Monday, 29 October 2012

Jobs reality less cosy than life on planet Randall

I quite like watching Jeff Randall’s live evening business programme on Sky News. I’ve appeared on it once or twice and found Mr Randall courteous as well as challenging. On occasion I’ve also tuned it to hear my own views and forecasts being questioned, notably back in November 2010 when I was working as Chief Economic Adviser to the Chartered Institute of Personnel and Development (CIPD). And although I have now moved on it’s my views that are implicitly under attack in Mr Randall’s criticism of the CIPD as being part of a so-called ‘Armageddon Alliance’, published in this morning’s Daily Telegraph. I therefore think it necessary to put the record straight on a number of counts.

In my 30 years as a professional economist I’ve always steered an independent line on policy issues, and did so throughout my 12 years at the CIPD which is itself a fiercely independent professional membership organisation. This has at times caused me to disagree with politicians and commentators of every hue.

As someone who takes a broadly Keynesian view of macroeconomics, I have argued consistently since 2010 that the coalition’s policy of rapid severe fiscal austerity is misguided in an economy struggling to escape the trauma of the worst global post-war financial crisis. I continue to hold this opinion and cite the experience of the past two years, in which the economy has experienced almost no overall net expansion in output, as proof in support of those who share my view. And on this matter I make no apology in acknowledging that my opinion is far closer to that of the Shadow Chancellor of the Exchequer than to the present incumbent of 11 Downing Street.  

It is, however, my analysis of the labour market that requires most scrutiny. My reckoning in 2010 was that the coalition government’s fiscal austerity measures would eventually result in a gross loss of 1.6m million jobs across both the public and private sectors of the economy. The net effect on employment would then depend on the strength of any subsequent recovery in private sector employment, which would in turn depend on the overall strength of the economy.    

I have so far seen no reason to alter my estimate of the gross employment effect of austerity. While my estimate that public sector employment would fall by more than 700,000 was widely ridiculed in 2010 this is precisely what the Office for Budget Responsibility (OBR) has been projecting since November 2011.  Redundancies in the construction and retail sectors, those parts of the private sector most obviously susceptible to cuts in public spending and the higher rate of VAT, have to date also been running in line with my expectations.

What has surprised me, however, is the strength of offsetting job gains, especially in 2012, which has resulted in a much bigger than expected net increase in employment. Having argued at the outset of the recession in 2008 that Britain’s flexible labour market was likely to respond to an economic shock far better than in earlier decades, I had anticipated a relatively fast rate of job creation once the economy started to grow again. Yet despite this I did not expect to witness net employment growth against the backdrop of economic stagnation. Indeed, my forecast for 2012, published by the CIPD last December, was for employment to fall and unemployment to rise to close to 2.9 million this year. But if this was an Armageddon forecast it was one shared by most other major forecasters, including the OBR.    

Just why the economy has been creating jobs without economic growth therefore remains a puzzle to most economists, especially when one also considers that the stock of unfilled job vacancies has, like the GDP growth rate, been flat-lining since 2010.  Putting to one side explanations that involve some error in either the GDP or jobs data, I think the answer lies in a slump in real wages – down around 7% since 2009 – and a tougher benefit regime that means jobless people fill part-time jobs that they might have turned down in previous recessions when, like now, there was a serious shortage of full-time vacancies.

This brings me, finally, to Mr Randall’s criticism that the CIPD is dismissive of people who have become self-employed during the recession, a group who in one of my final reports for the Institute I described as ‘odd jobbers’. Again not true. Self-employment is a welcome feature of our economy. I myself recently became self-employed. But just as jobless people who want full-time work have been turning to part-time employment to avoid the dole, so too the tens of thousands of people who have taken up self-employment but who in a stronger economy would probably choose to work as employees.

Having looked in detail at the rise in self-employment between 2008 and 2011, my CIPD report concluded that this was accounted for by individuals with characteristics very unlike the bulk of self-employed people. The latter tend either to be skilled professional consultants or trades people of the ‘white van man’ variety, in both cases working long hours. The ‘new self-employed’ by contrast are often unskilled and work hardly any hours at all – hence the ‘odd jobber’ tag.

Although the recent jobs market data have taken many people, myself included, by surprise, on closer examination the picture they paint is one consistent with an economy that is seriously short of demand rather than, as the tenor of Mr Randall’s article suggests, on the up. ‘Part-time/odd job/pay squeezed’ Britain might well be preferable to the kind of ‘doleful Britain’ seen in earlier decades but it is just as much a sign of ongoing economic malaise. And those of us who wish to point this out rather than act as cheerleaders for a flawed fiscal policy don’t deserve to be called ‘pedlars of gloom’.  


  1. So, any ideas on how to get the economy going again?

    Has anyone any ideas on how to get the economy going again?

    What about linking the top-rate of bankers income tax to the unemployment rate; kind of like an engine governor?

    Surely to get the economy going again we need to winkle out the QE money sitting in banks, and guide the banks away from "casino" banking.

    Let's say bankers top-rate of income tax is dynamically set at ten times the percentage unemployment level.
    This would have seen it around the 80% mark for the first half of 2012.
    Before the bankers melted the globe, this would have been about a 50% top-level of income tax.
    Strictly speaking this is offering them more money, we're just resetting the base level from which "more" is measured.

    Simplicity itself.


    1. Thanks Harry

      Food for thought. I'd start by getting more credit to small businesses and for government to borrow for infrastructure investment. Temporary cut in VAT would be a good idea too. There is a case for higher taxes on top earners - including bankers - but more as an issue of fiscal fairness than a means of kick starting the economy per se

      Cheers, John