stark reminder of which was given by the latest Office for National Statistics labour market figures, also published this morning. 

The UK jobs market clearly took a turn for the worse in the first quarter of the year. The number of people in work fell by 43,000 and unemployment increased by 15,000 to 2.52 million (7.8%). Men and people on temporary contracts or working as self-employed contractors are being hit hardest by this latest bout of weakness, suggesting that employers are primarily making adjustments to the flexible component of the workforce in the face economic uncertainty. This helps explain the apparent paradox of a corresponding fall in redundancies, the number of which will generally rise only when employers are cutting their core permanent staff.

Young people aged 16-24 have also suffered a fall in employment in the latest quarter (down 46,000) but this has not shown up in higher youth unemployment, which has actually also fallen by 17,000 because a large number of those in full-time education have stopped looking for part-time jobs to supplement their student income.

The English regions have fared particularly poorly in 2013 so far. Most have registered a rise in unemployment in the first quarter, with the notable exception of the North West which managed a sharp fall in unemployment (down 18,000) only because a large number of people responded to an equally sharp contraction in jobs by exiting the labour market. By contrast, Wales and Scotland have enjoyed both decent employment growth and falling unemployment, signalling an end to the ‘Celtic jobs drought’ of 2012.

Ironically for the English regions, while 2012 saw strong employment growth and falling unemployment in a flat lining economy, the slightly better GDP growth registered in the early months of 2013 has thus been accompanied by falling employment and a renewed rise in joblessness. With average weekly earnings now increasing at a paltry rate of just 0.4% – which means a real cut of 2.4% relative to Consumer Price Inflation – 2013 is shaping up to be the ‘hard slog’ year for UK workers I anticipated in my annual forecast last December. Indeed, combining these latest pay and jobs data, the Jobs Economist Labour Market Temperature Index (LMTI) shows that the UK jobs market is now as cold as it was two years ago in the spring of 2011.

The LMTI  is constructed from official data on unemployment, (CPI) price inflation, nominal pay increases and changes in average hours worked per person. A zero reading represents the economy’s potentially attainable combination of unemployment and real pay growth, as obtained from Office for Budget Responsibility estimates.   A reading above zero indicates excess demand for labour, a reading below zero (i.e. the chill factor) indicates deficient demand. An increase in the reading indicates that the labour market is heating up (conditions improving), a decrease in the reading indicates that the labour market is cooling down (conditions deteriorating). 

The labour market was at its coldest at the depth of the recession in February 2009, at which time the LMTI reading fell to minus 13. The reading then increased and broadly stabilized through the remainder of 2009 and 2010 before moving back onto a decreasing trend through to the end of 2011. A combination of strong growth in employment, falling unemployment and moderation in the real pay squeeze saw the LMTI reading rise to minus 5 by autumn 2012. However, since then rising unemployment and a bigger pay squeeze has again lowered the LMTI reading, taking it back to where it was in spring 2011.

The UK labour market has proved remarkably good at creating jobs in the past two years but only because people have been desperate to price themselves into work. As the LMTI shows the prevailing combination of high unemployment and falling real pay indicates a significant ongoing shortfall in demand. People in work and jobseekers alike have now experienced five years of severe labour market chill. And with the somewhat warmer conditions of summer 2012 having given way to a much colder 2013, life in our deep chilled jobs market looks set to continue for some considerable time yet.    

A fond farewell to Fergie

I’ve been away, but got back in time to hear Sir Alex Ferguson bid farewell to the Old Trafford faithful yesterday. It was the first time for a while that football has brought a tear to my eye. No matter what happens to Manchester United from now on, things will never be quite the same again.

Having supported the club since 1965, then an enthusiastic 8 year old, I recall the immediate post-Busby era of decline and relegation. Tommy Doc and Big Ron brought back excitement and hope in the decade to the mid-1980s. But periodic Cup triumphs never translated into the consistency of performance necessary to win League Championships. Fergie not only eventually managed to achieve this but also instilled a belief that success would follow success, regardless of the strength of increasingly powerful opponents. Rarely in the past 20 years has failure in any one season been by a large margin or persistent, with despair soon followed by renewed triumph. Time will tell if this era of resilience is over but I fear that it might be. Manchester United have more than enough financial resource to remain a top four Premier League club for the foreseeable future. But somehow I don’t expect the season climaxing months of April and May to be as adrenaline inducing as they have been throughout the Ferguson era.

I see from the media that quite a lot has been written and said about Sir Alex’s leadership and management qualities, some of it an excuse for the kind of management speak guff that one regularly hears. My view is that if there are wider lessons to be drawn from Fergie’s success they stem not so much from his ability to nurture and orchestrate talented individual players into winning teams but rather from a number of key personal values that underpinned his approach to management. Aside from the obvious need for hard work, the values that time and again crop up whenever Sir Alex is mentioned are those of ambition, honesty and, especially, loyalty.

The thing that has shocked me most in organisational life is the number of people who are satisfied with mediocrity, either because they prefer to drag colleagues down to their own level or because they can’t be bothered to make the effort to excel. Such are the enemies of success. Honesty in the face of such limited ambition or effort is equally important – being honest with oneself and others, even if as in Fergie’s case this means occasional use of the metaphorical hairdryer treatment.

Most important of all is loyalty, both to the cause any organisation sets for itself and to one another within the organisation. Success cannot be built on lack of trust or betrayal of colleagues in order to satisfy some personal ambition or objective. No single individual should think of themselves as being bigger than the team – the disloyalty this breeds is corrosive to all. Hence Sir Alex’s evident disappointment over the years in players prepared to leave Manchester United, be it for money or, even worse, in the belief that they might achieve greater success elsewhere.

Ambition, honesty and loyalty are personal qualities of great men and women. These are not ‘management skills’ that can be acquired, though they can be used to influence the behaviour and performance of us lesser mortals. Sir Alex Ferguson is such a great man. It is that which made him a great football manager and would doubtless have enabled him to succeed in another walk of life had the rebuilding of Manchester United not been his ‘impossible dream’.                 

A sombre reality check for the UK jobs market

Baroness Thatcher’s funeral meant that fewer eyes than usual were directed at this month’s official labour market statistics. Sadly, they haven’t done anything to lift the funereal mood.

After a period of remarkably strong job growth 2013 was always likely to be a tougher year for the UK labour market, and today’s triple whammy of bad news delivers the inevitable reality check. Job growth has stalled, the number of people in work having fallen slightly by 2,000 in the December-February quarter compared to the previous quarter. Unemployment on the headline survey measure has risen sharply (by 70,000, though the number of people on Jobseeker’s Allowance fell by 7,000 in March). Meanwhile, people in work are not only suffering a real wage squeeze but also seeing barely any improvement in the cash value of their earnings. The rate of growth in total pay has fallen from 1.2% to 0.8% (from 1.3% to 1% for regular pay i.e. excluding bonuses) compared with Consumer Price Inflation at 2.8%. We haven’t seen such weak nominal pay growth in more than a decade of comparable data.

This rash of bad news doesn’t necessarily mean we are facing a further ongoing surge in joblessness. While the unemployment rate has increased to 7.9% most forecasters expect a peak of around 8.2% later this year.  But what looks like the end of the jobs boom does demonstrate that simply relying on people to price themselves into work cannot guarantee continued employment growth in an economy still experiencing a serious lack of demand.

The net fall in employment is due mainly to fewer unpaid family workers and those employed on government schemes. By contrast the number of employees grew by 22,000. Moreover, the rise in unemployment is driven by an increase of 68,000 in the size of the total workforce. Even so what’s clear from the latest figures is that sectors dependent on discretionary consumer spending or public subsidy – notably hospitality, the arts and entertainment – are beginning to shed jobs, while the impact of public sector downsizing has cut the number of admin and support jobs and jobs in education.  In a reverse of the pattern seen in 2012, it also looks as though the jobs market has taken a particular turn for the worse in England, with London experiencing a marked reverse following the Olympic jobs boost. Scotland and Wales saw falls in unemployment.

Overall, today’s figures are in line with what I expected at the turn of the year. They are bad, especially relative to the surprisingly good news of last year, but maybe economic policy debate will benefit from this dose of sombre reality.   

What's been happening to public sector jobs?

The surprising strength of private sector jobs growth has deflected attention away from what’s been happening to public sectors jobs, so here is a brief recap. A fuller account with tables is available at www.thejobseconomist.org

At the end of 2012 5.72 million people were employed in the UK public sector, comprising 5.24 million in ‘general government’ (i.e. central and local government) and 0.48 million in public corporations. This total is 640,000 lower than the peak in q3 2009 and 600,000 lower than q1 2010, the final full quarter before the Coalition Government was formed.

Part of the total fall in public sector employment is due to a statistical reclassification of people employed in English Further Education (FE) Colleges and Sixth Form Colleges from the public to the private sectors. Adjusting for this the underlying reduction in public sector employment between q1 2010 and q4 2012 is 410,000 (6.5%). This is a better indicator of the net impact of public sector job cuts on the overall labour market.

The Office for Budget Responsibility (OBR) projections for public sector jobs relate only to general government employment. Adjusting for statistical reclassification there was an underlying fall in general government employment of 340,000 (-5.9%) between q1 2010 and q4 2012, slightly less than half the total  underlying fall of 700,000 (-12.1%) the OBR projection implies for q1 2010 to q1 2015. Given the current quarterly rate of decline in general government employment the OBR projection points to a further total reduction of 340,000 between q1 2013 and q1 2015.

If the OBR projection proves correct the total fall in general government employment of 700,000 between 2010 and 2015 will match the rise in general government employment from its previous trough in q2 1999 to the previous peak in q4 2009. Consequently the Coalition will in five years cut as many general government jobs as the former Labour Government created in the decade to the end of 2009.

As a point of comparison, during the most recent previous period of UK public sector downsizing in the 1990s, general government employment fell by a total of 590,000 (10.8%) with an average reduction of 75,000 per year. The annual average projected fall in general government employment between 2010 and 2015 is 140,000. On the current OBR projection the Coalition Government is therefore cutting general government employment at almost double the annual amount achieved in the 1990s.

The projected average reduction in general government of almost 43,000 per quarter between now and the General Election due in 2015 is considerably higher than the average reduction of 30,000 per quarter since the 2010 General Election.  However, although this points to a quickening in the pace of public sector downsizing, the actual underlying reduction in general government employment has slowed to around 20,000 per quarter since mid-2012.

If the OBR is right, almost half the pain of public sector jobs cuts expected in the current five year Parliament is still to be felt.  This will almost certainly further exacerbate tension between the government and public sector trade unions at a time when talk of a general strike is in the air. But an important caveat should be applied here.  

As I have continually pointed out over the past couple of years, the OBR methodology for projecting public sector employment takes no account of what’s happening on the ground in public sector workplaces. This raises the possibility that the OBR, which in 2010 greatly underestimated the scale of public sector job cuts in 2011 and 2012, may now be overestimating the scale of future cuts. If the current actual quarterly rate of reduction were to persist, the fall in general government employment between now and 2015 would be 160,000, limiting the total fall between 2010 and 2015 to 520,000. If so, the worst of the public sector job cuts in this Parliament are already behind us.  

Jobs and HRM in the Thatcher years

Last year I prepared a historical timeline looking at trends in work, human resource management and the related political context during the past century. In the light of yesterday's news of the death of Baroness Thatcher, here is my brief account of what happened during the Thatcher era.

Margaret Thatcher entered Downing Street in 1979 as Britain’s first woman prime minister. The Thatcher government broke the post-war political consensus by prioritising low and stable inflation, achieved by controlling the supply of money, rather than full employment as the principal objective of macroeconomic policy. Raising economic growth and cutting unemployment were instead the target of structural or supply side policies, such as de-regulating markets, privatising state run enterprises, switching more of the burden of taxation from incomes to VAT, abolition of the Wages Councils, and curbing the power of trade unions to affect pay bargaining or prevent managers from changing work practices.

The initial combination of tight monetary policy, tight fiscal policy and economic restructuring was a major recession, lasting from 1979 to 1981 and soaring unemployment. Unemployment rose above 3 million (close to 12%), higher than at any time since the 1930s Depression, and remained at around that level until 1986. Manufacturing bore the brunt of job losses, partly because tight monetary policy caused the value of the pound to rise which priced UK goods out of global markets, and partly because the recession coincided with greater use of advanced robot technology and increased competition from emerging economies. Society became imbued with a strong sense of economic insecurity and it was commonly said that people could ‘no longer expect a job for life.’

The efforts of unions to counter the impact of global competition and technology on jobs clashed with the Thatcher government’s aim to fully embrace market forces by weakening union resistance. That resistance was broken most visibly and violently in the Miners’ Strike of 1984-85 and the Wapping newspaper dispute of 1986. Broader social unrest was in turn witnessed in a series of inner city riots, often involving conflict between the police and disadvantaged ethnic minority communities. Trade union membership, which had peaked at around 12.2 million in 1980, entered what was to prove the start of a period of continual long run decline (the number falling to less than 6 million by 2011).

As in the 1930s, the 1980s witnessed a widening north-south divide. Recession, increased competition and technology hit manufacturing and heavy industries, concentrated in the north of Britain particularly hard. By contrast economic recovery, boosted by reductions in interest rates, a boom in house prices and a surge in spending on consumer services, favoured the south. The growing economic power of London and the south east plus the shift from an manufacturing to finance based economy was symbolised by The Big Bang financial deregulation of 1986 and fictionalised by Harry Enfield’s comedy creation Loadsamoney, an employed brash southerner who delighted in flashing his wad of banknotes at poor, jobless, northerners.

Once the economic recovery gathered pace more generally, resulting in a sharp fall in unemployment from 1986 onward, personnel managers in the private sector schooled in the strife ridden post-war era of collective industrial relations and pay bargaining, made full use of the structural and legislative changes taking place.

There was a clear strategic decision to depart from traditional collective procedures and instead focus on employees as individuals. British managers also started to adopt the new US fashion for calling personnel management Human Resources management (HR or HRM). This combined the concept of treating employees as a resource with investment potential with that of treating employees as people who needed to be nurtured and motivated. More and more HR professionals started to specialise, focusing on specific roles in training, reward or diversity. The development of the European Community plus the emergence of multi-national corporations operating in different countries in turn set in train a shift toward what would later be labelled ‘global HR.’ 

HR managers led HR departments and started to introduce individual performance appraisal, individual performance-related pay conditioned by market forces rather than national or sectoral collective agreements, and direct communications between front-line managers and their employees. Organisations also started to be influenced by the management practices of overseas businesses, especially in the car industry, that started to invest in the UK. Increased attention was paid to the quality movement inspired by management writers like William Edwards Deming whose 1982 study Out of the crisis drew on his post-war experience of Japanese management practice. Concepts like lean production and just-in-time systems entered the management lexicon.

British employers and HR gurus started to talk in terms of ‘flexible firms’ comprising a core of workers on permanent contracts working alongside armies of temporary staff and self-employed contractors. Charles Handy published his study on The Future of Work in 1984, forecasting that fewer people would have a single employer but instead be ‘portfolio workers’ performing jobs for a number of different employers. The shift of employment from manufacturing to services also shifted the gender and hours balance of the workplace, with women taking advantage of the greater opportunity to work part-time and workers in general more likely to be employed to work flexible hours rather than on a traditional ‘9 to 5’ basis. Labour market flexibility in turn helped price more low skilled people into jobs, eventually enabling the UK to achieve a lower rate of structural unemployment than seen in the still strongly regulated economies of continental Europe, albeit at the cost of a return to early 20th century style wage inequality.

Government and employers claimed that greater labour market flexibility explained why unemployment started to fall rapidly from 1986 onward once strong demand returned to the economy, though part of this improvement was due to shifting some people receiving unemployment benefits onto incapacity benefits which disguised the true extent of joblessness and welfare dependency. Unfortunately, however, as the decade drew to an end, economic recovery once again turned into an unsustainable inflationary boom (nicknamed the Lawson boom after the then Chancellor of the Exchequer Nigel Lawson). And as usual a bust was soon to follow.  Unemployment began to rise again and was soon on its way back to 3 million.

Without an incomes policy to combat rising prices the Thatcher government instead in 1990 decided to fix the value of the pound and set interest rates at a relatively high level within the constraints of the European Exchange Rate mechanism (ERM). The result was a depression of demand which resulted in recession. Alongside political turmoil caused by the government’s plan to replace the household rates system of local taxation with a poll tax, this marked the end of Mrs Thatcher’s 11 and a half year premiership.

The worrying slump in manufacturing productivity

I’ve just got back from the barbers having had my pre-Easter shearing. Fortunately my Cypriot hairdresser did as good a job as on all my previous visits in the past 20 years. He was understandably concerned about his finances but seemed happy that he was doing haircuts rather than having them metaphorically done to him by assorted monetary authorities. But I made sure I went before the banks reopened, just to be on the safe side.

Suitably shorn, I turned to the latest economic headlines. A good news day it seemed. The Office for National Statistics figures for service sector output looked good, while a report from the OECD paints a somewhat brighter picture for the global economy, continued weakness in the Eurozone notwithstanding. The OECD also reckons the UK will avoid a triple-dip recession, though I’m increasingly tired of debate on this subject. Whatever modest side of zero GDP turns out to be in Q1 2013 is of far less significance than the possibility of several more years of below trend growth.  

As for the latter, with the number of people in work rising sharply against a backdrop of falling GDP it’s not surprising to see that the ONS this morning also reported a further quarterly fall in UK hourly labour productivity (down 2.3% comparing Q4 2012 with Q4 2013). However, I was taken aback by the figures for manufacturing productivity.

Output per hour in the manufacturing sector has now fallen for five successive quarters and in Q4 2012 was 5.2% lower than a year earlier. Such a sharp and prolonged fall is in marked contrast to much of the period since the start of the recession in 2008 during which time manufacturing productivity has generally increased. There have been a few isolated quarters of falling productivity but these have never been sustained in the manner of 2012.

This is worrying. The counterpart to the slump in manufacturing productivity has been a surge in unit wage costs in the sector which have registered a year on year increase of 7.4%, despite relatively subdued pay rises for manufacturing employees. This cost hike is not good for manufacturing competitiveness, especially with our potential customers in the Eurozone feeling the economic squeeze, and represents a serious further blow to hopes of an export led recovery in the UK. Falling productivity in the economy as a whole is a problem as well as a puzzle. A slump in manufacturing productivity is an even bigger concern, and deserves more attention.