Thursday 27 September 2012

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.’  

Monday 24 September 2012

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.    

Wednesday 19 September 2012

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

Tuesday 18 September 2012

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.         

Friday 14 September 2012

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.

Wednesday 12 September 2012

The Coalition's jobs record - good or bad?

It's chilly outside today, so just as well I've put my anorak on, made a mug of tea, and had a look at the latest monthly jobs release from the Office for National Statistics (ONS).

The quarterly figures for May-July, showing a rise of more than 230,000 in the number of people in work, are remarkably good, indeed near miraculous for an economy in a double dip recession. Okay, so unemployment fell by only 7,000 but this was dampened by an extra 180,000 people entering the labour market to compete for jobs, so a decent outcome in the circumstances. I've commented elsewhere today on how one might explain this apparent puzzle of 'jobs without growth', which I think is due to a structural change in the operation of the labour market. However, this month's jobs stats are particularly useful since they show what's happened in the first  full  two years since the Coalition government was formed in May  2010.

I hesitate to call this the 'Coalition's jobs record' since it's not entirely clear what if anything it says about the impact of current government policy. But since politicians take both undeserved credit and flak for what happens on their watch, the title seems appropriate. Moreover, given that ministers can at present point to upbeat jobs figures when concerns are raised about the state of the wider economy, it's worth considering just how strong the jobs market really is.

The good news is that there are around 440,000 more people in work than two years ago, despite the public sector having shed 400,000 jobs (adjusting for classification changes which make comparisons tricky). Private sector employment is therefore up by 840,000 - some achievement given that the economy has, according to the ONS's GDP estimates, barely grown at all in that time. Admittedly, much of this extra private sector employment (some 60%) is self-employment, often undertaken by people who would prefer to be in work as employees but for whom 'going it alone', even with all the insecurity involved, is better than unemployment. Many of the new jobs are also part-time and/or temporary, though contrary to popular perception full-time employment accounts for well over half the total increase.

The bad news is that the increase in employment still hasn't been large enough to prevent an overall rise in the level of unemployment, which is almost 120,000 higher than when Mr Cameron and Mr Clegg famously got together in the Downing Street rose garden. And the number of unemployed people chasing each job vacancy has risen slightly too, from a national average of 5.2 to 5.5. Consequently, there is more slack in the labour market than in 2010, which is why so many jobless people are struggling to find work and so many workers feeling the financial pinch because of limits on pay or hours.  Employment may be rising and unemployment falling but the jobs market is still very low on demand, with the 8.1% unemployment rate  probably some three percentage points above what the UK economy could achieve at full capacity. This is an awfully big waste of human resource and output, and crying out for more purposeful policy action.  


Monday 10 September 2012

Unions have a progressive part to play

Talk of strikes at the annual TUC conference, which kicked off in Brighton earlier today, must be good news for The Strawbs. While most long-forgotten Seventies rock-bands rely on Never Mind the Buzzcocks to remind people they once existed, the merest hint of industrial unrest results in an airing for Part of the Union.  For a time the turntables were silent but with a new generation of union bosses confronting the government over its general economic strategy as well as cuts to public sector jobs, pay and pensions there is a renewed mood of hostility.

We shouldn’t, however, get carried away with the idea that the UK is on the verge of a new period of union power. Although I’ve stated consistently since the last General Election that some kind of ‘general strike’ is likely before the end of this Parliament, this will struggle to be as disruptive as in times past. Having reached a peak of 12.2 million in 1980, the TUC tells us, union membership has more than halved to below 6 million as employment has switched away from manufacturing to services and legislation curbed union power, with the bulk of union members now confined to the public sector. Consequently, despite having the ability to directly challenge the impact of fiscal austerity in the workplace, union influence is nowadays felt mainly in its contribution to debate on economic and social policy, as demonstrated this morning in outgoing TUC General Secretary Brendan Barber’s well-constructed Olympic themed critique of a Plan A that shows no sign of working.

The trade unions are thus relatively impotent, even though those who know and welcome this still like to talk up the threat of union militancy whenever politically convenient to do so. This relative weakness is not a wholly bad thing. Unions have at times in our history abused their role, which as a result has necessarily had to be tempered by appropriate legal restrictions to ensure that they behave responsibly.  The current treatment of unions in UK law would therefore seem about right. Yet wanting to go further by introducing further curbs so as to effectively paint unions out of the national picture would surely be wrong.

Experience shows that responsible trade unions, working in partnership with employers, should be embraced rather than treated with suspicion. Unions can act as an important channel through which organisations build strong engagement relations between management and workers that help raise productivity and improve the quality of working life. Moreover, unions can limit the worst aspects of exposure of workers to market pressures which if totally unchecked can lead to excessive disparity in the distribution of incomes.

It is no coincidence that the slump in union membership has accompanied a steady fall in the share of national income received in wages relative to profits. In the mid-1970s wages and salaries accounted for 65 per cent of UK gross domestic product. Today the figure is hovering just above 50 per cent. This may be of little concern to ardent neo-liberals who believe that allowing labour markets to clear is good for jobs and a higher profit share good for investment. But those of us concerned about the impact of this for low skilled workers and the public finances in an economy where levels of business investment disappoint in time of boom as well as slump, take a different view.

The consequences have been highlighted in recent days with the emergence of the wonkish concept of ‘predistribution’ into UK political debate. It’s very costly to maintain a large proportion of the workforce by means of what is in effect ‘in work welfare’ support. Better, if possible, to ensure workers earn enough not to need such hand-outs. This, as we will doubtless hear in the coming months, can be achieved in a number of ways. A progressive role for trade unions is one of them.   

Wednesday 5 September 2012

World Economic Forum helps shed light on UK jobs puzzle - and vindicates Dr Cable

Having switched radio channels last evening after listening to an arts review of the new big screen version of cop drama The Sweeney, it seemed fitting to hear that yesterday's government reshuffle handed Tory MPs Michael Fallon and Matthew Hancock ministerial roles in the Department for Business and Skills.  The prime minister has clearly decided that this duo, the political equivalents of Regan and Carter, are needed in Vince Cable's manor to put the cerebral Lib Dem Business Secretary on the ideological straight and narrow. Ironically, however, this morning's annual Global Competitiveness Report from the renowned Swiss based think tank the World Economic Forum (WEF) suggests that the newly appointed heavies have more to learn from Dr Cable's evidence based approach to policy making than vice versa.

According to the WEF, the UK has moved up from 10th to 8th place in the league table of global competitiveness, which is good news for the Business Secretary since improving business competitiveness is his principle job. But this improvement is despite the UK having slumped from 85th to 110th when it comes to the 'macroeconomic environment', political responsibility for which is down to the Chancellor of the Exchequer, George Osborne, of whom Messrs Fallon and Hancock are close acolytes. 'Physicians heal thyself' one is tempted to say, yet the more intriguing aspect of the WEF's observation is an apparent structural improvement in the performance of the UK economy during a year that has seen a return to recession, a paradox that is perhaps most evident in the unusual occurrence of a contraction in output alongside falling unemployment.

Significantly, the WEF highlights the relatively good performance of the UK labour market as an economic positive, attributing this to flexibility in the ability of employers to hire and fire staff. This is important since it contrasts with most recent explanations of the 'jobs without growth' paradox, which tend to focus on the GDP side of the equation and thus overlook the structural performance of the labour market itself. But unlike the WEF I think the strength of the UK labour market owes less to hire and fire flexibility than to the ability to match jobseekers to vacancies.

The economy has enjoyed a big increase in (private sector) employment over the past year and a fall in unemployment with hardly any net increase in the level of job vacancies. Indeed, vacancies are still down on mid-2010 levels. In other words, the labour market has been really effective at filling vacancies as they arise - probably related to ever greater pressure on jobless people to find work plus a much greater financial penalty to joblessness than ever before which provides a heightened incentive to work- even though, as a result of weak macroeconomic conditions, the economy isn't creating masses of net extra vacancies. Consequently, the labour market is at least to some extent decoupled from the macro economy, albeit prolonged weak output growth is at some point likely to have a negative impact on jobs if it results in far fewer net vacancies to fill or increased redundancies. If so unemployment will start to rise again, and I still expect this to happen in the coming months.

The combination of a powerful ability to fill vacancies with a still relatively high total rate of unemployment of around 8% also explains why the rise in employment and fall in unemployment has  been accompanied by a sharp fall in the rate of growth of average earnings. This is the opposite of what we saw in the early 1980s when profound skills mismatch and a lack of effective welfare to work measures caused structural unemployment to track upwards in line with total unemployment and thus become entrenched. At that time people in work knew that they could push for higher pay even thiough the jobless rate was around 10% because a large proportion of jobless people were not able or eager to fill vacancies (roughly 40% were long-term jobless compared to roughly a third today).

Putting all this together offers a very good news story since it suggests to me that the economy is capable of a very strong rate of non-inflationary growth and a really big fall in unemployment once we get the demand side of the macro economy fixed. But that won't be achieved by applying strong arm tactics to the Business Secretary, who seems to be pursuing a broadly sensible and rational approach to supply side policy.       

Monday 3 September 2012

I'm Back!

As we enter September, the wettest UK summer on record looks to be turning into a glorious early autumn. And things are looking up for me too. I have finally left the CIPD and can end several months of self imposed purdah to resume my regular commentary on the state of the jobs market, both here and abroad.

It's been an odd time on the jobs scene. The economy is back in recession but the number of people in work has been rising and unemployment is falling. Puzzling indeed, and in future posts I'll be looking at all the possible explanations, including some that haven't been given much attention in public debate.

I'm also eager to see what, if anything, this week's economic policy announcements and government ministerial reshuffle might do to boost growth and jobs. I'm sceptical that a change in personnel will make much difference, especially since it looks as though the Prime Minister's turn of the political rubic cube is set to leave the biggest players where they are. But it should be an interesting few weeks with policy tensions in the coalition parties likely to mount during the conference season. I can't wait to get back in the game.