Tuesday, 17 March 2020

Initial thoughts on Covid-19 and UK jobs

Earlier today the UK’s Office for National Statistics (ONS) published its latest monthly report on the state of the labour market. These fairly healthy figures mostly refer to the period up to January 2020, before coronavirus Covid-19 spread beyond China to achieve pandemic status. This is therefore one of those times when our positive rear mirror view of the labour market offers little comfort given what we anticipate will obviously be a very rocky road ahead.

Employment was growing strongly at the start of the year (up 184,000 in the three months to January, reaching a record equaling rate of 76.5%). This was not enough to prevent a rise of 63,000 in unemployment – with the jobless rate also up slightly to 3.9% - but only because of a big fall of 175,000 in the number of people leaving economic inactivity in order to seek jobs. There were more jobs in both the private (up 169,000) and public (up 15,000) sectors and although the rate of growth in average regular weekly earnings slowed to 3.1% this delivered 1.5% real terms pay growth. However, it now looks inevitable that the global and local economic impact of the coronavirus on aggregate demand will hit the labour market with at least as much immediate force as the Great Recession just over a decade ago.

It’s too early to assess how much of the impact will fall on jobs as opposed to cuts in hours of work or pay and it will be a few months before the outcome starts to register in ONS figures. Previous recent experience suggests that such a mega shock to the economy has the potential to reduce total employment by between 500,000 and 1 million. But we don’t really know how the global economic supply and demand side dynamics triggered by a natural phenomenon like Covid-19 will actually play out, nor how effective traditional tools of economic management will prove to be in coping with the effects even if wartime levels of financial firepower are devoted to the struggle.

Moreover, assuming government action succeeds in providing enough support to ensuring that fundamentally strong businesses survive to fight another day, there will still be a shortfall in demand for labour while the crisis lasts. It is thus difficult to be optimistic about job prospects in the short-run.

Low unemployment at the onset of the crisis offers some hope that employers will adjust to falling demand in ways that avoid mass layoffs for fear of not being able to recruit staff once the malaise has eased, albeit the weakening of employment protection legislation by the Coalition government between 2010 and 2015 risks a bigger shake-out of jobs than experienced in the recession of 2008/9. Similarly, initial indications suggest that jobs are particularly vulnerable in consumer facing private sector services affected by restrictions on travel or public gatherings. These sectors are not only major employers, the driving force of the so-called ‘jobs miracle’, but also make considerable use of flexible contract workers who are relatively easy to stand down when demand falls. Remember, what the flexible jobs market giveth, it can easily taketh away.

Either way, perhaps the best we can expect, assuming an optimal fiscal, monetary and welfare policy response, is a very sharp rise in unemployment (or some combination of higher unemployment and increased economic inactivity) throughout much of 2020 followed by an equally sharp fall in 2021, if by then the deadly potency of Covid-19 has finally started to subside.      

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