Monday, 16 March 2015

How to view Britain’s post-recession jobs recovery

The performance of the UK labour market since 2010 will feature in political rhetoric between the Budget day on Wednesday 18 March and General Election polling day on May 7. With politicians and commentators set to trade opinions on the subject, here is my brief take viewed in the light of what I thought would happen five years ago  

At the outset of the recession I expected unemployment to rise higher than it has (to a peak of around 10% rather than the outturn of 8.5%) but also expected a very sharp and sustained fall (to well below the pre-crisis rate of 5.2%) once the economy returned to above trend growth. 

The projected effect of the recession on unemployment was based on the assumption of no underlying change in the rate of labour productivity growth and stable real wages. Unemployment only rose less than expected because productivity and real wages at first fell and then remained subdued during the recession and subsequent period of stagnation.

On the subsequent sharp fall in unemployment I argued in a lecture to HR directors in March 2012 'Unemployment: the case for optimism" that this was highly likely because the structural unemployment rate is nowadays much lower than in previous decades (the lecture was a response to a CBI claim at the time that the UK's structural unemployment rate was around 8%, allied to which was a call for further labour market deregulation).

In my view the only barrier to a sharp fall in unemployment in 2012 was the coalition's macroeconomic policy stance, which served to stymie economic recovery in the first few years after 2010. In the event we had to wait another year for a solid improvement in aggregate demand and thus what I would consider a genuine jobs recovery. In terms of trajectory, job growth was weak in 2010 and 2011 and then only very modest in 2012 and the early part of 2013. It was only from mid-2013 onward when the economic recovery really gathered steam that we saw a very fast rate of job growth and acceleration in the fall in unemployment. Unsurprisingly, it is also only in this latter period that we saw the balance of job creation switch away from part-time, temp and self-employment jobs toward full time, permanent jobs for employees. 

The conclusion I draw from this is that had the coalition pursued a less restrictive macroeconomic course after May 2010 the jobs recovery enjoyed since 2012 would have begun much earlier (probably in 2011) and the labour market would by now have tightened sufficiently to allow much stronger real wage growth. Moreover, only the strong aggregate demand driven phase of the jobs recovery from mid-2013 onward can be considered unalloyed good news, which means we should view put figures related to net employment growth between 2010 and 2015 as a whole in the perspective of what has happened to productivity and real wages over the same period.

Although it is possible to portray the use of more workers at lower average real wages to produce a given level of output as good economic news, the reality is that this is a sign of underlying economic malaise rather than strength and does not bode well for long-term improvement in living standards.


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