A, little, bit of festive jobs cheer

It’s freezing outside and quite Christmassy, so not the ideal day for looking at the monthly jobs stats. For once, however, they brought a bit of cheer. Not a great deal, maybe, but a bit.

On the disappointing side, the rate of UK private sector job growth, having achieved a pace in the summer that Usain Bolt would have admired, has slowed considerably following the Olympics boost. The third quarter increase of around 40,000 was only about half that achieved in the second. However, there were still easily enough net new private sector jobs (65,000) to offset continued public sector job cuts of 24,000.  This along with a rise in the number of economically inactive people resulted in a further quarterly fall in unemployment (down 82,000), with all the new jobs being full-time posts for employees with permanent contracts. Moreover, the rise in full-time jobs for employees appears to be encouraging more self-employed people to seek employers rather than go it alone (self-employment is down 23,000 on the quarter). So while the pace of job creation has slowed it looks as though underemployment, and thus the overall shortage of work, has fallen slightly.

                                        

It’s also good to see a continued fall in youth unemployment of 72,000, with the best news being for the core of youth jobless not in full-time education, who are probably being helped by the government’s Youth Contract measures. The number of people long-term unemployed has remained unchanged, though with total unemployment having fallen even more the percentage long-term unemployed has increased.

But the news is less good on the pay front. Had a sharp jump in bonus payments not boosted pay packets, the latest earnings figures would have registered a sharp fall in the rate of growth rather than a steady 1.8%. With consumer price inflation still stubbornly running well above 2%, this suggests the real pay squeeze is set to continue for some time whatever happens to jobs and unemployment.                 

A temperature check for the UK labour market

Those economists who have been proved right to be pessimistic about prospects for UK economic growth following the recession of 2008-09 have nonetheless been surprised by what’s happened to the labour market. For example, the unemployment rate, which had been widely forecast to reach 8.7% by the end of 2012, will probably end the year at below 8%. It would be wrong, however, to conclude that this means the labour market has got off relatively lightly in the period since the financial crisis first broke. On the contrary, the degree of pain inflicted on the labour market has been as severe as expected it’s just that the pain has been felt in a different way. In particular, an unprecedented post-war slump in real earnings – caused by a mix of below inflation pay rises and shorter hours working - has served to spread pain throughout the workforce rather than, as in previous recessions, seen it concentrated on the unemployed.

Consequently, while unemployment remains the key central indicator of the overall balance of supply and demand in the labour market it doesn’t provide a full temperature reading. My consultancy The Jobs Economist (www.thejobseconomist.org) is therefore publishing a Labour Market Temperature Index (LMTI), a variant on the well-known Economic Misery Index first devised by economist Arthur Okun in the 1960s. The original Misery Index was calculated by adding the unemployment rate to the consumer price inflation rate. The labour market variant instead adds the unemployment rate to the rate of change of real earnings.

The LMTI takes into account the impact of (CPI) price inflation, nominal pay increases and changes in average hours worked per person, the latter two variables determining the rate of growth of average weekly earnings. The index is in turn benchmarked against an even temperature reading for the labour market, set at zero. A sub-zero reading is a measure of deficient demand for labour assuming that the chosen even temperature benchmark reflects the sustainable (or structural) rate of unemployment and the sustainable rate of average real weekly wage growth. Sustainable in this context means the rates consistent with the official policy target of 2% CPI inflation, which on the basis of estimates currently implicit in economic modelling by the independent Office for Budget Responsibility (OBR) corresponds to an assumed sustainable rate of unemployment of around 5% and sustainable real average weekly wage growth of around 2%.

The LMTI should be considered a temperature index rather than a misery index since its purpose is to gauge fluctuation in the demand side strength or weakness of the labour market rather than measure the precise extent of human distress or misery this causes. Although any sub-zero LMTI reading will increase misery, the same overall temperature reading can give rise to a variety of configurations between pay, hours of work and unemployment, with those resulting in higher unemployment generally thought to be the source of greater misery. The post 2008 configuration is therefore likely to have been associated with less misery than the higher unemployment configurations witnessed in the wake of the 1980s and 1990s recessions.

The figure below shows how the UK’s LMTI has fluctuated since 2000. Prior to the recession of 2008-9 the overall temperature reading was close to or above zero. Unemployment at that time was likely to have been close to its underlying structural rate, with the strength of demand for labour resulting in higher real wage growth for people in work. Since then mounting labour market weakness has shown up in a combination of higher unemployment, shorter working hours and real wage reductions. Comparing 2008 and 2012 the net reduction in demand for labour as measured by the fall in the LMTI is more than twice that indicated by the rise in unemployment. The cooling shown by the LMTI is thus more indicative of the overall degree of pain inflicted on the labour market since the start of the financial crisis.       

The labour market was at its coldest in February 2009 with a LMTI reading of -13. Things warmed up a little in early 2010 but cooled again in 2011. Though the labour market temperature has improved in 2012 in response to a fall in unemployment and moderation in the squeeze on real earnings, sub-zero conditions continue. Indeed, a projection of the LMTI based on the latest OBR economic forecast, published last week alongside the Chancellor’s Autumn Statement, suggests a further period of cooling in the near term with subsequent warming to 2018 doing no more than easing the chill.  If the OBR forecast proves correct the UK labour market will eventually have suffered a sub-zero decade, still be feeling cold, and some distance from returning to the pre-financial crisis climate. 

Autumn Statement: the Octopus strikes back

I’m getting old. Set piece parliamentary events like today’s Autumn Statement only serve to bring out the cynic in me. The current Chancellor of the Exchequer seems even more adept than most of his recent predecessors at pulling the smoke and mirrors trick in order to make the fiscal arithmetic look better. And listening to him address the House of Commons this lunchtime one might even think the Office for Budget Responsibility (OBR) had painted a fairly rosy outlook for jobs. However, a closer look at what the OBR actually published today offers a rather different perspective.   

Although, as the Chancellor stated, the OBR has lowered its forecast for the peak in unemployment from 8.7% to 8.3%, it nonetheless paints a very bleak outlook for the UK labour market in 2013. The number of people in work is forecast to be unchanged between Q4 2012 and Q4 2013, the employment rate is forecast to fall from 58.4% to 58.1%, the number of people unemployed is forecast to rise by 100,000 with the unemployment rate increasing from 7.9% to 8.3%. Whatever the medium term employment impact of the policy measures contained in the Autumn Statement, the OBR clearly does not expect these to help the jobless in the short term.

The picture for the public sector is even bleaker. Again, the Chancellor stated that the OBR is forecasting that two additional private sector jobs will be created for each job lost from the public sector. What he didn’t mention was the scale of projected public sector job cuts. The OBR is now projecting that the coalition’s spending plans will eventually result in the loss of 1.1 million public sector jobs, including 700,000 in the current Parliament. Assuming the OBR is correct in forecasting 2.4 million additional private sector jobs in the coming years, the share of public sector employment in total employment is heading toward a record post war low.

When I predicted public sector job losses on this scale in 2010 I was ridiculed in many quarters, most notably by Conservative MP Michael Fallon who verbally attacked me during an oral evidence session before the Commons Treasury Select Committee suggesting that I had the professional “credibility of a dead octopus”. Mr Fallon, now a minister in the Business Department, has been doing the post Autumn Statement media round this afternoon defending the Chancellor’s policy record. He was wrong in 2010 and didn’t sound very credible today either. I suggest Mr Fallon consult the seaweed, it might offer him a way forward.   

Winners and losers in the 2011-12 jobs market

I’m slightly hesitant about naming anyone in my blog at the moment. Within days of mentioning Clive Dunn, the Dad’s Army actor died at the age of 91. Last week’s Dallas themed post was equally swiftly followed by the death of 81 year old Larry Hagman. The latter was most famous for playing the character JR Ewing, whose fictional close encounter with death a generation ago meant that “Who Shot JR?” for a short while usurped “Who Killed JFK?” as the question most associated with the Texan city. It was therefore somehow fitting that Mr Hagman passed away on November 23^rd, just one day after the 49^th anniversary of the assassination of the former United States president.

Back here at home 22 November saw the Office for National Statistics (ONS) release the latest Annual Survey of Hours and Earnings (ASHE). The results confirm the extent of the real pay squeeze between spring 2011 and 2012, with hourly median pay growth for full-time employees only around half the corresponding 3% rise in price inflation as measured by the Consumer Prices Index. But with the national minimum wage helping to support pay in the lower half of the earnings league, the top 10% of earners felt the biggest squeeze. The pay of full-time employees in the bottom tenth of the distribution increased by 2.3%, while pay for those in the top tenth fell by 0.2% (i.e. a real hourly pay cut of 3.2%).

My initial response to this was that although the pay gap between top, middle and low earners remains very wide in the UK and is still far wider than a generation ago, 2011-12 has as least turned out to be something of a ‘we’re all in it together’ year in Britain’s jobs market with pay at the top hit hardest by the double dip recession. However, I was also interested to see how pay growth between spring 2011 and 2012 compared with employment growth during roughly the same period (April-June in each year), as discussed in my blog posting of 12 November which listed the top 10 fastest growing occupations in the past year and the 10 occupations recording the biggest loss of employment.

Growing demand for certain types of labour might result in a combination of relatively strong growth in both employment and pay, or vice versa where demand is weak. But it’s also possible that faster or slower pay growth could help price some types of workers out of or into jobs, thereby causing pay and employment growth to diverge.   

Although the ASHE lists the number of jobs in each occupation as well as pay and hours these are considered indicative rather than accurate estimates, so it’s best to compare the ASHE results with the broadly corresponding Labour Force Survey employment estimates.

Listed according to their position in the Standard Occupational Classification (SOC) the 10 fastest growing occupations saw the following percentage change in median hourly earnings for full-time employees: Production Managers and Directors in Manufacturing (+1.1%), Human Resource Managers and Directors (+2.2%), Information Technology Specialist Managers (-0.5%),  Management Consultants and Business Analysts (-0.3%), Quality Assurance and Regulatory Professionals (-2.8%), Graphic Designers (+1.0%), Financial Accounts Managers (+0.7%), Credit Controllers (+0.5%), Chefs (+0.5%) and Sales and Retail Assistants (+1.9%).

The corresponding changes for the 10 occupations registering the biggest jobs losses are: Financial Managers and Directors (+0.2%), Chartered and Certified Accountants (+5.5%), Youth and Community Workers (-2.8%), Local Government Administrative Occupations (+0.8%), Typists and Related Keyboard Occupations (+1.8%),  Electricians and Electrical Fitters (+0.1%), Plumbers and Heating and Ventilating Engineers (-0.5%), Teaching Assistants (+2.5%), Nursing Auxiliaries (+1.4%), Security Guards and Related Occupations (+0.8).

Interestingly the only one of these 20 occupations to register a real hourly pay increase, Chartered and Certified Accountants, was one of the biggest job shedders (down 39,000 or 16.8% on the year), suggesting that this group was content to trade-off higher pay against jobs. The biggest losers are Youth and Community Workers, who suffered a 5.8% real hourly pay cut as well as shedding 25,000 jobs, a 30% reduction in numbers. Of the remainder, Human Resource Managers and Directors is the occupation that fares best (a modest hourly pay cut of 0.8%, alongside employment growth of 22,000, or 19.2%), indicating relatively strong demand for this group. Ironically, therefore, HR managers and directors, who are employed to deliver news about pay and job cuts to others in the workplace, have of late been keeping the best news for themselves.  

HR - more big hats, cattle no more engaged or productive

Talk about finding sixpence and losing a shilling. Just as I rejoiced at no longer having to watch archive footage of Jim’ll fix it!, while channel hopping I discover that an updated version of Dallas is on TV. Little has changed. Once again JR Ewing is dismissing a rival as being ‘big hat, no cattle’, talking a lot but lacking money, power and influence. This reminded me that the same phrase has often been used to deride the HR profession, so I decided to take a quick look at what’s been happening to the size of HR hats and what effect this might be having on the ‘cattle’ they're responsible for.

On the conventional Labour Force Survey measure just over 0.4 million people are currently (Q2 2012) employed in HR and development roles in the UK. This narrow figure encompasses HR directors, managers, trainers, and administrators. The figure doubles to around 0.8 million if payroll and wage clerks are added but people doing these jobs are often considered finance rather than HR staff.

The narrow HR total is 83,000 higher than in 2001. The number surged by almost 100,000 to a total of 450,000 in the boom years to 2008 before falling in the 2008-9 recession, settling at 432,000 in 2010. But the number has since recovered to 437,000 despite the 2011-12 recession and widespread back office job cuts in the public sector. Although occupational classifications changed in 2011 the effect of this on HR was simply to reclassify some HR director roles to HR managerial roles and to separate HR administrators into a specific occupational sub-category. This led to a sudden statistical drop of 28,000 between 2010 and 2011 in the number of senior HR staff and a corresponding jump in HR managers and administrators. However, the number of senior HR staff bounced back sharply between 2011 and 2012 with a 22,000 increase to a total of 136,000, 17,000 more than the equivalent figure in 2001.

The number of ‘big hat’ HR honchos is thus around 14% higher and the level of HR staff in general almost a quarter (23.5%) higher than in 2001.  The share of HR in total employment has likewise increased from 1.3% to 1.5%. This is great news for the HR profession but is also somewhat disconcerting. While HR employment has increased considerably in both absolute and relative terms in the past decade this hasn't had any discernible effect on outcome measures of things one might expect HR to have a positive influence on.

Surveys suggest that the average rate of what is now fashionably called ‘employee engagement’ has flat-lined in the UK since this began to be measured in the early 2000s. Growth in labour productivity meanwhile has, as we are constantly being told, been even more disappointing. It might be argued that things would have been even worse had we not created more HR jobs but on the face of things HR appears to have offered a smaller bang for the buck in recent years.

HR professionals rightly call upon organisations to adopt better people management practice in order to raise levels of employee engagement and boost productivity. But in doing so HR must also demonstrate that it is genuinely adding value to organisations and is not just a compliance or administrative function.  The UK has a lot more HR hats and a lot more big and high paid HR hats, yet the ‘cattle’ are no more engaged or more productive. Before the HR profession points the finger of blame about poor workplace performance it needs to explain why its own influence appears so ineffective          

Jobs schemes boost latest jobs figures

I’ve just been looking at the monthly labour market statistics data release from the Office for National Statistics, mostly covering the period July-September. On the face of things these are another good set of quarterly jobs figures with 100,000 more people in work and unemployment down by 49,000, although the 10,000 rise in JSA claimant unemployment in October takes away some of the shine as does very weak growth in average earnings. The annual rate of growth in regular pay (excluding bonuses) has dropped across all the major sector groupings, to just 1.9% on average, so still lagging price inflation. Employment may have become oddly decoupled from what’s happening in the wider economy but viewed in the full perspective of jobs, productivity and pay the UK labour market remains in a state of distress.   

The number of employees in employment has increased by 87,000 while self-employment has fallen by 11,000. Significantly more than a fifth (22,000) of the net increase in total employment and almost half the fall in unemployment is due to a big quarterly rise in the number of people employed on government supported employment and training schemes. Many of these will be core jobless young people not in full-time education targeted by measures such as the Youth Contract. The number of unemployed people aged 16-24 in the core jobless category fell by 65,000 on the quarter, compared with an increase of 17,000 in 16-24s looking for work while in full-time education. This suggests that help for the target group of core jobless may be substituting for jobs that would otherwise have been taken by those in education.

The high proportion of scheme supported jobs in total new jobs this quarter distorts the underlying trend in growth in full-time and part-time jobs. Even so, it’s good to see signs of increased working hours and at last a welcome fall of 11,000 in the number of people working part-time because they can’t find a full-time job. It would seem that the jobs story in the most recent quarter is not so much one of full-time vs. part time work as temporary as opposed to permanent work, with an increase to 0.65 million in the number of people working as temps because they can’t find permanent jobs.

Also welcome in these latest figures is a surprising quarterly reversal of the traditional north-south divide across the English regions, with the North East, North West, Yorkshire and Humberside and West Midlands easily outperforming London, the South East and the East Midlands both in terms of increased employment and lower unemployment. The South East labour market looks to have weakened markedly since the spring while in London the temporary boost provided by the Olympics appears to be on the wane.

What jobs are being created?

It’s been a remarkable year in Britain’s jobs market. A flat economy has added more than 500,000 net new jobs – an annual employment growth rate of around 2% that one would normally expect only in a period of strong growth in GDP. There has been much discussion of this puzzling outcome which, even more remarkably, has occurred alongside large scale public sector job cuts. Most comment has focused on self-employment and part-time employment which together account for the bulk of the increase. Yet relatively little attention has been given to the types of jobs that have been created, or for that matter lost, during the surprising jobs boom. I’ve therefore looked at what at present available Office for National Statistics (ONS) data reveal about employment change by occupation in the past year.  

Managerial and professional jobs dominate the top 10 positions in the league table of UK job growth between April-June 2011 and April-June 2012, with big gains for Production Managers and Directors in Manufacturing (up 33,000, 13%), Human Resource (HR) managers and Directors (up 22,000, 19.2%), Management Consultants and Business Analysts (up 18,000, 12.3%), Quality Assurance and Regulatory Professionals (up 18,000, 29.5%), and Information Technology (IT) Specialist Managers (up 18,000, 10.3%).  However, Sales and Retail Assistants saw the biggest jobs gains (up 77,000, +7.2%), while the number of Chefs in employment also increased substantially (up 27,000, 14.4%).

The majority of the 10 occupations registering the biggest jobs losses are outside the managerial and professional groups, with the impact of the recession and cuts in public expenditure apparent in falling employment of Electricians and Electrical Fitters (down 26,000, 9.3%), Plumbers and Heating and Ventilating Engineers (down 24,000, 12.6%), Nursing Auxiliaries (down 32,000, 10.6%), Teaching Assistants (down 25,000, 7.1%), Youth and Community Workers (down 25,000, 30%) and Local Government Administrative Occupations (down 18,000, 10.5%).  Other occupations shedding substantial numbers of jobs include Electrical Engineers (down 17,000 36.9%), Medical Practitioners (down 15,000, 6.2%), Special Needs Education Teaching Professionals (down 14,000, 19.7%), Further Education Teaching Professionals (down 13,000, 9.4%) and Police Officers below sergeant level (down 12,000, 6.9%).

From the available data I also estimate that 1 in 14 UK workers (2.1 million or 7.1% of all people in employment) are back office workers. Of these 0.7 million work in finance, 0.4 million in HR, 0.4 million in IT and 0.6 million in back office administration. The number of back office jobs increased by more than 100,000 (4.8%) between 2011 and 2012, in percentage terms more than double the net increase in total employment.      

This analysis overall shows that the recent ‘jobs boom’ is a mix of good news for some groups of workers but bad news for others. While the net job gain is most welcome, at a time of economic austerity and mounting social distress it’s obviously worrying that we are shedding so many front-line public sector jobs in areas like health, teaching, policing and youth and community support work.    

Moreover, in a period of falling labour productivity it’s also very puzzling to see so many back office jobs being created. HR managers and IT professionals may be important to our increasingly knowledge based and personalized service based economy but it’s nonetheless surprising to see a surge in back office jobs at this stage in the economic cycle.  

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. http://www.telegraph.co.uk/finance/comment/jeffrandall/9639842/Armageddon-It-doesnt-look-like-it-to-me.html 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’.  

Much ado about nothing but construction

There’s always something slightly old fashioned about Office for National Statistics (ONS) media events and this morning’s press conference to announce the preliminary estimate of Q3 GDP was no exception. Avuncular chief economist Joe Grice delivered the news that the economy had grown by 1% between Q2 and Q3 – marking a statistical departure from the double-dip recession – with the air of a country solicitor telling assembled eager beneficiaries of a will that it’s a little too soon to be precise about the size of the bequest.

Mr Grice said that the latest growth estimate will have been affected, positively and negatively, by the impact on the economy of the Queen’s Diamond Jubilee bank holiday, unusually poor midsummer weather and the Olympic and Paralympic games. But just how big these effects are wasn’t yet clear, although the sales of tickets to the two sporting extravaganzas was reckoned to have added 0.2% to GDP in Q3.

However, what the sober statisticians did highlight was that even with the largest quarterly surge in output since before the start of the financial crisis in 2007 the economy was no bigger in Q3 than a year before and only 0.6% bigger than Q3 2010. The economy has thus been through three quarters of decline and one quarter of growth which roughly balance out. Given the furore that accompanies these GDP snapshots, good and bad, this could be a case of much ado about nothing. Yet that can’t be said about one particular sector, construction, which may hold the key to explaining why the economy has flat-lined over the past year.

Q3 was much better for both the production and service sectors which grew by 1.1% and 1.3% respectively (the latter, intriguingly, boosted most by output in the ‘government and other services’ sub-sector). But construction sector output contracted by 2.5% in the quarter, following a big contraction in previous quarters. While all such figures are subject to revision, these preliminary estimates suggest that the construction sector is producing 10.8% less than a year ago and a whopping 17% less than before the recession.

Why is this economically significant as well as important for construction firms and workers? Because construction is not only suffering very badly, in terms of jobs and pay as well as output,  but is also the one major part of private sector activity that is clearly being adversely hit by fiscal austerity.

The Chancellor may argue that broader economic forces, rather than cuts in public spending and investment, are the reason for our current woes. But the plight of the construction sector suggests otherwise. Mr Osborne may outline his own ideas for boosting infrastructure spending, and thus demand for construction projects, in the forthcoming autumn statement. However, the longer he waits the fewer the excuses he will have if the relatively good economic news in Q3 isn’t repeated well into next year.            

Mini jobs, maximum confusion

In common with some of you reading this blog, I spent much of yesterday at a seminar organised by the Office for National Statistics (ONS) listening to assembled economists and number crunchers puzzling over why Britain’s stagnant economy is somehow creating jobs by the bucket load albeit at the cost of a slump in labour productivity.

As is often the case at such events, most participants agreed there is a puzzle to solve but no one was fully convinced by any of the suggested explanations, though the ONS was at pains to stress there is nothing dodgy about the numbers it churns out. I therefore left feeling rather like one of those bemused coppers in television’s Silent Witness who can’t understand why after hours of picking over a horribly mutilated corpse the expert pathologists are unable to tell him how, let alone why, the victim died.   

I’m no less bemused this morning having sifted through the latest ONS labour market statistics. There’s no doubting the headline news is good – a quarterly June to August rise of 212,000 in the number of people in work and 50,000 fewer unemployed. August in particular appears to have been an amazingly strong month of almost Olympian proportions in the jobs market, the ONS monthly estimate suggesting that total unemployment may have dropped by more than 190,000 in that single month alone.

Best of all 18-24 year olds account for almost a quarter of the rise in employment, helping to cut total youth unemployment to below 1 million. And better still, these jobs have gone to NEETs, jobless young people not in education or training, rather than students looking for jobs to support them through college.

Yet not everything in the garden is rosy. 1 in 3 new jobs created in the latest quarter are ‘mini-jobs’ providing fewer than 15 hours paid work per week while more than half (54%) provide fewer than 30 hours. Moreover, the annual rate of growth in average earnings was just 1.7%, much slower than the corresponding rise in the Consumer Prices Index.    

For millions of people in work the downside of generating jobs in a stagnant economy is therefore low hours at low pay and with little prospect of getting a pay rise big enough to keep pace with price inflation.  A surge in low paid mini jobs may be better than no jobs at all but this is not a sign that the economy is experiencing anything like a proper recovery.

‘Shares for rights’ risks sullying employee ownership

What is it with George Osborne and Adrian Beecroft? Business Secretary Vince Cable openly reckons venture capitalist Beecroft’s ideas on reforming employment law are ‘bonkers’. Yet time and again the Chancellor gives special credence to whatever the leading Tory donor proposes.

Mr Osborne was at it again today in his speech to the Conservative Party conference in Birmingham. Having name checked his friend in a manner otherwise confined only to the prime minister and high ranking Cabinet colleagues, the Chancellor announced a Beecroft inspired change to employment law that, when introduced next April, will allow private sector employees to swap certain employment rights for shares in the companies they work for. Moreover any profits made on the shares held by these new ‘owner employees’ will be exempt from capital gains tax if they do not exceed £50,000.

The plan, detail of which is subject to consultation, is aimed primarily at small and medium sized businesses in an effort to encourage them to hire, although companies of any size can take part. Participating employees will waive their rights on unfair dismissal and redundancy as well as the right to request flexible working and time off to train. Women on maternity leave will also have to give much longer notice of the date they will return to work. Existing employees can choose whether to give up these rights for shares but when hiring new staff employers will be able to offer contracts only on these terms if they so wish. The only proviso is that if an employee leaves, is dismissed or made redundant the company has to buy their shares back at “a reasonable price.”

Mixing the sensible idea of employee share ownership, which can in principle be said to be good for businesses and workers alike, with the populist view, widely held in business circles, that watering down workers’ rights is good for jobs, is clever politics. The Chancellor reckons ‘owner-employees’ amounts to “owners, workers and the taxman all in it together’. But could linking this to reduced workers’ rights prove to be lousy economics?

An obvious problem is limited take-up. For some workers giving up key employment rights for the uncertainty of a return on shareholdings will look like a risky bet, increasing their day to day insecurity with no guarantee of additional reward. However, even if others decide the risk is worthwhile, associating employee share ownership with minimal employment rights undermines the shared interest ethos that makes such ownership successful in the first place.

Having shares in a company is a potential incentive to higher employee performance and productivity not only because of the possibility of greater financial reward but also because it tends to go hand in hand with high trust styles of employment relations. This is the exact opposite of the ‘hire and fire’ business culture that the Chancellor and Mr Beecroft seem determine to instil in the UK. Given, as is well known, that there is no evidence to suggest that watering down workers’ rights would have any significant positive impact on employment levels, why sully employee share ownership with the taint of low trust management and heightened job insecurity.  

Shaken and stirred by tax dodge debate

Turned on the radio just before 7am this morning and immediately heard Monty Norman’s famous James Bond theme, played to mark fifty years since the film franchise was launched with the release of Dr No. In a reverse of the way Bond likes his favourite tipple fixed, I was stirred rather than shaken by the music. But within seconds a phone call from BBC Radio 5 live, asking me to give a live interview at 7:10, kick started the adrenaline.

The House of Commons Public Accounts committee has published a report looking at the contractual arrangements of people hired by public bodies, notably the BBC, which enables them to pay less tax. These so-called ‘off payroll’ staff are self-employed service providing contractors who control their own limited companies. They can avoid the income tax and national insurance they would pay if engaged by public sector organisations on the payroll as employees. While such arrangements are perfectly legal the concern is that these contractors, especially if they work for just one public body or do so for a prolonged period of time, are merely employees dressed up as self-employed to cut their tax bill.   

The issue surfaced earlier this year when it was revealed that the head of the Student Loans Company was employed full-time on this basis, which led MPs on the Commons committee to inquire into the scale of the practice. HM Treasury has also been undertaking an investigation and is currently reviewing submissions to a public consultation exercise which it ran until August.  

The perceived avoidance caused by ‘disguised self-employment’ was initially tackled almost a decade ago by the IR35 legislation but it’s generally reckoned that this is being bypassed because of more widespread hiring of ‘controlling persons’ , so ministers are considering tighter regulation. The aim now is therefore to ensure that where an organisation hires a controlling person to perform a role, that organisation (unless a private sector firm with fewer than 10 staff) will have to deduct PAYE and NI at source, just as if the contractor were an employee. 

Judging by the tone of today’s Commons report, not to mention loads of anti-tax avoidance stories in this morning’s newspapers, there is likely to be widespread political and popular support for such a move. For example, the shadow chancellor Ed Balls spoke of cracking down on ‘bogus self-employment’ when addressing the Labour Party conference at the start of the week. However, those taking tough action must take care not to undermine the important source of flexibility that ‘off payroll’ work provides both to hiring organisations and the economy more generally.  

The Treasury has yet to calculate how much revenue a tightening of tax rules in this area might generate, though it does conclude that there will be ‘no significant economic impact’ and only ‘minimal impact’ on public service delivery, a conclusion I find somewhat surprising.

It’s silly to portray off payroll contractors as tax avoiding ‘fat cats’ who can afford to cough up extra taxes without any side effects. Only a minority are the ‘top talent’ media personalities that attract criticism, the majority are working long hours for comparatively little financial reward. The most obvious possibility therefore is that if required to pay higher tax and national insurance these contractors will simply raise their fees. This will either dent any hoped for addition to the government’s coffers or mean that public sector bodies will cut back on their use of contractors, which will be bad news for those hoping to improve public service delivery as well as contractors themselves. If private sector organisations (which will also be covered by changes to tax rules) end up having to cut back too, work will be left undone with no guarantee that more employees will be hired on the employee payroll to compensate.

It’s perfectly understandable that at a time of fiscal austerity, with either ‘we’re all in this together’ or ‘One Nation’ essential mantras for politicians looking to respond to popular sentiment, there is a policy imperative to ensure everyone pays their fair share of tax. But it’s daft to go about improving tax transparency in a way that could easily harm public sector reform, economic growth and jobs. We may not need our politicians to be as ruthlessly efficient as James Bond, but we don’t want them to act like Bond’s hapless comic opposite Johnny English and shoot us all in the foot either.  

No kidding - employment might be flat-lining too

I liked Ed Balls’s Butch Cameron and the Flat Line Kid joke in his Labour Party conference speech yesterday. Not, it has to be said, a side splitter but funny enough to trigger a smile. However, a lot of economists think the joke will one day be on the shadow chancellor himself, who may eventually have to admit that the economy is doing a little better than official statistics at present suggest.

Last week the Office for National statistics (ONS) revised its estimates for GDP in the second quarter of the year. Output fell by 0.4%, a bit better than the previous estimate of minus 0.5% and a lot better than the 0.7% contraction the ONS originally reported. Many commentators reckon that without the distorting effect of the long June bank holiday to celebrate the Queen’s Diamond Jubilee the economy might have registered positive growth. Moreover, some go further in challenging the accuracy of the ONS numbers, which show contraction since the final quarter of 2011, thereby questioning whether there has been a double dip recession at all.

One reason for this is the strength of employment growth during this period. The number of people in work rose by 201,000 in the second quarter, while total unemployment fell by 46,000. Maybe, it’s argued, this isn’t a genuine puzzle, but simply the result of faulty GDP estimates. Yet while the growth figures get a lot of stick the employment and unemployment figures are taken at face value, so it was good to see last Saturday’s article on the Labour Force Survey (LFS) by Sam Fleming, economics editor of The Times.

http://www.thetimes.co.uk/tto/business/economics/article3553295.ece

The LFS provides estimates, published each month, of a variety of key labour market indicators drawn from a rolling quarterly survey of households. All those in the sampled households aged 16 or over are interviewed five times at 13 week intervals, initially face to face, and asked questions about their employment status, hours of work, pay etc. Households drop out of the sample after their fifth interview and are replaced by newly sampled households, so there is a quarterly turnover rate of 20% in the total sample.

The survey involves a variety of well-known statistical practices designed to ensure results can be obtained and published without too much delay. For example, if a household misses one of its interviews its responses from the previous interview are assumed to be unchanged (a process called imputation, though this is not extended if a further interview is missed). Similarly, typically, a third of responses are proxies, with answers for a temporarily absent household member given by an appropriate respondent, normally a spouse or parent of the absent person. While these proxy responses, which are much higher than average in the case of teenagers and ethnic minorities, amount in effect to informed guesses, an ONS study from the late 1990s suggests they provide fairly close approximations to the answers the absent respondent would have given except with regard to hours of work and earnings.   

However, as The Times article notes, these normal statistical practices are being applied to a survey with a much lower response rate, and thus far fewer households, than it used to achieve. This is due in part to a methodological change in 2010 which saw households with respondents aged 75 or over removed from the sample after their first interview because it was found that their subsequent answers were very unlikely to change. But a long running downward trend is evident nonetheless, with the total sample having fallen from around 60,000 to around 45,000 between 1999 and 2010.

The significance of this lies in what it might mean for so-called ‘sampling variability’. This is the possibility that any given survey sample might give a somewhat different estimate of particular labour market indicators than other samples. This possibility gets bigger the smaller the sample size of the survey. Consequently, the ONS publishes substantial confidence intervals alongside its estimates of LFS indicators which show how much higher or lower the ‘true’ figure of an indicator might be than the survey estimate.

These confidence intervals don’t get much attention but in the second quarter of 2012 were as high as 159,000 for the quarterly LFS estimate of the level of total employment and 83,000 for total unemployment. The corresponding estimated quarterly rise in employment and fall in unemployment was 201,000 and 46,000. It is therefore quite possible that employment increased by no more than 40,000 in that quarter with unemployment flat.

I personally doubt that the puzzle of rising employment in a contracting economy can be entirely attributed to a ‘statistical illusion’, especially since the ONS’s alternative Workforce Jobs Survey also records net job creation of 93,000 in the second quarter of the year. But a closer look at the statistics might give pause for thought to those who accept the strength of the LFS figures without question.     

Is pensions auto-enrolment good for the economy?

Rock superstars no longer ‘just fade away’. Rather like monarchs and popes they nowadays keep going until called to the great hall of fame in the sky. With improvements in health aiding ‘active ageing’ it’s becoming increasingly common for people from all sorts of occupational backgrounds to put off retirement too. But while for some this is a matter of lifestyle choice, a growing band of older people are finding it financially difficult to slow down in later life and need to stay in employment simply to keep the wolf from the door.

One reason is the paucity of decent pension provision against the backdrop of increasing longevity. Last week the Office for National Statistics (ONS) told us that only around 8 million people in the UK are contributing to workplace pension schemes, the number of savers working for private sector firms having more than halved to just 2.9 million in the past two decades. With the state pension never likely to offer more than a meagre ration, the stark choice facing the remaining millions if they are to avoid poverty in later life is thus that between saving more while young and/or working well beyond their mid-sixties.

Policy makers have for more than a decade been wrestling with how to deliver the necessary wake-up call on this issue, especially with regard to pensions. Most of us don’t like to think about getting old and would rather spend today than save for tomorrow. But next week sees the start of a major effort to nudge us toward saving much more with the introduction of auto-enrolment to workplace pensions.

Employers will have to enrol employees aged over 22 not in a pension scheme and earning more than £8,105 a year onto a workplace pension scheme to which both employers and employees will make at least a minimum contribution alongside a taxpayer contribution.  At first only large businesses will have to comply, with employers and employees required to contribute no more than the equivalent of 1% of the employee’s basic pre-tax pay. But by 2018 employers of all sizes will be covered, with employer and employee contributions gradually rising to 3% and 4% respectively.

The policy amounts only to a nudge because participation isn’t compulsory for employees. Those eligible can choose to opt out if saving a chunk of their pay cheque doesn’t appeal, though this means losing out on the employer and taxpayer contributions. Nonetheless, the expectation is that around two-thirds of those automatically enrolled will decide to contribute – around 8 million people by 2018 – which will give a massive boost to overall pension saving.     

However, despite the broad political consensus in favour of auto-enrolment some business groups have warned of potential adverse impacts on cash strapped small employers who may find the cost and red tape associated with providing employee pensions difficult to bear. This it is argued will harm economic growth and cost jobs. But relatively little attention has been paid to the possibility that encouraging more people to save in what remain very tough times will slow the pace of economic recovery by curbing consumer spending.  

As the ONS confirmed this morning, the economy contracted by 0.4% in the second quarter of the year and has been contracting since last autumn. Even if this marks the trough of the double dip recession few economists expect an early return to strong economic growth. So what might be the effect of auto-enrolment in this context?

Given that the policy is a slow burn, with only around 600,000 employees expected to be enrolled by the start of 2013 and minimum contributions initially set very low, the immediate impact on overall consumer spending should be small. But with the likelihood of several years of relatively slow economic growth, and the prospect of little if any improvement in real take home pay for most workers, the dampening impact of auto-enrolment could well become significant.

Not only will more workers be drawn into pension saving but as time goes on those enrolled will start to bear a bigger financial burden since labour market economics suggests that employers will gradually shift the additional costs they incur onto employees by way of curbing pay rises. Eventually, therefore, the effect of auto-enrolment will be to shift at least 7% of the pre-tax  earnings of participating employee into savings. If the real value of those earnings is static or only growing very slowly it’s difficult to avoid the conclusion that this will hit consumer spending.

However, while this will be painful for our ‘live for today, forget about tomorrow’ culture it isn’t necessarily bad news for the long-term health of the economy. We need as a society to be saving more to meet the cost of an ageing population and we also need to rebalance the economy away from over-reliance on consumption and toward productive capital investment. Auto-enrolment can help in both respects, with the possibility that even the short-run impact on economic growth might be limited if we get better at channelling pension savings to financing investment projects. As those classic ageing rockers The Rolling Stones might put it, when it comes to the choice between saving or spending more today ‘you can’t always get what you want, but you get what you need.’  

We need to talk about jobs

“Jobs, jobs, jobs.” The constant rhetoric from the podium addressed to a massed throng of delegates couldn’t be clearer – we need to ‘get our country back to work’. This was the central message of both Republican and Democrat pre-Presidential Election party conventions in the United States which were held a few weeks ago. Here in the UK we’ve just begun the nearest British equivalent, with the Liberal Democrats gathered in a very wet and windswept Brighton at the start of the annual three week autumn conference season for the main political parties. The intense public relations management of these latter events has over the years seen them become more like their counterparts across the pond. Yet one thing that strikes me as different at present is the relatively low focus of attention on jobs – or rather lack of jobs – in British political discourse as compared to what we see in United States.  

Aside from youth unemployment there’s nothing to suggest that jobs will take centre stage during our conference season.  I doubt if this has anything to do with respective political cultures. Voters in both countries are used to matters like the furore over whether a Cabinet minister did or didn’t call a police officer a ‘pleb’ serving to deflect media coverage from bigger issues. But this can’t explain why the subject of jobs isn’t playing as loudly on the political agenda over here as over there.

It could of course simply be that the UK jobs market is in a healthier state than that in the United States. However, both economies have the same unemployment rate of 8.1% and both have been creating more new jobs of late. The United States did fare much worse during the recession at the end of the last decade, when its unemployment rate topped 10%, but has since experienced a sustained economic recovery combining growth in both productivity and employment. By contrast, while UK unemployment rose less sharply it is still higher today than in 2009 when the economy first emerged from recession and has stabilised during the double dip recession only because productivity continues to slump.     

This suggests to me that there is something slightly odd about the current British jobs narrative that gives rise to a rather sanguine political discourse. My hunch is that the roots of this can be found in the persistent mass unemployment of the 1980s which flowered into a series of popular myths, ranging from the belief that technology would result in ‘the end of work’ to constant misplaced references to ‘the end of the job for life.’

As a result, we Brits have such low underlying expectations about our labour market prospects that we’re delighted that the worst recession since the Great Depression hasn’t had an even worse impact on jobs. But the unfortunate downside of this is a tendency for our current jobs situation to be portrayed as a relatively good news story rather than the very bad news story that in reality it is. This helps the Coalition to deflect attention from the broader state of the economy and makes it harder for the opposition to highlight the severity of joblessness. An 8.1% unemployment rate should be considered as big an economic and social failure in the UK as it is in the United States. And our politics should reflect this too.    

Flawed youth contract will do little to help jobless

It’s less than six months since Deputy Prime Minister Nick Clegg launched the ‘youth contract’, the coalition’s big idea for cutting youth unemployment. One shouldn’t therefore read too much into the fact that the £1 billion package of wage subsidies and work experience placements has so far failed to dent the problem (indeed the most recent available data show that the number of unemployed young people in the 18-24 age group targeted by the contract increased between April and July). But while the jury is still out, the court of policy appraisal today received disconcerting testimony from the cross party House of Commons Work and Pensions select committee which places a serious question mark over the central wage subsidy element of the contract.

In their report Youth Unemployment and the Youth Contract, MPs on the committee, though generally supportive of the contract in principle, doubt whether offering employers a financial incentive of up to £2,275 if they hire and employ a young jobless person for six months will succeed in helping 160,000 young people into work. Not only is the committee sceptical that the incentive is big enough to attract enough employers but its report also quotes a senior DWP civil servant who states that both UK and international evidence for the effectiveness of such subsidies is ‘varied and patchy’ (mandarin speak for ‘they aren’t that great’) .

I’m not at all surprised by this. At present the main factors deterring employers from hiring young unemployed people are actual lack of demand for products and services, uncertainty about future demand, inadequate credit available to small businesses which prevents them from expanding, and a shortage of suitably qualified or experienced applicants from the pool of young unemployed.

A financial incentive is unlikely to encourage employers to recruit young workers they can’t use or don’t want. As a result the policy will either attract too few employers or mainly operate to the advantage of those employers who are already recruiting young people, resulting in considerable deadweight subsidy with relatively little net impact on youth unemployment.  Increasing the size of the subsidy, which the Commons committee suggests might prove necessary, would probably attract more takers but wouldn’t remove the problem of deadweight.

Moreover, in a labour market experiencing a serious shortage of demand, a financial incentive to recruit young people from the eligible target group will reduce the chances of other unemployed people being hired, so the net impact on total unemployment is zero. This in itself is not a reason for objecting to the subsidy since one might prefer to shift the burden of unemployment from young people to others, especially if limiting the well-known ‘scarring’ effects of youth unemployment is a policy objective. But this is very much a second best solution when what’s desperately needed are demand side measures to boost economic growth and cut joblessness for people across the age spectrum

Damned statistics!

I don’t know if the newly proposed English Baccalaureate exams will extend to statistics but if so plenty of us could do with sitting it. Yet again in recent days the Office for National Statistics (ONS) has been challenged over the reliability of a key economic indicator, though this time unemployment rather than GDP data, while so-called ‘government insiders’ are said to be fretting over which statistical index to use when uprating most welfare benefits. In both cases the level of public discourse leaves much to be desired.  

On benefits uprating, the government has already jettisoned the RPI as the reference index in favour of the CPI, which is typically lower. But ahead of this morning’s release of the latest monthly inflation figures (which show the CPI rate down to 2.5% and RPI down to 2.9%) the BBC reported that some government ministers think enabling benefit claimants to ‘enjoy’ CPI linked increases in welfare payments is still too generous at a time of fiscal austerity. According to the report the Treasury is looking at a two year benefit freeze followed by subsequent uprating in line with growth in average earnings rather than CPI. Had benefits tracked average pay growth rather than CPI inflation since recession first hit the jobs market in 2008/9, the Treasury is said to have reckoned, government coffers would be £14 billion richer.

This is all rather perplexing. If the government wants to cut the welfare bill it should simply do so rather than bother with the fiction of identifying some conveniently automatic, and thus supposedly more politically neutral, way of doing so. But in any case, average pay growth is not a good index to choose since one normally expects this to run comfortably ahead of price inflation. Assuming the economy at some point returns to the trend productivity performance enjoyed before the financial crisis, average pay should start to rise by around 4% to 4.5% each year, enabling the average worker to receive an annual real pay increase of around 2% above the Bank of England’s existing CPI inflation target. If this does not happen, either because trend productivity growth has truly slumped or target inflation proves very hard to achieve, the Treasury and the rest of us will have a lot more to worry about than how to uprate benefits.

Turning to unemployment, in an interesting article in yesterday’s Independent newspaper, former Monetary Policy Committee member Professor David (‘Danny’) Blanchflower contends that rather than puzzle over why UK unemployment is falling despite the double dip recession we should instead look more closely at ONS data, which on inspection actually show a rise in the number of jobless people actively seeking work.*

Professor Blanchflower is broadly right about this but perhaps protests a little too much. His argument is that the monthly estimate of unemployment provided by the Labour Force Survey shows a jump of 113,000 between June and July this year, which offers a very different picture of the current state of the jobs market than provided by the headline quarterly estimate which shows a fall of 7,000 between the three month average for May-July as compared with the previous three month average.

However, while the three month average comparisons can be confusing – and I agree with Professor Blanchflower that in due course the ONS should move to straightforward month on month comparison, say in a manner akin to what the US Bureau of Labor Statistics does – one simply can’t read too much into the current monthly estimates. The sampling variability for each month of data means that the ONS estimates are only fully statistically reliable when averaged over a quarter.

The most that one can say is that the labour market probably weakened in July and that this will show up in subsequent quarterly comparison. But there is as yet no way of telling how much the market has weakened. Moreover, however one reads the ONS data for this year it’s clear that there has been remarkably strong employment growth since the spring and nothing like the worsening in the unemployment situation that most economists, myself and I presume Professor Blanchflower included, expected at the start of the year. This remains a puzzle, albeit a welcome one.                 

* http://www.independent.co.uk/news/business/comment/david-blanchflower/david-blanchflower-unravelling-puzzle-of-jobless-fall-that-isnt-8143350.html?origin=internalSearch#

UK workplaces could suffer from Coalition balancing act on employment rights

The Business Secretary, Vince Cable, clearly has a political fight on his hands. Many Conservative MPs would prefer it if one of their own were doing Dr Cable’s job and are even more scornful following reports that Vince has exchanged the occasional text message with Labour leader Ed Miliband.  The recent appointment of Michael Fallon and Matthew Hancock, two allies of Chancellor George Osborne, as ministers in the Business Department reinforces the view that the secretary of state is under close ideological scrutiny.

In such a tense situation it’s hardly surprising that the latest package of proposals to streamline UK employment law conveys more than a hint of political compromise. The package may omit the most controversial idea floated earlier this year by venture capitalist Adrian Beecroft - who in a report for Downing Street recommended that employers, small businesses in particular, ought to be able to fire staff ‘at will'– but even these ‘Beecroft lite’ proposals are probably more than Dr Cable in his heart of hearts knows are necessary.

Employers’ organisations and some in HR may welcome the key proposals: so-called ‘settlement agreements’ to enable bosses to dismiss staff in ‘a fair and consensual way’ without resort to an expensive employment tribunal process, and a cap on compensation for unfair dismissal. But there is nothing to suggest that this further watering down of workers’ rights, which comes on top of the extension to two years in the qualifying period for protection against unfair dismissal, will be of any benefit to UKplc.

In launching the consultation package the Business Secretary states that “the UK has a lightly regulated flexible labour market that the Organisation for Economic Cooperation and Development (OECD) considers to be amongst the best in the world, behind only the USA and Canada.” Dr Cable goes on to suggest that this ‘low reg, high flex’ labour market helps explains why the private sector has generated around 1 million extra jobs during the past two years. Yet while one might argue that even less employment protection would bring even more jobs, what the well read Business Secretary will be aware of, but fails to mention, is the total lack of evidence to support this claim.  

Regular reviews of evidence on the effects of employment protection legislation published by the OECD suggests that while less job protection encourages increased hiring during economic recoveries it also results in increased firing during downturns. The overall effect is thus simply to make employment less stable over the economic cycle, with little significant impact one way or the other on structural rates of employment or unemployment.

There is no evidence that UK employment suffered significantly in the 1970s as a result of the introduction in 1975 of a six month qualifying period for rights against unfair dismissal or that there was any substantial benefit when the qualifying period was subsequently raised to two years in the 1980s before being lowered to one year in 1999. In light of this it’s unlikely the recent increase to two years will have any beneficial effect, let alone further watering down of employment protection legislation.

Employment law should seek to reach an appropriate balance between enabling employers to make reasonable decisions based on a genuine assessment of employee performance and giving employees a sufficient sense of job security to actively engage with the organisation they work for. Tilting this balance too heavily in favour of employers by way of deregulation runs the risk of reinforcing a hire and fire culture in UK workplaces which will be detrimental to fostering genuine engagement between employers and their staff and potentially harmful to the long-run performance of the UK economy.  Oddly, while Dr Cable openly acknowledges this in his rejection of Beecroft’s ‘fire at will’ (no-fault dismissal) he doesn’t seem to recognise that his own proposals carry the same risk. Let’s hope that in having to perform a political balancing act within the coalition the Business secretary does not unbalance our workplaces.